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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11862
INTERPOOL, INC.
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(Exact name of registrant as specified in the charter
DELAWARE 13-3467669
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 COLLEGE ROAD EAST, PRINCETON, NEW JERSEY 08540
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(Address of principal executive office) (Zip Code)
(609) 452-8900
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(Registrant's telephone number including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on which Registered
----------------------------- -----------------------
COMMON STOCK, PAR VALUE $.001 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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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. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $130,007,635.00 as of March 22, 1999.
At March 22, 1999, there were 27,566,452 shares of the registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 26, 1999 are incorporated by reference into
Part III of the Form 10-K.
INTERPOOL, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1. Business........................................................................................... 3
2. Properties......................................................................................... 9
3. Legal Proceedings.................................................................................. 9
4. Submission of Matters to a Vote of Security Holders................................................ 9
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters.......................... 10
6. Selected Financial Data............................................................................ 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12
7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 19
8. Financial Statements and Supplementary Data........................................................ 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 39
PART III
10. Directors and Executive Officers of the Registrant................................................. 40
11. Executive Compensation............................................................................. 40
12. Security Ownership of Certain Beneficial Owners and Management..................................... 40
13. Certain Relationships and Related Transactions..................................................... 40
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 41
Signatures......................................................................................... 46
2
PART I
ITEM 1. BUSINESS
Interpool, Inc. (the "Company" or "Interpool") is one of the world's leading
lessors of intermodal dry freight standard containers and is the second largest
lessor of intermodal container chassis in the United States. At December 31,
1998, the Company's container fleet totalled approximately 500,000 twenty foot
equivalent units ("TEUs"), the industry standard measure of dimension for
containers used in international trade, and its chassis fleet totalled
approximately 76,000 chassis. The Company leases its containers and chassis to
over 200 customers, including nearly all of the world's 20 largest international
container shipping lines.
The efficiencies and cost savings inherent in intermodal transportation of
containerized cargo have facilitated the dramatic growth of international trade.
Intermodal transportation permits movement of cargo in a standard steel
container by means of a combination of ship, rail and truck without unpacking
and repacking of the contents during transit. The Company believes the world's
dry freight standard container fleet has grown from fewer than .4 million TEUs
in 1970 to approximately 10.1 million TEUs by mid-1998. During the twelve-month
period ending in mid-1998 the Company estimates that approximately 1.2 million
TEUs were produced, of which .4 million have been estimated to be replacements
of older containers. Concurrently with this growth of the world's container
fleet, the domestic chassis fleet has grown to accommodate the increased
container traffic. Leasing companies have played a significant role in the
growth of intermodal transportation, supplying approximately half of the world's
container and chassis requirements.
The Company focuses on leasing dry freight standard containers and container
chassis on a long-term basis in order to achieve high utilization of its
equipment and stable and predictable earnings. From 1991 through 1994, the
combined utilization rate of the Company's container and chassis fleets averaged
at least 90%. At the end of 1995 and 1996 the combined utilization rate of the
Company's container and chassis fleets was approximately 97% and at December 31,
1997 and 1998 such rate was approximately 98%. A substantial portion of the
Company's newly acquired equipment is leased on a long-term basis and, at
December 31, 1998, approximately 91% of its total equipment fleet was leased on
this basis. The remainder of the Company's equipment is leased under short-term
agreements to satisfy customers' peak or seasonal requirements, generally at
higher rates than under long-term leases. The Company concentrates on standard
dry cargo containers and chassis because such equipment may be more readily
remarketed upon expiration of a lease than specialized equipment. In financing
its equipment acquisitions, Interpool generally seeks to meet debt service
requirements from the leasing revenue generated by its equipment.
The Company conducts its container and chassis leasing business through its two
subsidiaries, Interpool Limited and Trac Lease, Inc. ("Trac Lease"),
respectively. Certain other United States equipment leasing activities are
conducted through Interpool itself.
The Company and its predecessors have been involved in the leasing of containers
and chassis since 1968. The Company leases containers throughout the world, with
particular emphasis on the Pacific Rim. The Company leases chassis to customers
for use in the United States. The Company maintains contact with its customers
through a worldwide network of offices, agents and sales representatives. The
Company believes one of the key factors in its ability to compete effectively
has been the long-standing relationships management has established with most of
the world's large shipping lines. In addition, Interpool relies on its strong
credit rating and low financing costs to maintain its competitive position.
From time to time the Company considers possible acquisitions of complementary
businesses and asset portfolios. In April 1998, the Company established a
strategic alliance with another container leasing company whose business
complements that of the Company through the acquisition of a 50% interest in
Container Applications International, Inc. (CAI) whose business is primarily in
the short term master lease market. The Company also provided CAI with financing
to repay debt.
Company History
The Company is a Delaware corporation formed in February 1988. The Company is
the successor to a line of container and chassis leasing businesses that traces
its beginning to the 1960's.
Interpool Limited, a container and chassis leasing business, was formed in 1968
by Warren L. Serenbetz, a director of the Company and executive consultant until
January 1995, Martin Tuchman, currently Chairman of the Board, Chief Executive
Officer and director of the Company, and two other individuals. In 1978,
Interpool Limited was sold to Thyssen-Bornemisza, N.V. ("Thyssen"). As part of
Thyssen, Interpool Limited continued to be managed by Messrs. Serenbetz and
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Tuchman. In 1986, Messrs. Serenbetz and Tuchman, along with Mr. Raoul J.
Witteveen and two other senior executives formed and became the stockholders of
Trac Lease. In 1988, the Company was formed by Messrs. Serenbetz, Tuchman and
Witteveen and acquired Interpool Limited from Thyssen (the "Interpool Limited
Acquisition"). In 1993, the Company acquired 87.5% of Trac Lease (the "Trac
Lease Acquisition"). In the first quarter of 1996 pursuant to an Agreement of
Merger between Trac Lease and Trac Lease Merger Corp., a newly formed subsidiary
(the "Trac Merger"), the Company acquired the minority interests in Trac Lease
and as a result Trac Lease became a wholly owned subsidiary.
Intermodal Transportation
The fundamental component of intermodal transportation is the container.
Containers provide a secure and cost-effective method of transporting finished
goods and component parts because they are generally freely inter-changeable
between different modes of transport, making it possible to move cargo from a
point of origin to a final destination without the repeated unpacking and
repacking of the goods required by traditional shipping methods. The same
container may be carried successively on a ship, rail car and truck and across
international borders with minimal customs formalities. Containerization is more
efficient, more economical and safer in the transportation of cargo than "break
bulk transport" in which the goods are unpacked and repacked at various
intermediate points enroute to their final destination. By eliminating manual
repacking operations when differing modes of transportation are used,
containerization reduces freight and labor costs. In addition, automated
handling of containers permits faster loading and unloading and more efficient
utilization of transportation equipment, thereby reducing transit time. The
protection provided by sealed containers also reduces damage to goods and loss
and theft of goods during shipment. Containers may also be picked up, dropped
off, stored and repaired at independent common user depots located throughout
the world.
The adoption of uniform standards for containers in 1968 by the International
Standards Organization (the "ISO") precipitated a rapid growth of the container
industry, as shipping companies recognized the advantages of containerization
over traditional break bulk transportation of cargo. This growth resulted in
substantial investments in containers, container ships, port facilities,
chassis, specialized rail cars and handling equipment.
Most containers are constructed of steel in accordance with recommendations of
the ISO. The basic container type is the general purpose dry freight standard
container (accounting for approximately 87% of the world's container fleet),
which measures 20 or 40 feet long, 8 feet wide and 8 1/2 or 9 1/2 feet high. In
general, 20-foot containers are used to carry heavy, dense cargo loads (such as
industrial parts and certain food products) and in areas where transport
facilities are less developed, while 40-foot containers are used for lighter
weight finished goods (such as apparel, electronic appliances and other consumer
goods) in areas with better developed transport facilities. Standards adopted by
the International Convention for Safe Containers and the Institute of
International Container Lessors govern the operation and maintenance of
containers.
The demand for containers is influenced primarily by the volume of international
and domestic trade. In recent years, however, the rate of growth in the
container industry has exceeded that of world trade as a whole due to several
factors, including the existence of geographical trade imbalances, the expansion
of shipping lines, and changes in manufacturing practices, such as growing
reliance on "just-in-time" delivery methods and increased exports by certain
technologically advanced countries of component parts for assembly in other
countries and the subsequent re-importation of finished products.
When a container vessel arrives in port, each container is loaded onto a chassis
or rail car. A chassis is a rectangular, wheeled steel frame, generally 20 or 40
feet in length, built specifically for the purpose of transporting a container.
Once mounted, the container and chassis are the functional equivalent of a
trailer. When mounted on a chassis, the container may be trucked either to its
final destination or to a railroad terminal for loading onto a rail car.
Similarly, a container shipped by rail may be transferred to a chassis to travel
over the road to its final destination. As the use of containers has become a
predominant factor in the intermodal movement of cargo, the chassis has become a
prerequisite for the domestic segment of the journey. A chassis seldom travels
permanently with a single container, but instead serves as a transport vehicle
for containers that are loaded or unloaded at ports or railroad terminals.
Because of differing international road regulations and the lack of
international standards for chassis, chassis used in the United States are
seldom used in other countries.
The Company's management believes that in recent years domestic railroads and
trucking lines have begun actively marketing intermodal use of services for the
domestic transportation of freight. In 1992, container loadings represented, for
the first time, a majority of total domestic rail loadings of intermodal
transportation equipment. Management further believes that this trend should
serve to accelerate the growth of intermodal transportation, and hence result in
increased container and chassis demand.
As a result of the advantages of intermodal containerization and the increased
globalization of the world economy, the use of containers for domestic
intermodal transportation has also grown over the last few years. Greater use of
containers on cargo ships led railroad and trucking companies to develop the
capacity to transport containers domestically by chassis and rail car. In
addition,
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shipping companies began soliciting domestic freight in order to mitigate the
cost of moving empty containers back to the port areas for use again in
international trade. The introduction in the mid-1980's of the double stack
railroad car, specially designed to carry containers stacked one on top of
another, accelerated the growth of domestic intermodal transportation by
reducing shipping costs still further. Due to these trends, an increasing
portion of domestic cargo is now being shipped by container instead of by a
conventional highway trailer. The Company has acquired over 11,500 units of
equipment, including domestic trailers, domestic chassis and domestic containers
in order to increase its participation in the growing domestic intermodal
market.
The Leasing Market and the Company's Strategy
Benefits of Leasing
Leasing companies own approximately half of the world's container fleet and half
of the domestic chassis fleet, with the balance owned predominantly by shipping
lines. Leasing companies have maintained this market position because container
shipping lines receive both financial and operational benefits by leasing a
portion of their equipment. The principal benefits to shipping lines of leasing
are:
o to provide shipping lines with an alternative source of financing
in a traditionally capital-intensive industry;
o to enable shipping lines to expand their routes and market shares at
a relatively inexpensive cost without making a permanent commitment
to support their new structure;
o to enable shipping lines to benefit from leasing companies'
anticipatory buying and volume purchases, thereby offering them
attractive pricing and prompt delivery schedules;
o to enable shipping lines to accommodate seasonal and/or directional
trade route demand, thereby limiting their capital investment and
storage costs; and
o to enable shipping lines at all times to maintain the optimal mix of
equipment types in their fleets.
Because of these benefits, container shipping lines generally obtain a
significant portion of their container fleets from leasing companies, either on
short-term or long-term leases. Short-term leases provide a considerable degree
of operational flexibility in allowing a customer to pick up and drop off
containers at various locations worldwide at any time. However, customers pay
for this flexibility in the form of substantially higher lease rates for
short-term leases and drop-off charges for the privilege of returning equipment
to certain locations. Most short-term leases are "master 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. Long-term leases
provide the lessee with advantageous pricing structures, but usually contain an
early termination provision allowing the lessee to return equipment prior to
expiration of the lease only upon payment of an early termination fee. Since
1991, the Company has experienced minimal early returns under its long-term
leases, primarily because of the penalties involved and because customers must
return all containers covered by the particular long-term lease being
terminated, generally totalling several hundred units, and bear substantial
costs related to their repositioning and repair. Frequently, a lessee will
retain long-term leased equipment well beyond the initial lease term. In these
cases, long-term leases will be renewed at the then prevailing market rate,
either for additional one-year periods or as part of a short-term agreement. In
some cases, the customer has the right to purchase the equipment at the end of a
long-term lease. The Company's long-term leases generally have five to eight
year terms.
The Company often enters into long-term "direct finance" leases. Under a direct
finance lease, the customer owns the container at the expiration of the lease
term. Although customers pay a higher per diem rate under a direct finance lease
than under a long-term operating lease, a direct finance lease enables the
Company to provide customers with access to financing on terms generally
comparable to those available from financial institutions which provide this
type of financing. The percentage of the Company's revenues provided by direct
finance leases has increased from 11% in 1991 to 19% in 1998.
Shipping lines generally spread their business over a number of leasing
companies in order to avoid dependence on a single supplier.
Unlike the business of container leasing, which is global in scale, the
Company's chassis leasing business is almost exclusively a domestic business.
Many of the customers for the Company's chassis, however, are United States
subsidiaries or branches of international shipping lines.
5
Company Strategy
The Company emphasizes long-term leases in order to minimize the impact of
economic cycles on the Company's revenues and to achieve high utilization and
stable and predictable earnings. The lower rate of turnover provided by
long-term leases enables the Company to concentrate on the expansion of its
asset base through the purchase and lease of new equipment, rather than on the
repeated re-marketing of its existing fleet.
The result of this strategy has been to establish the Company as one of the
world's leading lessors of dry freight standard containers. The Company intends
to continue its emphasis on acquiring and leasing dry freight standard
containers, rather than investing significantly in special purpose equipment
such as refrigerated or tank containers. Management believes that the Company
currently has one of the youngest container fleets of the world's ten largest
container lessors.
Trac Lease, with a fleet of approximately 76,000 chassis, is currently the
second largest chassis lessor in the United States, with the largest lessor
having a fleet approximating 90,000 chassis. The Company's chassis leasing
strategy includes an emphasis on long-term leasing of new or re-manufactured
chassis which allows the Company to offer equipment packages to its customers at
the most attractive cost to the Company.
In order to redeploy chassis that are coming off long-term leases, the Company
operates "chassis pools" for most of the major port authorities and terminal
operators on the Eastern seaboard and the Gulf coast. A chassis pool is an
inventory of chassis available for short-term leasing to customers of the port
or terminal. The principal ports in the United States where the Company supplies
chassis pools are Boston, Baltimore, Norfolk, Charleston, Savannah, New Orleans
and Houston.
Like most leasing companies, the Company depends on high utilization of its
equipment in order to run its operations profitably. Because the Company has
most of its container and chassis fleets under long-term leases, the Company
believes that it has generally experienced better utilization in periods of weak
demand than other leasing companies having a smaller proportion of their fleets
under long-term leases. From 1991 through 1994, the annual utilization of the
Company's container fleet and Trac Lease's chassis fleet has averaged at least
90%. At the end of 1995 and 1996, the combined utilization rate of the Company's
container and chassis fleets was approximately 97%, and at December 31, 1997 and
1998, such rate was approximately 98%.
Operations
Lease Terms
Lease rentals are typically calculated on a per diem basis, regardless of the
term of the lease. The Company's leases generally provide for monthly or
quarterly billing and require payment by the lessee within 30 to 60 days after
presentation of an invoice. Generally, the lessee is responsible for payment of
all taxes and other charges arising out of use of the equipment and must carry
specified amounts of insurance to cover physical damage to and loss of
equipment, as well as bodily injury and property damage to third parties. In
addition, the Company's leases usually require lessees to repair any damage to
the containers and chassis. Lessees are also required to indemnify the Company
against losses to the Company arising from accidents or similar occurrences
involving the leased equipment. The Company's leases generally provide for
pick-up, drop-off and other charges and set forth a list of locations where
lessees may pick up or return equipment. The Company's long-term leases
generally have five to eight year terms.
Equipment Tracking and Billing
The Company uses a computer system with proprietary software for equipment
tracking and billing to provide a central operating data base showing the
Company's container and chassis leasing activities. The system processes
information received electronically from the Company's regional offices. The
system records the movement and status of each container and chassis and links
that information with the complex data comprising the specific lease terms in
order to generate billings to lessees. More than 15,000 movement transactions
per month are routinely processed through the system, which is capable of
tracking revenue on the basis of individual containers and chassis. The system
also generates a wide range of management reports containing information on all
aspects of the Company's leasing activities.
Sources of Supply
Because of the rising demand for containers and the availability of relatively
inexpensive labor in the Pacific Rim, approximately 75% of world container
production now occurs in China. Containers are also produced in other countries,
such as South Korea, India, Indonesia, Malaysia, Taiwan, Turkey, South Africa,
and, to a lesser extent, in other parts of the world. Most chassis used in
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the United States are manufactured domestically due to the high cost of
transportation to the United States of chassis manufactured abroad.
Manufacturers of chassis frequently produce over-the-road trailers as well, and
can convert some production capability to chassis as needed.
Upon completion of manufacture, new containers and chassis are inspected to
insure that they conform to applicable standards of the ISO and other
international self-regulatory bodies.
Maintenance, Repairs and Refurbishment
Maintenance for new containers and chassis has generally been minor in nature.
However, as containers and chassis age, the need for maintenance increases, and
they may eventually require extensive maintenance.
The Company's customers are generally responsible for maintenance and repairs of
equipment other than normal wear and tear. When normal wear and tear to
equipment is extensive, the equipment may have to be refurbished or
remanufactured. Refurbishing and remanufacturing involve substantial cost,
although chassis can be remanufactured for substantially less than the cost of
purchasing a new chassis. Because facilities for this purpose are not available
at all depots or branches, equipment requiring refurbishment or remanufacture
may have to be repositioned, at additional expense, to the nearest suitable
facility. Alternatively, the Company may elect to sell equipment requiring
refurbishment.
Depots
The Company operates out of approximately 50 depots throughout the world. Depots
are facilities owned by third parties at which containers and other items of
transportation equipment are stored, maintained and repaired. The Company
retains independent agents at these depots to handle and inspect equipment
delivered to or returned by lessees, to store equipment that is not leased and
to handle maintenance and repairs of containers and chassis. Some agents are
paid a fixed monthly retainer to defray recurring operating expenses and some
are guaranteed a minimum level of commission income. In addition, the Company
generally reimburses its agents for incidental expenses.
Repositioning and Related Expenses
If lessees in large numbers return equipment to a location which has a larger
supply than demand, the Company may incur expenses in repositioning the
equipment to a better location. Such repositioning expenses generally range
between $50 and $500 per item of equipment, depending on geographic location,
distance and other factors, and may not be fully covered by the drop-off charge
collected from the lessee. In connection with necessary repositioning, the
Company may also incur storage costs, which generally range between $.20 and
$2.50 per TEU per day. In addition, the Company bears certain operating expenses
associated with its containers and chassis, such as the costs of maintenance and
repairs not performed by lessees, agent fees, depot expenses for handling,
inspection and storage and any insurance coverage in excess of that maintained
by lessee. The Company's insurance coverage provides protection against various
risks but generally excludes war-related and other political risks.
Disposition of Containers and Chassis and Residual Values
From time to time, the Company sells equipment that was previously leased. The
decision whether to sell depends on the equipment's condition, remaining useful
life and suitability for continued leasing or for other uses, as well as
prevailing local market resale prices and an assessment of the economic benefits
of repairing and continuing to lease the equipment compared to the benefits of
selling. Containers are usually sold to shipping or transportation companies for
continued use in the intermodal transportation industry or to secondary market
buyers, such as wholesalers, depot operators, mini storage operators,
construction companies and others, for use as storage sheds and similar
structures. Because old chassis are more easily remanufactured than old
containers, chassis are less likely to be sold than containers.
At the time of sale, the residual value of a container or chassis will depend,
among other factors, upon mechanical or economic obsolescence, as well as its
physical condition. While there have been no major technological advances in the
short history of containerization that have made active equipment obsolete,
several changes in standards have decreased the demand for older equipment, such
as the increase in the standard height of containers from 8 feet to 8 1/2 feet
in the early 1970's.
Marketing and Customers
The Company leases its containers and chassis to over 200 shipping and
transportation companies throughout the world, including nearly all of the
world's 20 largest international container shipping lines. With a network of
offices and agents covering major ports
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in the United States, Europe and the Far East, the Company has been able to
supply containers in nearly all locations requested by its customers. In 1998,
the Company's top 25 customers represented approximately 68% of its consolidated
revenues, with no single customer accounting for more than 7%.
The customers for the Company's chassis are a large number of domestic
companies, many of which are domestic subsidiaries or branches of international
shipping lines to which the Company also leases containers.
The Company maintains close relationships with a large customer base on which
detailed credit records are kept. The Company's credit policy sets different
maximum exposure limits for its customers. Credit criteria may include, but are
not limited to, customer trade route, country, social and political climate,
assessments of net worth, asset ownership, bank and trade credit references,
credit bureau reports, and operational history. Since 1990, the Company's losses
from defaults by customers have averaged less than 1% of consolidated revenues.
The Company seeks to reduce credit risk by maintaining insurance coverage
against defaults and equipment losses. Although there can be no assurance that
such coverage will be available in the future, the Company currently maintains
contingent physical damage, recovery/repatriation and loss of revenue insurance
which provides coverage in the event of a customer's default. The policy covers
the cost of recovering the Company's equipment from the customer, including
repositioning costs, the cost of repairing the equipment and the value of
equipment which cannot be located or is uneconomical to recover. It also covers
a portion of the lease revenues the Company may lose as a result of the
customer's default (i.e., 180 days of lease payments following default). The
Company has the option to renew the current policy for periods through December
2001, subject to premium adjustments.
Competition
There are many companies leasing intermodal transportation equipment with which
the Company competes. Some of the Company's competitors have greater financial
resources than the Company or are subsidiaries or divisions of much larger
companies. Over the last several years, there has been consolidation in the
container leasing business resulting from several acquisitions. The result of
the consolidation has been fewer lessors, a more rationalized industry and a
stabilizing pricing environment. Management believes that the Company is
currently one of the world's largest dry freight standard container leasing
companies and the second largest container chassis leasing company in the United
States.
In addition, the containerized shipping industry which the Company services,
competes with providers of alternative methods of transporting goods, such as by
air, truck and rail. The Company believes that in most instances such
alternative methods are not as cost-effective as shipping of containerized
cargo.
Because rental rates for containers and chassis are not subject to regulation by
any government authority but are determined principally by the demand for and
supply of equipment in each geographical area, price is one of the principal
methods by which the Company competes. In times of low demand and excess supply,
leasing companies tend to grant price concessions, such as free days or pick-up
credits, in order to keep their equipment on lease and to avoid storage charges.
The Company attempts to design lease packages tailored to the requirements of
individual customers and considers its long-term relationships with customers to
be important to its ability to compete effectively. The Company also competes on
the basis of its ability to deliver equipment in a timely manner in accordance
with customer requirements.
Other Business Operations
In addition to its container and chassis leasing operations through Interpool
Limited and Trac Lease, the Company also receives revenues from other
activities. The Company leases approximately 500 freight rail cars to railroad
companies through its Chicago based Railpool division. Microtech Leasing
Corporation, a 75.5% owned subsidiary of the Company, leases microcomputers and
related equipment. The Company also leases intermodal trailers which are
designed to be carried on rail flatcars and pulled by tractor over the highway.
The Company received, in the aggregate, approximately 10% of its consolidated
revenues for the year ended December 31, 1998 from these other business
operations. These operations have been consistently profitable since the
Company's formation.
PoolStat Chassis Pool Management
Trac Lease has developed a new business service, which allows for cooperative
management of chassis among competing shipping lines. Under this program,
shipping lines can "pool" their chassis at common locations such as marine
terminals and railroad depots. The PoolStat software compiles data from each
location and reports on levels of chassis contribution as compared to levels of
chassis usage by each shipping line in the cooperative pool. The benefit of this
program to the shipping lines is a lower overall inventory requirement at each
location. In addition, centralized maintenance and repair improves service
levels to customers and the trucking community. The benefits to Trac Lease are
the management fee, and the closer relationship forged with the same
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shipping lines, which lease chassis from Trac Lease on both a long and
short-term basis. A number of leasing and other companies have been vying to
provide cooperative pool services to the shipping community, and Trac Lease has
been successful at winning most of the contracts awarded to date. PoolStat now
has about 70,000 chassis under contract and is actively looking to increase its
level of business.
Employees
As of December 31, 1998 the Company had approximately 143 employees,
approximately 120 of whom are based in the United States. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its relations with its employees are good.
ITEM 2. PROPERTIES
On July 22, 1998, the Company purchased approximately 18,000 square feet of
condominium office space located on the 27th floor at 633 Third Avenue, New
York, NY 10017. The Company's New York office moved to this new loation during
the forth quarter of 1998. All the Company's other commercial office space,
aggregating approximately 11,000 square feet, is leased. The Company's executive
offices are located at 211 College Road East, Princeton, New Jersey. The Company
also leases office facilities in Chicago, Salem, Barbados, Aberdeen, Antwerp,
Basel, Hong Kong and Singapore.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings from time to time incidental
to the conduct of its business. In the opinion of management, the Company is
adequately insured against the claims relating to such proceedings, and any
ultimate liability arising out of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through
solicitation of proxies during the fourth quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Common Stock of the Company is traded on the New York Stock Exchange under
the symbol "IPX". The following table sets forth for the periods indicated
commencing on January 1, 1996, the high and low last reported sale prices for
the Common Stock on the New York Stock Exchange. All share and per share data
have been adjusted to reflect the 3-for-2 stock split effected on March 27, 1997
and have been rounded to the nearest eighth.
HIGH LOW
---- ---
Calendar Year 1996
First Quarter $12.125 $9.50
Second Quarter 13.25 11.50
Third Quarter 14.75 11.375
Fourth Quarter 16.125 13.125
Calendar Year 1997
First Quarter $16.75 $10.25
Second Quarter 15.50 12.25
Third Quarter 17.75 13.50
Fourth Quarter 17.625 13.50
Calendar Year 1998
First Quarter $15.50 $13.25
Second Quarter 16.1875 14.3750
Third Quarter 18.9375 9.875
Fourth Quarter 17.125 10.00
As of March 22, 1999 there were approximately 1,386 record holders of Common
Stock. On March 22, 1999 the last reported sale price of the Common Stock on the
New York Stock Exchange was $14.9375 per share.
The Company paid a quarterly dividend in the amount of 3.75 cents per share on
its Common Stock in January, April, July and October 1998.
Equity Financing
On January 27, 1997, Interpool Capital Trust, a Delaware statutory business
trust (the "Trust"), sold an aggregate of $75 million in aggregate liquidation
amount of 9 7/8% Capital Securities (the "Capital Securities") for a total sales
price of $75 million in cash. Interpool owns all the common securities of the
Trust. The proceeds received by the Trust from the sale of the Capital
Securities were used by the Trust to acquire $75 million of 9 7/8% Junior
Subordinated Debentures due February 15, 2027 of Interpool.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma consolidated
financial data for the Company, for the periods and at the dates indicated. The
historical financial data for each of the five years in the period ended
December 31, 1998, and at December 31, 1998, 1997, 1996, 1995, and 1994, are
derived from and qualified by reference to the historical consolidated financial
statements that have been audited and reported upon by Arthur Andersen LLP,
independent public accountants. This information should be read in conjunction
with the historical consolidated financial statements of the Company and the
notes thereto.
10
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
1998 1997 (1) 1996 (2) 1995 (3) 1994
---- -------- -------- -------- ----
INCOME STATEMENT DATA:
Revenues $182,316 $161,425 $147,148 $127,925 $92,272
Earnings before interest and taxes 96,624 86,474 81,481 70,752 46,170
Income before extraordinary gain/loss $37,614 $33,091 $34,196 $29,545 $24,102
======= ======= ======= ======= =======
Income per share before extraordinary gain/loss (4)
Basic $1.36 $1.17 $1.24 $1.09 $0.93
===== ===== ===== ===== =====
Diluted $1.31 $1.13 $1.16 $1.02 $0.87
===== ===== ===== ===== =====
Weighted average shares outstanding (4):
Basic 27,561 27,552 25,953 25,953 25,953
Diluted 28,615 29,370 31,438 30,533 30,293
Cash dividends declared per common share (4): $0.15 $0.15 $0.13 $0.12 ---
AS OF DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash, short-term investments and marketable securities $112,298 $42,976 $70,055 $70,661 $107,398
Total assets 1,362,234 1,114,456 939,418 851,600 664,792
Debt and capital lease obligations 932,157 744,227 602,704 571,102 482,323
Stockholders' equity 283,215 250,446 280,546 246,690 156,147
(1) The 1997 income statement data excludes an extraordinary loss of $5,428,
net of the tax benefit, resulting from the retirement of debt.
(2) The 1996 income statement data includes non-recurring expense items
totaling $3,892. The Company recorded a $1,500 charge for the initial
public offering expenses of Interpool Limited which was withdrawn in the
fourth quarter; this charge has a $.06 net income per share effect on
basic basis and a $.05 net income per share effect on a diluted basis.
Also, a $2,392 charge was recorded for the accumulated dividends of the
Company's subsidiary, Trac Lease, Inc. which resulted from the acquisition
of the outstanding preferred stock of Trac Lease through the issuance of
Interpool, Inc. preferred stock. Such charge had no impact on net income
per share because unpaid dividends were included in the computation of net
income per share in prior periods.
(3) The 1995 income statement data excludes the extraordinary gain of $2,422
net of taxes resulting from the exchange of $67,436 of 5 1/4% Convertible
Exchangeable Subordinated Notes due 2018 for new 5 3/4% Cumulative
Convertible Preferred Stock.
(4) Restated to give effect of the three-for-two stock split effective March
27, 1997. In 1997, the Company adopted Statement of Financial Accounting
Standards Statement No. 128. See Note 1 to the consolidated financial
statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's historical financial condition and
results of operations should be read in conjunction with the historical
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this report.
Certain of the matters discussed herein and elsewhere in this Form 10-K may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and as such may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of Interpool to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
General
The Company generates revenues through leasing transportation equipment,
primarily dry cargo containers and container chassis. Most of the Company's
revenues are derived from payments under operating leases and income earned
under finance leases, under which the lessee has the right to purchase the
equipment at the end of the lease term.
Revenue derived from an operating lease generally consists of the total lease
payment from the customer. In 1998, 1997 and 1996, revenues derived from
operating leases were $148.0 million (81% of revenues), $127.6 million (79% of
revenues), and $117.0 million (80% of revenues), respectively.
Revenue derived from a direct finance lease consists only of income recognized
over the term of the lease using the effective interest method. The principal
component of the direct finance lease payment is reflected as a reduction to the
net investment in the direct finance lease. In 1998, 1997 and 1996, total
payments from direct finance leases were $128.1 million, $94.4 million and $81.1
million, respectively. The revenue component of total lease payments totalled
$34.3 million (19% of revenues), $33.8 million (21% of revenues) and $30.1
million (20% of revenues) in 1998, 1997 and 1996, respectively.
The Company's mix of operating and direct finance leases is a function of
customer preference and demand and the Company's success in meeting those
customer requirements. During the initial two years of either an operating lease
or a direct finance lease, the contribution to the Company's earnings before
interest and taxes is very similar. In subsequent periods, however, the
operating lease will generally be more profitable than a direct finance lease,
primarily due to the return of principal inherent in a direct finance lease.
However, after the long-term portion (and any renewal) of an operating lease
expires, the operating lease will have redeployment costs and related risks
which are avoided under a direct finance lease.
The Company conducts business with shipping line customers throughout the world
and is thus subject to the risks of operating in disparate political and
economic conditions. Offsetting this risk is the worldwide nature of the
shipping business and the ability of the Company's shipping line customers to
shift their operations from areas of unfavorable political and/or economic
conditions to more promising areas. Substantially all of the Company's revenues
are billed and paid in U.S. dollars. In addition, the Company's container
purchases are paid for in U.S. dollars. The Company believes these factors
substantially mitigate foreign currency rate risks.
Certain of the shipping lines to which the Company leases containers are
entities domiciled in several Asian countries. In addition, many of the
Company's customers are substantially dependent upon shipments of goods exported
from Asia. Economic disruption, political instability or military disturbances
in these areas of the world could adversely affect the Company. Although the
Company has not experienced any material adverse impact on its business as a
result of the recent financial conditions in certain Asian markets, there can be
no assurance that financial turmoil in one or more of the Asian markets would
not adversely affect the Company's business.
The Company's container leasing operations are conducted through Interpool
Limited, a Barbados corporation. The Company's effective tax rate benefits
substantially from the application of an income tax convention, pursuant to
which the profits of Interpool Limited from container leasing operations are
exempt from federal taxation in the United States. Such profits are subject to
Barbados tax at rates which are significantly lower than the applicable rates in
the United States. See "--United States Federal Income Tax." The Company's
chassis leasing operations are conducted primarily through Trac Lease. Certain
other United States equipment leasing activities are conducted through Interpool
itself.
12
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gain and losses to offset related
results on the hedge item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election before January
1, 1998). The Company has not yet quantified the impacts of adopting Statement
133 on its financial statements and has not determined the timing or method of
our adoption of Statement 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. The Company's consolidated revenues increased to $182.3 million for
the year ended December 31, 1998 from $161.4 million in the year ended December
31, 1997, an increase of $20.9 million or 13%. Of this increase, $8.3 million
was attributable to increased container revenue resulting from an increased
container fleet size which by year-end had grown by approximately 74,000 TEUs
from the previous year. Chassis revenue also increased by $10.8 million with the
fleet increasing to 76,000 units from the previous level of 63,000. Revenue from
other business operations increased by $1.8 million in 1998 primarily due to
increased micro computer leasing revenue of $2.0 million. Partially offsetting
the increase in other business operations revenue was a reduction in intermodal
trailer leasing revenue of $.2 million.
Lease operating and administrative expenses. The Company's lease operating and
administrative expenses increased to $45.0 million for the year ended December
31, 1998 from $39.8 million in the year ended December 31, 1997, an increase of
$5.2 million. The increase was due to higher administrative costs of $3.2
million resulting from both increased operations and inflation, as well as
higher operating expenses of $2.0 million resulting from expanded operations
generating increased commission, insurance and other operating expenses.
Depreciation and amortization. The Company's depreciation and amortization
expenses increased to $42.6 million in the year ended December 31, 1998 from
$35.6 million in the year ended December 31, 1997, an increase of $7.0 million.
The increase is due to an increased fleet size.
Other income, net. The Company's income from unconsolidated subsidiaries net of
goodwill amortization was $.7 million in the year ended December 31, 1998. The
Company's gain on sale of leasing equipment increased to $1.3 million in the
year ended December 31, 1998 from $.5 million in the year ended December 31,
1997.
Interest expense, net. The Company's net interest expense increased to $53.2
million in the year ended December 31, 1998 from $48.9 million in the year ended
December 31, 1997, an increase of $4.3 million. The issuance of additional debt
and lease financing necessary for capital expenditures resulted in additional
interest expense.
Provision for income taxes. The Company's provision for income taxes increased
to $5.8 million in the year ended December 31, 1998 from $4.5 million in the
year ended December 31, 1997, an increase of $1.3 million. This increase was
primarily due to a higher effective tax rate resulting from greater income
contribution from the domestic intermodal division, as well as an increase in
Subpart F taxable income.
Net income. As a result of the factors described above, the Company's net income
was $37.6 million in the year ended December 31, 1998 versus income before
extraordinary loss of $33.1 million in the year ended December 31, 1997. For the
year ended December 31, 1998, the Interpool Limited international container
division contributed $34.6 million to net income while the domestic intermodal
division contributed $3.0 million. An extraordinary loss of $5.4 million, net of
tax benefit, was recorded in the year ended December 31, 1997. This loss
resulted from the retirement of debt replaced with the proceeds of other
financings.
13
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. The Company's consolidated revenues increased to $161.4 million for
the year ended December 31, 1997 from $147.1 million in the year ended December
31, 1996, an increase of $14.3 million or 10%. Of this increase, $6.5 million
was attributable to increased container revenue resulting from an increased
container fleet size which by year-end had grown by approximately 125,000 TEUs
from the previous year. Chassis revenue also increased by $5.2 million with the
fleet increasing to 63,000 units from the previous level of 57,000 and chassis
utilization increasing to 96%. Also contributing to the increased revenue was a
$1.5 million successful legal claim recovery. Revenue from other business
increased by $1.1 million in 1997 primarily due to increased micro computer
leasing revenues of $1.6 million and increased railcar leasing revenue of $.1
million. Partially offsetting the increase in other business operations revenue
was a reduction in intermodal trailer leasing revenue of $.6 million.
Lease operating and administrative expenses. The Company's lease operating and
administrative expenses increased to $39.8 million for the year ended December
31, 1997 from $30.7 million in the year ended December 31, 1996, an increase of
$9.1 million. The increase was due to higher operating expenses of $6.9 million
resulting from expanded operations generating increased maintenance and repair,
positioning, commission, insurance and other operating expenses. Also due to
expanded operations and inflation, higher administrative costs of $2.2 million
were incurred. The increased expenses were primarily incurred in the domestic
intermodal division operations.
Depreciation and amortization. The Company's depreciation and amortization
expenses increased to $35.6 million in the year ended December 31, 1997 from
$32.0 million in the year ended December 31, 1996, an increase of $3.6 million.
The increase was due to expanded operating lease fleet size. Partially
offsetting the increase was the change in the estimated depreciable lives and
salvage value for chassis resulting in a reduction of expense of $.9 million.
Other income, net. The Company's gain on sale of leasing equipment decreased to
$.5 million in the year ended December 31, 1997 from $.9 million in the year
ended December 31, 1996.
Interest expense, net. The Company's net interest expense increased to $48.9
million in the year ended December 31, 1997, from $39.5 million in the year
ended December 31, 1996, an increase of $9.4 million. The issuance of capital
securities increased interest expense by $6.8 million. Also during the third
quarter of 1997 the issuance of $225 million of unsecured notes increased
interest expense by $.9 million because of the excess of interest expense over
interest income until the proceeds were deployed. The remaining increase was due
to increased financings necessary to fund capital expenditures.
Provision for income taxes. The Company's provision for income taxes decreased
to $4.5 million in the year ended December 31, 1997 from $7.8 million in the
year ended December 31, 1996 due to a lower effective tax rate resulting from
lower taxable income in the domestic intermodal division including higher
deductible interest expense on new borrowings in 1997 mentioned previously.
Income before extraordinary loss. As a result of the factors described above,
the Company's income before extraordinary loss decreased to $33.1 million in the
year ended December 31, 1997 from $34.2 million in the year ended December 31,
1996.
Extraordinary loss. The Company recorded extraordinary losses on the retirement
of debt of $5.4 million in the year ended December 31, 1997.
Net income. As a result of the factors described above, the Company's net income
decreased to $27.7 million in the year ended December 31, 1997 from $34.2
million in the year ended December 31, 1996.
Liquidity and Capital Resources
The Company uses funds from various sources to finance the acquisition of
equipment for lease to customers. The primary funding sources are cash provided
by operations, borrowings, generally from banks, the issuance of capital lease
obligations and the sale of the Company's debt securities. In addition, the
Company generates cash from the sale of equipment being retired from the
Company's fleet. In general, the Company seeks to meet debt service requirements
from the leasing revenue generated by its equipment. Since 1990, the Company has
been steadily increasing its fleet of containers and adding to its portfolio of
finance leases. The Company generated cash flow from operations of $164.3
million, $134.9 million, and $123.6 million in 1998, 1997 and 1996,
respectively. In 1998 net cash provided by financing activities was $183.1
million resulting from the issuance of debt and capital securities in excess of
debt payments and dividends paid. In 1997 and 1996, net cash provided by
financing activities was $150.5 million and $21.7 million, the result of the
proceeds from the issuance of debt in excess of debt repayment and dividends
paid. The Company has purchased equipment costing $263.0 million in 1998, $263.8
million in 1997 and $166.6 million in 1996.
The Company has a $215.0 million revolving credit facility with a group of
commercial banks; on December 31, 1998, $115.0 million was outstanding. The term
of this facility extends until May 31, 2000 (unless the lenders elect to renew
the facility) at which time a maximum of 10% of the amount then outstanding
becomes due, with the remainder becoming payable in equal monthly installments
over a five year period. In addition, as of December 31, 1998, the Company had
available lines of credit of $78.0 million under various facilities, under which
$59.3 million was outstanding. Interest rates under these facilities ranged from
6.0% to 6.3%. At December 31, 1998, the Company had total debt outstanding of
$932.2 million. Subsequent to December 31, 1998 the Company has continued to
incur and repay debt obligations in connection with financing its equipment
leasing activities.
14
On February 24, 1998, the Company issued $100 million principal amount of 6-5/8%
Notes due 2003 (the "6-5/8% Private Notes"). The net proceeds were used to repay
$83 million in borrowings under the revolving credit agreement and for other
general corporate purposes. On September 18, 1998, the Company consummated an
exchange offer whereby the entire $100 million principal amount of 6-5/8%
Private Notes were exchanged for the same principal amount of Interpool 6-5/8%
Notes due 2003 (the "6-5/8% Exchange Notes"), which have been registered under
the Securities Act. The 6-5/8% Private Notes were originally issued and sold in
a transaction exempt from registration under the Securities Act. The 6-5/8%
Exchange Notes issued in the exchange offer have substantially the same terms
and conditions as the unregistered 6-5/8% Private Notes, except that the 6-5/8%
Exchange Notes are not subject to the restrictions on resale or transfer, which
applied to the unregistered 6-5/8% Private Notes.
On April 30, 1998, the Company acquired a 50% interest in CAI, a container
leasing company whose business is primarily in the short term master lease
market. CAI would not be deemed a "significant subsidiary" of the Company for
purposes of the Securities and Exchange Commission accounting requirements. The
Company also advanced CAI subordinate debt. The Company's investment in and
advances to CAI totaled approximately $47.5 million.
As of December 31, 1998, commitments for capital expenditures totaled
approximately $37.0 million. The Company expects to fund such capital
expenditures through some combination of cash flow from the Company's
operations, borrowings under its available credit facilities and additional
funds raised through the sale of its debt securities in the private and/or
public markets.
The Company believes that cash generated by continuing operations, together with
existing short-term credit facilities, the issuance of debt securities in the
appropriate markets and the portion of the proceeds remaining from recent debt
security sales will be sufficient to finance the Company's working capital needs
for its existing business, planned capital expenditures and expected debt
repayments over the next twelve months. The Company anticipates that long-term
financing will continue to be available for the purchase of equipment to expand
its business in the future. In addition, from time to time Interpool explores
new sources of capital both at the parent and subsidiary levels.
The following table sets forth certain historical cash flow information for the
three years ended December 31, 1998.
Year Ended December 31,
1998 1997 1996
---- ---- ----
(dollars in millions)
Net cash provided by operating activities $164.3 $134.9 $123.6
Proceeds from disposition of leasing equipment 8.3 5.1 5.7
Acquisition of leasing equipment (182.3) (105.9) (67.5)
Investment in direct financing leases (80.7) (157.8) (99.1)
Net proceeds of issuance of long-term debt and capital leases obligations
in excess of payment of long-term debt and capital lease obligations 153.1 139.0 31.6
The Company invests its available funds in financial instruments and on occasion
makes investments in other businesses.
From time to time, the Company enters into discussions with third parties
regarding potential acquisitions or business combinations. If additional capital
were to be required for any such acquisition, there can be no assurance that
such additional capital would be available on terms acceptable to the Company.
On January 27, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission under which the Company may offer from time
to time up to $400 million aggregate principal amount of its debt and/or equity
securities. As of March 30, 1999, this registration statement has not yet become
effective.
In 1998, the Company entered into interest rate swap contracts with notional
amounts totalling $79.7 million. The terms of the interest rate swap contacts
are for three, five and seven years. The interest rate swap contracts convert
variable rate debt into fixed rate debt. The maturity of these contracts
coincides with the maturity of the underlying debt instruments hedged.
15
In 1996, the Company entered into a five year interest rate swap contract, with
a notional amount of $80 million to convert variable rate debt into fixed rate
debt. The maturity of this contract coincides with the principal and maturity of
the underlying debt instruments hedged. The notional amount was reduced for 1997
when a portion of the debt was retired. At December 31, 1998, the notional
amount was approximately $39 million.
Interest rate swap contracts are intended to be an integral part of borrowing
transactions and, therefore are not recognized at fair value. Interest
differentials paid or received under these contracts are recognized as yield
adjustments to the effective yield of the underlying debt instruments hedged.
Interest rate swap contracts would only be recognized at fair value if the
hedged relationship is terminated. Gains or losses accumulated prior to
termination of the relationship would be amortized as a yield adjustment over
the shorter of the remaining life of the contract, or the remaining period to
maturity of the underlying debt instrument hedged. If the contract remained
outstanding after termination of the hedged relationship, subsequent changes in
market value of the contract would be recognized in earnings. The Company does
not use leveraged swaps and does not use leverage in any of its investment
activities that would put principal capital at risk.
United States Federal Income Tax
The Company is subject to federal and state income taxes as a Subchapter "C"
corporation under the Internal Revenue Code (the "Code"). The Company, Trac
Lease, Inc. and other United States subsidiaries file a consolidated United
States federal income tax return. This consolidated group is liable for federal
income taxes on its worldwide income.
Personal holding company issues. If the Company or any of its subsidiaries were
classified as a personal holding company, such corporation's undistributed
personal holding company income would be subject to a federal income tax of
39.6% in addition to its regular federal income tax liability. The federal
income tax laws have two requirements for classifying a company as a personal
holding company. The Company and its subsidiaries currently satisfy the first
requirement, the ownership of more than 50% of the value of the Company's stock
by five or fewer individuals. Whether or not the Company or any of its
subsidiaries satisfies the second requirement, that at least 60% of such
corporation's adjusted ordinary gross income constitutes personal holding
company income, will depend upon such corporation's income mix.
Based upon current management projections, Interpool will likely be considered a
personal holding company for federal income tax purposes in 1999 (and possibly
in subsequent years). If Interpool or any of its subsidiaries were to be
classified as a personal holding company for federal income tax purposes, in
addition to its regular federal income tax liability, Interpool's or such
subsidiary's undistributed personal holding company income (generally, taxable
income with certain adjustments, including a deduction for federal income taxes
and dividends paid) would be subject to a personal holding company tax of 39.6%.
Management anticipates that in 1999 Interpool's current level of dividends would
be sufficient to avoid having any undistributed personal holding company income,
and thus does not anticipate that there will be any personal holding company tax
imposed in 1999. There can be no assurance, however, that the Company will not
at some point in the future become liable for such personal holding company tax.
Furthermore, the Company may at some point in the future elect to increase the
dividend rate on its common stock in order to avoid such tax.
Trac Lease. Trac Lease has approximately $15.6 million of net operating loss
carryforwards for federal income tax purposes, which may be used only to offset
the income of Trac Lease and, if not utilized, will expire between 2005 and
2006. The use of substantially all these loss carryforwards is subject to a
number of limitations under federal tax laws.
The Company has incurred certain losses from leasing activities that are
characterized for tax purposes as "suspended passive losses". These losses can
be carried forward indefinitely to offset income from future leasing activities.
As of December 31, 1998 such suspended passive losses totalled approximately
$61.7 million.
Interpool Limited. Under certain circumstances, the Company may be liable for
United States federal income taxes on earnings of Interpool Limited and any
other foreign subsidiaries of the Company, whether or not such earnings are
distributed to the Company. This would occur if Interpool Limited realized
"Subpart F income" as defined in the Code, if it were deemed to be a foreign
personal holding company or a passive foreign investment company, or if it were
to have an increase in earnings invested in United States property.
Subpart F income includes foreign personal holding company income, such as
dividends, interest and rents. Although a substantial portion of Interpool
Limited's income consists of rents from container leasing activities, the
Company believes that such rents are not Subpart F income because they are
derived from the active conduct of a trade or business and received from
unrelated persons. However, Interpool Limited has received some dividend and
interest income in 1995 and 1996, which was taxed as Subpart F income.
16
If Interpool Limited were treated as a foreign personal holding company for any
year, the Company would be taxed on the amount the Company would have received
if Interpool Limited had distributed all its income to the Company as a
dividend. One of the conditions for treating a foreign subsidiary as a foreign
personal holding company is that a minimum of 60% of the foreign subsidiary's
gross income must be foreign personal holding company income. Foreign personal
holding company income does not include rental income that constitutes at least
50% of the subsidiary's gross income. Because the Company expects that rental
income will constitute at least 50% of Interpool Limited's gross income, the
Company does not anticipate that Interpool Limited will be deemed a foreign
personal holding company.
A foreign corporation such as Interpool Limited is a passive foreign investment
company if 75% or more of its gross income is foreign personal holding company
income or the average percentage of assets by value held by such corporation
during the taxable year which produce foreign personal holding company income is
at least 50%. The Company does not believe that Interpool Limited is a passive
foreign investment company. If Interpool Limited were to become a passive
foreign investment company, the Company would make the election to treat
Interpool Limited as a qualified electing fund with the result that the Company
would be taxed each year on Interpool Limited's entire earnings. The Taxpayer
Relief Act of 1997 eliminated application of the passive foreign investment
company rules for the Company for years after 1997.
A parent company is also subject to taxation when a foreign subsidiary increases
the amount of its earnings invested in United States property during any
calendar year. The Company does not expect that Interpool Limited will invest
any earnings in United States property.
The Revenue Reconciliation Act of 1993 added a new type of shareholder income
inclusion where a foreign subsidiary has its post-December 31, 1993 earnings
invested in "excess passive assets." Because the Company believes that more than
75% of the adjusted basis of Interpool Limited's assets will constitute assets
used in the active conduct of a trade or business generating income from
unrelated persons, rather than passive assets, the Company does not expect that
the provisions dealing with excess passive assets will apply. The Small Business
Job Protection Act of 1996 repealed the income inclusion for years after 1996.
United States/Barbados income tax convention. Interpool Limited's business is
managed and controlled in Barbados; it also has a permanent establishment in the
United States. Under the Tax Convention, any profits of Interpool Limited from
leasing of containers used in international trade generally are taxable only in
Barbados and not in the United States. For its taxable years commencing prior to
January 1, 1994, Interpool Limited is entitled to the benefits of the Tax
Convention for each year that more than 50% of the shares of Interpool Limited
are owned, directly or indirectly, by United States citizens or residents (the
"stock ownership test") and its income is not used in substantial part, directly
or indirectly, to meet liabilities to persons who are not residents or citizens
of the United States (the "base erosion test"). The Company believes that
Interpool Limited passes both of these tests and should continue to be eligible
for the benefits of the Tax Convention, but there can be no assurance as to such
continued eligibility. If Interpool Limited ceased to be eligible for the
benefits of the Tax Convention, a substantial portion of its income would become
subject to the 35% United States federal income tax and the 30% branch profits
tax.
A protocol to the Tax Convention has been ratified by the United States and
Barbados which amends the eligibility provision of the Tax Convention, making
the stock ownership test easier to satisfy and the base erosion test more
difficult to satisfy. The protocol became effective on January 1, 1994 and
applies to taxable years of Interpool Limited commencing on or after that date.
The Company believes that Interpool Limited will continue to satisfy the base
erosion test and remain eligible for the benefits of the Tax Convention after
1993.
Neither the Tax Convention nor the protocol affords Interpool Limited any relief
from the personal holding company tax or the accumulated earnings tax. To the
extent that Interpool Limited has United States source income that is personal
holding company income or is not needed in its business, Interpool Limited could
be taxed on such income unless such income is distributed to the Company as a
dividend. The Company expects that Interpool Limited would distribute any such
income to the Company.
State and Local Taxes
Income taxes. The Company and Trac Lease are liable for state and local income
taxes on their income, and Interpool Limited is liable for state and local
income taxes on its earnings attributable to operations in the United States.
17
Sales tax. To date, Interpool Limited and Trac Lease generally have not paid
sales taxes on their leasing revenues to the states in which they conduct
business because management has believed such revenues to be exempt from state
sales taxes on several grounds, including a long-standing interpretation of the
Commerce Clause of the United States Constitution that would prohibit the
imposition of a tax on cargo containers and chassis used primarily for
transportation of goods in interstate commerce or international trade. Recently,
Itel Containers International Corp. ("Itel"), a container leasing company,
challenged an attempt by the State of Tennessee to collect sales tax on Itel's
proceeds from the leasing of containers delivered in Tennessee. In a ruling by
the United States Supreme Court in February 1993, Itel's position was rejected
and the Court upheld the right of Tennessee to impose sales tax on leasing
revenues from containers delivered in Tennessee. The Company cannot predict the
extent to which states other than Tennessee will now attempt to collect sales
tax on the Company's equipment leasing revenues based on this Supreme Court
decision. Under the terms of the Company's equipment leases, the Company would
be entitled to pass any such sales tax on to its lessees.
Inflation
Management believes that inflation has not had a material adverse effect on the
Company's results of operations. In the past, the effects of inflation on
administrative and operating expenses have been largely offset through economies
of scale achieved through expansion of the business.
Year 2000
The Company has undertaken a program to address the issues associated with the
onset of the calendar year 2000 ("Y2K"). During 1998, a working group comprised
of senior management and members from potentially effected departments formed to
determine the full scope and related costs of Y2K issues to insure that the
Company's systems continue to meet its internal needs and those of its
customers. The Y2K Working Group meets periodically and reports its findings and
plans to the Company's Board of Directors.
The assessment phase of the Y2K project was completed on August 31, 1998. All
internal systems, hardware, software, and embedded were evaluated for Y2K
compliance. Software source code for in-house developed systems was analyzed to
determine program cognizance of Y2K. The analysis resulted in the need to
upgrade or replace three of the Company's four software systems: the fleet
management system, the accounting system for accounts payable and general
ledger, and the overseas data input program. The fourth program, PoolStat(TM),
has been developed over the past two years using Y2K coding practices. Testing
of PoolStat(TM) was carried out against software developed in-house, resulting
in demonstrated compliance. Testing resulted in demonstrated compliance of all
data servers, and the need to replace a specified number of personal computers
of a specific age and model. Testing was also carried out on internal systems
with embedded clocks and calendars, including the telephone PBX systems. The
result indicated that the PBX in both headquarters needed replacing. The New
York office PBX was replaced on December 18, 1998 and the Princeton office PBX
will be replaced by the middle of May, 1999.
The budget for the Y2K project is $210,000. The 1998 allocation of $75,000 was
associated with time and tools associated with the assessment, and the purchase
of a replacement accounting system. The 1999 budget of $125,000 is primarily
associated with the purchase of new desktop computer systems, a new telephone
PBX system for the Company's Princeton office, and the cost of in-house labor
for modification of date portions of internal software. While most of the
Company's desktop computers were slated for replacement regardless of Y2K
concerns, the presence of Y2K compliance problems have accelerated this effort.
The budget for the project in the year 2000 is $10,000 and covers additional
documentation work and cosmetic work for display of dates as either "2000" or
"00" as users request. The Company's expenditures to date have been
significantly less than budgeted for hardware, due to industry wide price
reductions. Expenditures for labor to date have been less than budgeted as the
completion of other projects has pushed back the Y2K remediation timeline. The
Company is now fully engaged in remediation efforts and will be on or below
budget for the entire project. The original timeframe, developed in August of
1998, has also been revised. Full Y2K compliance is now expected by June 30,
1999.
The Company recognizes that there are additional Y2K factors related to its
dependence on other business partners, including customers, suppliers, and
service providers. Because our business partners' Y2K projects are beyond the
Company's control, it is necessary to determine the level of risk currently
posed by these dependencies. The Company developed a questionnaire requesting
Y2K project information, which has been sent to over 400 business partners,
including approximately 95% of all customers and all key suppliers and service
providers. The majority of questionnaires are expected to be returned before the
end of April, 1999.
18
Potential risk from Y2K failures by outside companies can be categorized by type
of business partner. Risk from customer failure is two fold: potential inability
to pay invoices in a timely manner, and potential loss of effective tracking of
the Company's assets on lease and in their possession. There is some concern
that Asian headquartered shipping lines have been focussing on the effects of
the "Asian crisis" and therefore may not be giving the Y2K problem sufficient
attention. The potential inability of customers to pay invoices may cause the
Company to seek alternate financing to meet its obligations. The Y2K Working
Group will be paying special attention to the questionnaire responses from this
customer segment. Key suppliers are those which would require significant effort
to replace if the flow of goods were affected. Particular companies of concern
are manufacturers and re-manufacturers of chassis, and manufacturers of
containers. Two container manufacturers account for over 40% of new container
purchases. Alternate sources will be examined as part of a contingency plan.
Service providers of primary concern are banks and financial institutions with
which the Company has lines of credit.
The responses to the questionnaire will help determine the extent to which
contingency plans must be made for the Company to continue with uninterrupted
business. This contingency plan is being developed to deal with interruptions in
the flow of goods, services, and/or funds which could be deemed possible based
on the responses to the questionnaires. The contingency plan is expected to be
completed by May 31, 1999. Updates to the questionnaire will be requested
periodically during the last half of 1999 from companies who have disclosed a
high degree of risk, and who could significantly impact the Company's business.
At this time, the Company, if necessary, would begin implementation of its
contingency plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The nature of our business exposes us to market risk arising from changes in
interest rates.
The Company manages interest rate risk to protect its margins on existing
transactions. Interest rate risk is the risk of earnings volatility attributable
to changes in interest rates. Additionally, the Company considers interest rate
swap contracts as an integral part of borrowing transactions. The Company seeks
to minimize its exposure by entering into amortizing interest rate swap
contracts, which coincide with the principal and maturity of the underlying debt
instruments hedged. The Company does not use leveraged swaps and does not use
leverage in any of its investment activities that would put principal capital at
risk.
For 1998, a 10% change in interest rates would result in a $.6 million change in
pretax earnings of the Company.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page No.
INTERPOOL, INC.
Report of Independent Public Accountants 21
Consolidated Balance Sheets--At December 31, 1998 and 22
Consolidated Statements of Income For the Years Ended December 31, 1998, 1997, and 1996 23
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 25
Notes to Consolidated Financial Statements 26
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Interpool, Inc.:
We have audited the accompanying consolidated balance sheets of Interpool, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interpool, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 17, 1999
21
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(dollars in thousands, except per share amounts)
1998 1997
---- ----
ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 107,226 $ 30,402
MARKETABLE SECURITIES 5,072 12,574
ACCOUNTS AND NOTES RECEIVABLE, less allowance of $4,632 and $3,633, respectively 32,746 27,448
NET INVESTMENT IN DIRECT FINANCING LEASES 356,369 363,366
OTHER RECEIVABLES, net, including amounts from related parties of $13,433 and $13,433,
respectively 56,758 35,744
LEASING EQUIPMENT, at cost 905,173 745,351
Less - Accumulated depreciation and amortization (169,079) (136,989)
----------- -----------
LEASING EQUIPMENT, net 736,094 608,362
----------- -----------
OTHER ASSETS 67,969 36,560
----------- -----------
TOTAL ASSETS $ 1,362,234 $ 1,114,456
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 50,098 $ 26,139
INCOME TAXES:
Current 858 836
Deferred 18,751 15,269
----------- -----------
19,609 16,105
DEFERRED INCOME 1,531 2,030
DEBT AND CAPITAL LEASE OBLIGATIONS, including $2,447 and $3,750 due to a related
party, respectively:
Due within one year 77,776 74,830
Due after one year 854,381 669,397
----------- -----------
932,157 744,227
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES IN SUBSIDIARY GRANTOR TRUSTS (holding solely junior subordinated
deferrable interest debentures of the Company) (75,000 shares 9-7/8% Capital
Securities
outstanding, liquidation preference $75,000) 75,000 75,000
MINORITY INTEREST IN EQUITY OF SUBSIDIARIES 624 509
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 1,000,000 authorized, none issued at December 31,
1998 -- --
Common stock, par value $.001 per share; 100,000,000 shares authorized, 27,566,452
outstanding at December 31, 1998 and 27,551,728 at December 31, 1997 28 28
Additional paid-in capital 124,046 124,046
Retained earnings 159,138 125,657
Accumulated other comprehensive income 3 715
----------- -----------
Total stockholders' equity 283,215 250,446
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,362,234 $ 1,114,456
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
22
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands, except per share amounts)
1998 1997 1996
---- ---- ----
REVENUES $ 182,316 $ 161,425 $ 147,148
COST AND EXPENSES:
Lease operating expenses 27,214 25,259 18,361
Administrative expenses 17,825 14,573 12,370
Depreciation and amortization of leasing equipment 42,651 35,611 31,976
Other income, net (1,998) (492) (932)
Interest expense 64,271 54,131 42,784
Interest income (11,061) (5,248) (3,299)
Non-recurring charges -- -- 3,892
--------- --------- ---------
138,902 123,834 105,152
--------- --------- ---------
Income before provision for income taxes and extraordinary loss 43,414 37,591 41,996
PROVISION FOR INCOME TAXES 5,800 4,500 7,800
--------- --------- ---------
Income before extraordinary items 37,614 33,091 34,196
Extraordinary loss on debt retirement, net of applicable taxes of $1,825 -- 5,428 --
--------- --------- ---------
NET INCOME $ 37,614 $ 27,663 $ 34,196
========= ========= =========
INCOME PER SHARE BEFORE EXTRAORDINARY LOSS AND PREMIUM PAID ON REDEMPTION OF
PREFERRED STOCK:
Basic $ 1.36 $ 1.17 $ 1.24
========= ========= =========
Diluted $ 1.31 $ 1.13 $ 1.16
========= ========= =========
EXTRAORDINARY LOSS PER SHARE:
Basic NA $ (0.20) NA
========= ========= =========
Diluted NA $ (0.18) NA
========= ========= =========
PREMIUM PAID ON REDEMPTION OF PREFERRED STOCK:
Basic NA $ (0.24) NA
========= ========= =========
Diluted NA $ (0.23) NA
========= ========= =========
NET INCOME PER SHARE:
Basic $ 1.36 $ 0.73 $ 1.24
========= ========= =========
Diluted $ 1.31 $ 0.71 $ 1.16
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (in thousands):
Basic 27,561 27,552 25,953
Diluted 28,615 29,370 31,438
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECMEBER 31, 1998, 1997, AND 1996
(dollars and shares in thousands)
Preferred Stock Common Stock Accumulated
--------------- ------------ Additional Other
Par Par Paid-in Retained Comprehensive
Shares Value Shares Value Capital Earnings Income
------ ----- ------ ----- ---------- -------- -------------
BALANCE, December 31, 1995 674 $1 25,953 $26 $163,251 $83,342 $70
Net income -- -- -- -- -- 34,196 --
Other comprehensive income -- -- -- -- -- -- 440
Trac Lease minority interest acquisition 84 -- -- -- 6,892 -- --
Exchange of debt for preferred stock 1 -- -- -- 29 -- --
Cash dividends declared:
Preferred stock -- -- -- -- -- (4,241) --
Common stock -- -- -- -- -- (3,460) --
------- ------ ------- ------ -------- ------- ------
BALANCE, December 31, 1996 759 $1 25,953 $26 $170,172 $109,837 $510
Net income -- -- -- -- -- 27,663 --
Other comprehensive income -- -- -- -- -- -- 205
Redemption of preferred stock (510) (1) -- -- (46,154) (6,716) --
Conversion of preferred stock (249) -- 1,597 2 (2) -- --
Conversion of subordinated notes -- -- 2 -- 30 -- --
Cash dividends declared:
Preferred stock -- -- -- -- -- (994) --
Common stock -- -- -- -- -- (4,133) --
------- ------ ------- ----- -------- ------- ------
BALANCE, December 31, 1997 0 $0 27,552 $28 $124,046 $125,657 $715
Net income -- -- -- -- -- 37,614 --
Other comprehensive income -- -- -- -- -- -- (712)
Shares issued on exercise of stock option -- -- 37 -- 363 -- --
Shares surrendered in satisfaction of stock
option purchase price -- -- (23) -- (363) -- --
Cash dividends declared:
Common stock -- -- -- -- -- (4,133) --
------- ------ ------- ----- -------- ------- ------
BALANCE, December 31, 1998 0 $0 27,566 $28 $124,046 $159,138 $3
======= ====== ======= ===== ======== ======== ======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $37,614 $27,663 $34,196
Adjustments to reconcile net income to net cash provided by operating activities --
Extraordinary loss on retirement of debt -- 5,428 --
Cumulative dividend on preferred stock of subsidiary -- -- 2,392
Depreciation and amortization 44,590 37,439 33,371
Gain on sale of leasing equipment (1,313) (492) (932)
Collections on net investment in direct financing leases 128,064 94,384 81,051
Income recognized on direct financing leases (34,288) (33,820) (30,143)
Provision for uncollectible accounts 2,142 1,972 1,126
Changes in assets and liabilities -
Accounts and notes receivable (6,978) (137) (4,159)
Other assets (20,321) (9,159) (976)
Accounts payable and accrued expenses 7,112 9,054 533
Income taxes payable 945 582 294
Provisions for deferred income taxes 2,935 1,989 4,850
Other receivables 4,186 (49) 1,144
Deferred income (499) 60 828
Minority interest in equity of subsidiaries 115 (20) 40
------- ------- -------
Net cash provided by operating activities 164,304 134,894 123,615
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of leasing equipment (182,350) (105,905) (67,538)
Proceeds from dispositions of leasing equipment 8,253 5,115 5,674
Proceeds from disposition of loan receivable 14,148 -- --
Investment in loan receivable (5,698) (21,514) --
Investment in direct financing leases (80,694) (157,845) (99,064)
Investment in and advances to unconsolidated subsidiary (47,469) -- --
Changes in marketable securities and other investing activities 6,405 (20,204) 20,758
Accrued equipment purchases 16,856 -- --
------- ------- -------
Net cash used for investing activities (270,549) (300,353) (140,170)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 230,708 391,533 153,001
Payment of long-term debt and capital lease obligations (77,616) (291,554) (90,493)
Proceeds from issuance of capital securities -- 73,300 --
Redemption of preferred stock -- (52,871) --
Borrowings of revolving credit lines 297,428 197,169 212,363
Repayment of revolving credit lines (263,318) (162,091) (243,241)
Dividends paid (4,133) (4,958) (9,950)
------- ------- -------
Net cash provided by financing activities 183,069 150,528 21,680
------- ------- -------
Net increase (decrease) in cash and short-term investments 76,824 (14,931) 5,125
CASH AND SHORT-TERM INVESTMENTS, beginning of year 30,402 45,333 40,208
------- ------- -------
CASH AND SHORT-TERM INVESTMENTS, end of year $107,226 $30,402 $45,333
======= ======= =======
Supplemental schedule of non-cash financing activities:
Acquisition of subsidiary common and preferred stock in exchange for Company's
5-3/4% Cumulative Convertible Preferred Stock -- -- $6,892
The accompanying notes to consolidated financial statements
are an integral part of these statements.
25
INTERPOOL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(1) Nature of operations and significant accounting policies:
The nature of operations and the significant accounting policies used by
Interpool, Inc. and subsidiaries (the "Company" or "Interpool") in the
preparation of the accompanying consolidated financial statements are summarized
below. The Company's accounting records are maintained in United States dollars
and the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
Nature of operations--
The Company and its subsidiaries conduct business principally in a single
industry segment, the leasing of intermodal dry freight standard containers,
chassis and other transportation related equipment. Within this single industry
segment, the Company has two reportable segments: container leasing and domestic
intermodal equipment. The container leasing segment specializes in the leasing
of intermodal dry freight standard containers, while the domestic intermodal
equipment segment specializes in the leasing of intermodal container chassis and
other equipment namely freight rail cars and intermodal trailers. The Company
leases its containers principally to international container shipping lines
located throughout the world. The customers for the Company's chassis are a
large number of domestic companies, many of which are domestic subsidiaries or
branches of international shipping lines. Equipment is purchased directly or
acquired through conditional sales contracts and lease agreements, many of which
qualify as capital leases.
Basis of consolidation--
The consolidated financial statements include the accounts of the Company and
subsidiaries more than 50% owned. All significant intercompany transactions have
been eliminated. Minority interest in equity of subsidiaries represents the
minority stockholders' proportionate share of the equity in the income of the
subsidiaries.
In connection with acquisitions in 1988 and 1993, the excess of fair value of
assets acquired over the acquisition cost was allocated proportionately to
certain assets to reduce the value assigned to those assets. For accounting
purposes this allocation has only been recorded in the consolidation of the
Company and its subsidiaries.
Translation of foreign currencies--
The Company considers the U. S. dollar its functional currency and therefore,
translates foreign currency statements using an average exchange rate for
revenue and expense accounts and the rate of exchange in effect at the balance
sheet date for assets and liabilities. Substantially all transactions are U.S.
dollar denominated.
Revenues--
Equipment leasing revenues include revenue from operating leases and income on
direct financing leases, which is recognized over the term of the lease using
the effective interest method.
Leasing equipment--
As of December 31, 1998, in excess of 98% of leasing equipment is on lease to
customers. The net value of equipment available for hire is not material.
Depreciation and amortization of leasing equipment (both equipment currently
on-lease to customers and available for hire) are provided under the
straight-line method based on the following estimated useful lives:
Dry freight standard containers 12-1/2 to 15 years
Chassis 15 years
Other 3 to 25 years
26
Effective July 1, 1997, the Company revised its estimate of the depreciation
life of chassis from 20 years to 15 years and also changed the estimated salvage
value of these chassis from one thousand two hundred dollars per unit to two
thousand six hundred dollars per unit. The effect of this change was to decrease
depreciation expense by $853 for the six months ended December 31, 1997.
Gains or losses resulting from the disposition of leasing equipment are recorded
in the year of disposition.
The residual value of leasing equipment is estimated based on the projections
for the economic value and market value of intermodal equipment as well as the
Company's experience in leasing and selling similarly aged equipment. Such
projected values are reviewed and updated when market and/or economic conditions
change. The Company continually reviews leasing equipment and other long lived
assets to evaluate whether changes have occurred that would suggest these assets
may be impaired based on the estimated cash flows of the assets over the
remaining amortization period. If this review indicates that the remaining
estimated useful life requires revision or that the asset is not recoverable,
the carrying amount of the asset is reduced to its fair value.
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 did not have any impact on
the Company's financial statements.
Marketable securities--
Management has determined that all securities are to be held for an indefinite
period of time and classified as securities available-for-sale carried at market
value. Unrealized holding gains and losses for available-for-sale securities are
credited (charged) to a component of stockholders' equity net of related income
taxes. Management determines the appropriate classifications of securities at
the time of purchase.
Premium and discount on securities are included in interest income over the
period from acquisition to maturity using the level-yield method. The specific
identification method is used to record gains and losses on security
transactions.
Sales of available-for-sale securities for the twelve months ended December 31,
1998, 1997 and 1996, respectively resulted in proceeds of $7,838, $26,523 and
$2,852, gross gains of $1,945, $410 and $583, and gross losses of $211, $215 and
$135. There were no transfers of available-for-sale securities to another
category. No net unrealized holding gains or losses have been included in income
for the periods ended December 31, 1998, 1997 and 1996, respectively.
The amortized cost and estimated fair value of available for sale securities as
of December 31, 1998 and 1997 are as follows:
Gross
Unrealized
Amortized Holding Holding Estimiated
Cost Gains Losses Fair Value
--------- ------- ------- ----------
1998
----
U.S. Treasury $1,471 $--- $(1) $1,470
Other Debt Securities 876 --- (26) 850
Equity Securities 2,720 179 (147) 2,752
------ ---- ---- ------
$5,067 $179 $(174) $5,072
====== ==== ===== ======
1997
----
U.S. Treasury $1,808 $106 $-- $1,914
Other Debt Securities 6,401 600 (258) 6,743
Equity Securities 3,356 927 (366) 3,917
------ ---- ---- ------
$11,565 $1,633 $(624) $12,574
======= ====== ===== =======
The amortized cost and estimated fair value of U.S. Treasury and other debt
securities, by contractual maturity, are shown below:
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year $1,471 $1,470
Due after one year through five years 876 850
27
Comprehensive income-
Effective January 1, 1998, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components. Upon adoption of this Statement, the accumulated net
unrealized gain on the Company's available-for-sale investments of $715 and $510
at December 31, 1997 and 1996, respectively was restated as accumulated other
comprehensive income. Adoption of this statement has no effect on the Company's
financial position or operating results.
The following is a reconciliation of net income to comprehensive income:
1998 1997 1996
---- ---- ----
Net income $37,614 $27,663 $34,196
Unrealized gain (loss) on marketable securities, net of tax (712) 205 440
----- ------- -------
Comprehensive income $36,902 $27,868 $34,636
======= ======= =======
The tax effect of comprehensive income is as follows:
Before-Tax Tax Net of
Amount Effect Tax Amount
----------- ------ ----------
Year Ended December 31, 1998
Unrealized gains (losses) on securities-
Unrealized holding gains (losses) arising during period $(2,738) $812 $(1,926)
Less: Reclassification adjustments for gains (losses)
realized in net income 1,734 (520) 1,214
------- ----- -------
Unrealized gain (loss) on marketable securities $(1,004) $292 $(712)
======= ===== =======
Year Ended December 31, 1997
Unrealized gains (losses) on securities-
Unrealized holding gains (losses) arising during period $411 $(21) $390
Less: Reclassification adjustments for gains (losses)
realized in net income 195 (10) 185
------- ----- -------
Unrealized gain (loss) on marketable securities $216 $(11) $205
======= ===== =======
Year Ended December 31, 1996
Unrealized gains (losses) on securities-
Unrealized holding gains (losses) arising during period $922 $(65) $857
Less: Reclassification adjustments for gains (losses)
realized in net income 448 (31) 417
------- ----- -------
Unrealized gain (loss) on marketable securities $474 $(34) $440
======= ===== =======
Fair value of financial instruments--
The carrying amount of cash and short-term investments, trade receivables and
payables, accrued interest receivable and payable and the current portion of
long-term debt approximate fair value. There are no quoted market prices for the
Company's long-term debt and capital securities however, the Company believes
that the carrying amount of these instruments reasonably approximates fair
value.
The following table summarizes the carrying and fair values of the interest rate
swap contracts in place at December 31, 1998:
Carrying Amount Fair Value
Interest rate swap agreements $(26) $(449)
At December 31, 1997, the carrying amount of the interest rate swap contracts
reasonably approximated fair value.
Concentration of credit risk--
The Company extends credit to its customers after extensive credit evaluation.
At December 31, 1998 approximately 36% of accounts receivable and notes
receivable and 84% of the net investment in direct financing leases were from
customers outside of the United States. At December 31, 1997, approximately 29%
of accounts receivable and notes receivable and 87% of the net investment in
direct financing leases were from customers outside of the United States.
The Company's credit exposure to Korean, South American and Indonesian customers
at December 31, 1998 represented 6% of accounts receivable and notes receivable
and 21% of the net investment in direct financing leases. During 1998, 8% of the
Company's consolidated revenues were from these customers.
In 1998, 1997 and 1996 the Company's top 25 customers represented approximately
68%, 64% and 66%, respectively, of its consolidated revenues, with no single
customer accounting for more than 7%.
28
Net income per share--
At year-end 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 that requires the reporting of both basic and diluted income
per share.
Basic net income per share is computed by deducting preferred dividends (and in
1996 adding $2,392 of non-recurring charge for cumulative dividends described
in Note 8) from net income to arrive at income attributable to common
stockholders. This amount is then divided by the weighted average number of
shares outstanding during the period. Diluted income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The dilutive effect
of stock options and shares issuable upon the conversion of the 5 3/4%
Cumulative Convertible Preferred Stock and the 5 1/4% Convertible Exchangeable
Subordinated Notes have been added to the weighted shares outstanding and
interest expense net of tax effect on the notes has been added to net income in
the diluted earnings per share computation. Per share amounts and common shares
outstanding have been restated to give effect to the three-for-two stock split
effected March 27, 1997 described in Note 12.
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
(in thousands)
1998 1997 1996
---- ---- ----
Average common shares outstanding 27,561 27,552 25,953
Common shares issuable (1) 1,054 1,818 5,485
Average common shares outstanding assuming dilution 28,615 29,370 31,438
(1) Issuable primarily under stock option plans in 1998 and 1997 and
both stock option plans and Conversion of convertible securities
in 1996.
On September 16, 1998 the Company canceled all of the 4,393,501 options to
purchase shares of the Company's common stock outstanding under its 1993 Stock
Option Plan for Executive Officers and Directors, as well as the Company's
Nonqualified Stock Option Plan for Non-employee, Non-consultant Directors and
issued 4,393,501 new options in their place. The newly issued options were
granted with an exercise price equal to the closing market price of the
Company's stock as of September 16, 1998 (the "date of grant"). This results in
a new measurement date whereby the newly issued options vest six months from
date of grant and expire ten years from date of grant. All other terms and
conditions of the newly issued options are similar to the canceled options.
Use of estimates--
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) Income taxes:
Significant components of deferred tax assets and liabilities as of December 31,
1998 and 1997 were as follows:
1998 1997
---- ----
Deferred tax assets:
Loss carryforwards $27,040 $17,570
Finance leases receivable 2,778 2,414
Other, primarily operating reserves 3,456 3,026
------- -------
Total deferred tax assets 33,274 23,010
Deferred tax liabilities:
Operating property, net 49,353 36,200
Other 2,672 2,079
------- -------
Total deferred liabilities 52,025 38,279
------- -------
Net deferred tax liability $18,751 $15,269
======= =======
29
One of the Company's subsidiaries has tax net operating loss carryforwards
(NOLs) for Federal income tax purposes totalling approximately $15.6 million
which may be used only to offset that subsidiary's income. These NOLs, if not
utilized, will expire between 2005 and 2006.
A significant subsidiary of the Company is a Barbados corporation. Under the
terms of a protocol between the United States and Barbados, the subsidiary's
leasing income is fully taxable by Barbados, but exempt from U.S. Federal
taxation. For the years 1991 through 1998, the Barbados tax rate was a maximum
of 2 1/2% of income earned in Barbados. No deferred U.S. Federal income taxes
have been provided on the unremitted earnings of the subsidiary since it is the
Company's intention to indefinitely reinvest such earnings. At December 31, 1998
unremitted earnings of this subsidiary were approximately $148,000. The deferred
U.S. Federal Income taxes related to the unremitted earnings of this subsidiary
would be approximately $52,000, assuming these earnings are taxable at the U.S.
statutory rate, net of foreign tax credits.
A reconciliation of the U. S. statutory tax rate to the actual tax rate follows:
1998 1997 1996
---- ---- ----
U.S. statutory rate 35.0% 35.0% 35.0%
Difference due to operation of subsidiary in Barbados (28.1) (28.2) (24.3)
Federal taxes on foreign income 4.0 3.6 3.1
State taxes 2.6 1.7 2.4
Cumulative dividends on Trac Lease, Inc. preferred stock -- -- 2.0
Other (0.1) (0.01) 0.4
----- ------ -----
Actual tax rate 13.4% 12.0% 18.6%
===== ====== =====
The provision for income taxes reflected in the accompanying consolidated
statements of income is as follows:
1998 1997 1996
---- ---- ----
U.S. $5,300 $3,990 $7,210
Other 500 510 590
------ ------ ------
$5,800 $4,500 $7,800
====== ====== ======
Current $2,865 $2,511 $2,950
Deferred 2,935 1,989 4,850
------ ------ ------
$5,800 $4,500 $7,800
====== ====== ======
For further information regarding the Company's tax structure reference is made
to Item 7 of this Form 10-K.
(3) Leasing activities:
As lessee--
The net book value of assets acquired through capital leases was $222,439 at
December 31, 1998. The aggregate capital lease obligations, secured by
equipment, with installments payable in varying amounts through 2008, were
$240,098 at December 31, 1998.
As of December 31, 1998, the annual maturities of capital leases and related
interest were as follows:
Payment Interest Principal
------- -------- ---------
1999 $38,295 $13,707 $24,588
2000 39,157 12,056 27,101
2001 37,010 10,319 26,691
2002 27,939 8,951 18,988
2003 46,030 7,660 38,370
Thereafter 117,175 12,815 104,360
-------- ------- --------
$305,606 $65,508 $240,098
======== ======= ========
The Company leases office space and certain leasing equipment under operating
leases expiring at various dates through 2001. Rental expense under operating
leases aggregated $4,088, $3,728 and $3,838 for the periods ended December 31,
1998, 1997 and 1996, respectively.
30
As of December 31, 1998, the aggregate minimum rental commitment under operating
leases having initial or remaining noncancellable lease terms in excess of one
year was as follows:
1999 $2,422
2000 988
2001 120
2002 33
2003 220
------
$3,783
======
As lessor--
The Company has entered into various leases of equipment that qualify as direct
financing leases. At the inception of a direct finance lease, the Company
records a net investment based on the gross investment (representing the total
future minimum lease payments plus unguaranteed residual value), net of unearned
lease income. The unguaranteed residual value is generally equal to the purchase
option of the lessee, which in the case of the Company's lease contracts is
insignificant and is included in total lease receivables. Unearned income
represents the excess of gross investment over equipment cost. Receivables under
these direct financing leases, net of unearned income, are collectible through
2006 as follows:
December 31, 1998
-----------------
Total Lease Unearned Net Lease
Receivable Lease Income Receivable
------------ ------------ ----------
1999 $136,805 $28,988 $107,817
2000 106,198 20,305 85,893
2001 82,202 12,765 69,437
2002 56,420 7,971 48,449
2003 29,639 3,221 26,418
Thereafter 21,141 2,786 18,355
-------- ------- --------
$432,405 $76,036 $356,369
======== ======= ========
As of December 31, 1998, the Company also had noncancelable operating leases,
under which it will receive future minimum rental payments as follows:
1999 $44,695
2000 17,750
2001 4,505
2002 2,033
2003 666
-------
$69,649
=======
Effective January 1, 1995 the Company began capitalizing lease commissions and
amortizing this cost over the average life of the related lease contract. At
December 31, 1998 and 1997, $3,601 and $3,066 of these commissions were included
in other assets.
(4) Debt:
Debt consists of notes and loans with installments payable in varying amounts
through 2005, with effective interest rates of approximately 5.0% to 7.75% and a
weighted average rate of 6.64% in 1998. The principal amount of debt payable
under fixed rate contracts is $398,415. Remaining debt is payable under floating
rate arrangements. Approximately $116,334 of floating rate debt outstanding has
been converted to fixed rate debt through the use of interest rate swaps as
described below. The agreements contain certain covenants which, among other
things, provide for the maintenance of specified levels of tangible net worth
(as defined) and a maximum debt to net worth ratio. At December 31, 1998, under
covenants in the Company's loan agreement approximately $111,600 of retained
earnings were available for dividends. The Company was in compliance with its
debt covenants at December 31, 1998.
As of December 31, 1998, the annual maturities of notes and loans, net of
interest thereon were as follows:
1999 $53,954
2000 104,973
2001 68,707
2002 45,845
2003 141,847
Thereafter 276,733
--------
$692,059
========
31
The Company has a $215,000 revolving credit facility with a group of commercial
banks; on December 31, 1998, $115,000 was outstanding. The term of this facility
extends until May 31, 2000 (unless the lender elects to renew the facility) at
which time a maximum of 10% of the amount then outstanding becomes due, with the
remainder becoming payable in equal monthly installments over a five year
period. In addition, as of December 31, 1998, the Company had available lines of
credit of $78,000 under various facilities, under which $59,321 was outstanding.
Interest rates under these facilities ranged from 6.0% to 6.3%. At December 31,
1998, the Company had total debt outstanding of $932,157. Subsequent to December
31, 1998 the Company has continued to incur and repay debt obligations in
connection with financing its equipment leasing activities.
On February 24, 1998, the Company issued $100,000 principal amount of 6-5/8%
Notes due 2003 (the "6-5/8% Private Notes"). The net proceeds were used to repay
$83,000 in borrowings under the revolving credit agreement and for other general
corporate purposes. On September 18, 1998, the Company consummated an exchange
offer whereby the entire $100,000 principal amount of 6-5/8% Private Notes were
exchanged for the same principal amount of Interpool 6-5/8% Notes due 2003 (the
"6-5/8% Exchange Notes"), which have been registered under the Securities Act.
The 6-5/8% Private Notes were originally issued and sold in a transaction exempt
from registration under the Securities Act. The 6-5/8% Exchange Notes issued in
the exchange offer have substantially the same terms and conditions as the
unregistered 6-5/8% Private Notes, except that the 6-5/8% Exchange Notes are not
subject to the restrictions on resale or transfer, which applied to the
unregistered 6-5/8% Private Notes.
In July and August, 1997, the Company issued $225,000 of ten year notes,
comprised of $150,000 of 7.35% Notes due 2007 and $75,000 of 7.20% Notes due
2007. The net proceeds from these offerings were used to repay secured
indebtedness, to purchase equipment and for other investments. At December 31,
1998, borrowing outstanding on an unsecured basis totalled $367,382.
In 1998, the Company entered into interst rate swap contracts with notional
amounts totalling $79,709. The terms of the interest rate swap contracts are for
three, five and seven years. The interest rate swap contracts convert variable
rate debt into fixed rate debt. The maturity of these contracts coincides with
the maturity of the underlying debt instruments hedged.
In 1996, the Company entered into a five year interest rate swap contract with a
notional amount of $80,000 to convert variable rate debt into fixed rate debt.
The maturity of this contract coincides with the maturity of the underlying debt
instruments hedged. In 1997, a portion of the debt instrument hedged was retired
and the related portion of the swap contract was closed. At December 31, 1998,
the notional amount was approximately $38,870. In 1995, the Company entered into
and closed out an interest rate swap contract with a notional amount of $82,021
which was designated as a hedge to protect against increases in interest rates
for debt instruments which were secured in 1995. The close out value of the swap
was amortized as a yield adjustment over the remaining period to maturity of the
debt instruments hedged. In 1997, the debt instruments hedged were retired and
the unamortized swap value was recognized as part of the extraordinary loss on
retirement of debt.
Interest rate swap contracts are intended to be an integral part of borrowing
transactions and, therefore are not recognized at fair value. Interest
differentials paid or received under these contracts are recognized as yield
adjustments to the effective yield of the underlying debt instruments hedged.
Interest rate swap contracts would only be recognized at fair value if the
hedged relationship is terminated. Gains or losses accumulated prior to
termination of the relationship would be amortized as a yield adjustment over
the shorter of the remaining life of the contract, or the remaining period to
maturity of the underlying debt instrument hedged. If the contract remained
outstanding after termination of the hedged relationship, subsequent changes in
market value of the contract would be recognized in earnings. The Company does
not use leveraged swaps and does not use leverage in any of its investment
activities that would put principal capital at risk.
(5) Retirement of debt:
During 1997 the Company retired debt and recognized an extraordinary loss of
$5,428 net of tax benefit of $1,825.
(6) Other contingencies and commitments:
At December 31, 1998, the Company has outstanding purchase commitments for
equipment of approximately $37,000.
Under certain of the Company's leasing agreements, the Company as lessee may be
obligated to indemnify the lessor for loss, recapture or disallowance of certain
tax benefits arising from the lessor's ownership of the equipment.
In the second quarter of 1997 the Company recognized a successful legal claim
recovery of approximately $1,500 which is included in revenues.
The Company has entered into employment agreements with certain key officers and
employees which provide for minimum salary, bonus arrangements and benefits for
periods up to seven years.
32
The Company has a number of claims pending against it, has filed claims against
others and has been named as a defendant in a number of lawsuits incidental to
its business. The Company believes that such proceedings will not have a
material effect on its consolidated financial statements.
(7) Cash flow information:
For purposes of the consolidated statements of cash flows, the Company includes
all highly liquid short-term investments with an original maturity of three
months or less in cash and short-term investments.
For the years ended December 31, 1998, 1997 and 1996, cash paid for interest was
approximately $71,248, $51,367 and $41,998, respectively. Cash paid for income
taxes was approximately $2,500, $3,328 and $2,177, respectively.
(8) Related party transactions:
The Company leases approximately 19,000 square feet of commercial space for its
executive offices in Princeton, New Jersey from 211 College Road Associates, a
New Jersey general partnership. Martin Tuchman, the Company's Chief Executive
Officer, holds a direct or indirect equity interest of 28.85% and Radcliff
Group, Inc., a related party, holds a direct or indirect equity interest of
28.15% in 211 College Road Associates. The annual base rental for this property
is approximately $338 under a net lease expiring in 2001, subject to renewal. In
the opinion of the Company's management, rent being paid under this lease does
not exceed rent that the Company would have paid in an arms' length transaction
with an unrelated third party.
The Company had a consultation agreement with Radcliff Group, Inc. pursuant to
which Radcliff designated Warren L. Serenbetz, a stockholder and director, as an
executive consultant. Under the terms of the agreement compensation continues
through December 31, 2002. Compensation under this agreement was $492 in 1998,
1997 and 1996.
On August 10, 1992, The Ivy Group, a related party, borrowed $7,100 from the
Company, evidenced by a promissory note due in July 1997. In connection with
this promissory note, The Ivy Group executed a Chattel Mortgage, Security
Agreement and Assignment under which the Company, as secured party, was granted
a security interest in 4,364 chassis owned by The Ivy Group and was granted an
assignment of all rights to receive rental payments and proceeds related to the
lease and sublease of such chassis. On November 12, 1993, the Company pledged
the 4,364 chassis owned by The Ivy Group as security for an additional Company
borrowing of $4,800 bearing interest at LIBOR plus 1.25%. In consideration of
The Ivy Group's consent to the foregoing, the interest rate on the outstanding
balance of its promissory note to the Company was reduced to match the Company's
borrowing rate.
On February 28, 1996, the Board of Directors approved a loan to The Ivy Group of
an additional $7,035 from the Company by increasing its outstanding balance
under the Ivy loan from $6,398 to $13,433, reflecting the current estimated loan
value of the Ivy collateral. Under the terms of the amended loan, the entire new
balance bears interest at LIBOR plus 1.75% repayable over a five year term on an
interest only basis, subject to maintenance of fixed loan-to-collateral value
ratios. The Company was also granted the right to continue to utilize the
collateral to secure additional Company financings.
The Ivy Group, in which Mr. Tuchman, Radcliff Group, Inc. and Mr. Witteveen hold
interests, has invested in chassis which it has leased to Trac Lease. In 1986,
The Ivy Group became a New Jersey general partnership and Mr. Witteveen and two
senior executive officers of Trac Lease became partners. Radcliff Group, Inc.
and Mr. Tuchman share equally in the net income of The Ivy Group derived from
the lease of 1,184 chassis to Trac Lease ("Contributed Chassis"). In addition,
each of Radcliff Group and Mr. Tuchman receives 28.5% of the net income of The
Ivy Group, other than that derived from the Contributed Chassis. Mr. Witteveen
receives 14.3% of the net income of The Ivy Group, other than that derived from
the Contributed Chassis. In 1996, 1997 and 1998, 17.5%, 29% and 28.5%,
respectively of the aggregate gross income of The Ivy Group was derived from the
Contributed Chassis and 82.5%, 71% and 71.5%, respectively was derived from
other activities. The terms of all agreements between Trac Lease and The Ivy
Group, including rental rates, are fixed and, in the opinion of the Company's
management, are comparable to terms that Trac Lease would have obtained in arms'
length transactions with unrelated third parties. Trac Lease has been advised by
the principals of The Ivy Group that the personal tax consequences to such
principals would make it inadvisable to terminate the transactions entered into
except with respect to any extensions of the lease agreements. The Ivy Group has
entered into an agreement with the Company pursuant to which it has agreed not
to engage in any business activities that are competitive with the business
activities of the Company or its subsidiaries (including Trac Lease) without the
prior consent of the Company.
As of December 31, 1998, pursuant to lease agreements, Trac Lease leases from
The Ivy Group an aggregate 7,030 chassis for aggregate annual lease payments of
approximately $3,400. Such leases either renew automatically unless canceled by
either party prior to the first day of the renewal period or expire in 2000.
33
On August 15, 1992, Eurochassis L.P., a New Jersey limited partnership in which
Raoul J. Witteveen is one of the limited partners and the general partner,
entered into a master equipment lease agreement, as lessor, with Trac Lease, as
lessee, pursuant to which Eurochassis L.P. leases 100 chassis to Trac Lease for
an annual lease payment of $91. The annual lease term renews automatically
unless canceled by either party prior to the first day of the renewal period.
The terms of such master equipment lease agreement, in the opinion of Trac
Lease's management, are comparable to terms that Trac Lease would have obtained
in an arms' length transaction with an unrelated third party.
On March 15, 1996, pursuant to the terms of an Agreement of Merger between Trac
Lease and Trac Lease Merger Corp., a newly formed subsidiary (the "Trac
Merger"), the Company issued an aggregate of 24,390 shares of its 5 3/4%
Cumulative Convertible Preferred Stock ("Interpool Preferred Stock") with a
value of $2,000 to Thomas P. Birnie and Graham Owen, both officers of Trac
Lease, and Messrs. Birnie and Owen surrendered an aggregate of 25,000 shares of
common stock representing 12 1/2% of the outstanding common stock of Trac Lease.
Following the Trac Merger, Interpool, Inc. holds 100% of the outstanding shares
of common stock of Trac Lease.
Pursuant to the terms of the Trac Merger, the Company also issued 59,664 shares
of its Interpool Preferred Stock with a value of $4,892 to The Ivy Group and The
Ivy Group surrendered 2,500 shares of Trac Preferred Stock having a stated value
of $2,500 plus accrued, cumulative dividends of $2,392. Following the Trac
Merger, no shares of Trac Lease Preferred Stock were outstanding. The Trac
Merger was accounted for under the purchase method of accounting. The cumulative
dividends on the Trac Preferred Stock were charged to expense in the first
quarter of 1996 as a non-recurring charge. Such charge had no impact on net
income per share in the first quarter because unpaid dividends on the Trac
Preferred Stock were included in the computation of net income per share in
prior periods.
In December 1996, Interpool acquired all of the limited partnership interest and
substantially all of the senior securities of the Interpool Income Fund I, L.P.,
(the "Income Fund") a Delaware limited Partnership for $21,532. This amount is
included in accounts payable and accrued expense at December 31, 1996. Interpool
co-sponsored the offering of the securities of the Income Fund during 1992 and
1993 and managed the containers and chassis owned by the Income Fund. Fees for
managing the equipment on behalf of the Income Fund were not material. The
Income Fund originally acquired approximately 5,700 TEU containers and
approximately 1,500 chassis. As a result of this acquisition, Interpool received
title to the equipment and will receive all of the revenue from the containers
and chassis owned by the Income Fund, and will no longer be subject to the
Income Fund's obligations to make payments of approximately 11% on its
outstanding securities.
As of February 28, 1998, the Company entered into a Consulting Agreement with
Atlas Capital Partners, L.L.C. ("Atlas"), pursuant to which director nominee
Mitchell I. Gordon, President of Atlas, will provide investment banking
consulting services to the Company for a term of two years. Under the terms of
the Consulting Agreement, Atlas will be paid a monthly fee of $20, plus
reimbursement of the reasonable expenses of Atlas. In addition, Atlas will
receive an annual incentive fee in such amount as is usual and customary in the
investment banking business for investment opportunitites actually completed by
the Company subject to a minimum fee in the amount of $560. In connection
with investment opportunities presented by Atlas, the parties have agreed that
Atlas will receive a twenty percent carried interest in investments made with
funds provided by the Company, upon terms and conditions to be agreed upon by
the parties. The Consulting Agreement is not exclusive on the part of either the
Company or Atlas.
The effect of the above related party transactions included in the accompanying
statement of income are as follows:
1998 1997 1996
---- ---- ----
Revenue $991 $1,006 $851
==== ====== ====
Lease operating expense $3,024 $2,573 $2,573
====== ====== ======
Administrative expense $1,064 $943 $838
====== ==== ====
Interest expense $374 $568 $691
==== ==== ====
Non-recurring charge $-- $-- $2,392
==== ==== ======
(9) Retirement plans:
Certain subsidiaries have defined contribution plans covering substantially all
full-time employees. No contributions were made by the Company or its
subsidiaries to these plans during the years ended December 31, 1998, 1997, and
1996.
34
(10) Segment and geographic data:
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 that requires additional disclosures regarding segments of an
enterprise and related information.
The Company has two reportable segments: container leasing and domestic
intermodal equipment. The container leasing segment specializes in the leasing
of intermodal dry freight standard containers, while the domestic intermodal
equipment segment specializes in the leasing of intermodal container chassis and
other equipment namely freight rail cars and intermodal trailers. Segments below
the quantitiative threshold are included in other and specialize in the leasing
of microcomputers and other related equipment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes and extraordinary
items. The Company's reportable segments are strategic business units that offer
different products and services.
Segment Information:
- --------------------
Domestic
Container Intermodal
1998: Leasing Equipment Other Totals
----- --------- ---------- ----- ------
Revenues from external customers $92,172 $82,069 $8,075 $182,316
Lease operating and administrative expenses 9,621 33,332 2,086 45,039
Depreciation and amortization 20,982 17,732 3,937 42,651
Other income/(expense), net 873 1,078 47 1,998
Interest income 3,353 7,708 -- 11,061
Interest expense 29,489 33,358 1,424 64,271
Non-recurring charges -- -- -- --
Income before taxes and extraordinary item $36,306 $6,433 $675 $43,414
Net investment in DFL's $303,180 $34,563 $18,626 $356,369
Leasing equipment, net 362,591 366,448 7,055 736,094
Equipment purchases 156,695 82,813 23,536 263,044
Total segment assets $756,887 $579,063 $26,284 $1,362,234
Domestic
Container Intermodal
1997: Leasing Equipment Other Totals
----- --------- ---------- ----- ------
Revenues from external customers $86,264 $69,045 $6,116 $161,425
Lease operating and administrative expenses 8,923 28,826 2,083 39,832
Depreciation and amortization 18,097 14,613 2,901 35,611
Other income/(expense), net (3) 383 112 492
Interest income 1,008 3,984 256 5,248
Interest expense 28,528 24,604 999 54,131
Non-recurring charges -- -- -- --
Income before taxes and extraordinary item $31,721 $5,369 $501 $37,591
Net investment in DFL's $320,149 $31,866 $11,351 $363,366
Leasing equipment, net 301,367 300,558 6,437 608,362
Equipment purchases 176,579 68,648 18,523 263,750
Total segment assets $656,176 $439,403 $18,877 $1,114,456
35
Domestic
Container Intermodal
1996: Leasing Equipment Other Totals
----- --------- ---------- ----- ------
Revenues from external customers $79,422 $63,303 $4,423 $147,148
Lease operating and administrative expenses 6,988 22,326 1,417 30,731
Depreciation and amortization 17,288 13,060 1,628 31,976
Other income, net 482 723 (273) 932
Interest Income 1,390 1,909 --- 3,299
Interest Expense 26,179 15,736 869 42,784
Non-recurring charges -- 3,892 --- 3,892
Income before taxes and extraordinary item $30,839 $10,921 $236 $41,996
The Company's shipping line customers utilize international containers in world
trade over many varied and changing trade routes. In addition, most large
shipping lines have many offices in various countries involved in container
operations. The Company's revenue from international containers is earned while
the containers are used in service carrying cargo around the world, while
certain other equipment is utilized in the United States. Accordingly, the
information about the business of the Company by geographic area is derived from
either international sources or from United States sources. Such presentation is
consistent with industry practice.
Geographic Information:
1998 1997 1996
---- ---- ----
REVENUES:
United States (a) $92,106 $80,752 $70,981
International 90,210 80,673 76,167
------- ------- -------
$182,316 $161,425 $147,148
======== ======== ========
ASSETS:
United States $605,347 $469,732 $427,365
International 756,887 644,724 512,053
-------- -------- --------
$1,362,234 $1,114,456 $939,418
========== ========== ========
(a) Includes revenues from related parties of $991, $1,006 and $851
in 1998, 1997 and 1996, respectively.
(11) Company-obligated mandatorily redeemable preferred securities in subsidiary
grantor trusts:
On January 27, 1997, Interpool Capital Trust, a Delaware business trust and
special purpose entity (the "Trust"), issued 75,000 shares of 9 7/8% Capital
Securities with an aggregate liquidation preference of $75,000 (the "Capital
Securities") for proceeds of $75,000. Costs associated with the transaction
amounted to approximately $1,700 and were borne by the Company. Interpool owns
all the common securities of the Trust. The proceeds received by the Trust from
the sale of the Capital Securities were used by the Trust to acquire $75,000 of
9 7/8% Junior Subordinated Deferrable Interest Debentures due February 15, 2027
of the Company (the "Debentures"). The sole asset of the Trust is $77,320
aggregate principal amount of the Debentures. The Capital Securities represent
preferred beneficial interests in the Trust's assets. Distributions on the
Capital Securities are cumulative and payable at the annual rate of 9 7/8% of
the liquidation amount, semi-annually in arrears and commenced February 15,
1997. The Company has the option to defer payment of distributions for an
extension period of up to five years if it is in compliance with the terms of
the Capital Securities. Interest at 9 7/8% will accrue on such deferred
distributions throughout the extension period. The Capital Securities will be
subject to mandatory redemption upon repayment of the Debentures to the Trust.
The redemption price decreases from 104.975% of the liquidation preference in
2007 to 100% in 2017 and thereafter. Under certain limited circumstances, the
Company may, at its option, prepay the Debentures and redeem the Capital
Securities prior to 2007 at a prepayment price specified in the governing
instruments. The obligations of the Company under the Debentures, under the
Indenture pursuant to which the Debentures were issued, under certain guarantees
and under certain back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of the Trust under the
Capital Securities.
36
(12) Capital stock:
The Company's 1993 Stock Option Plan for Executive Officers and Directors (the
"Stock Option Plan") was adopted by the Company's Board of Directors and
approved by the stockholders in March 1993.
A total of 6 million shares of common stock have been reserved for issuance
under the Stock Option Plan. Options may be granted under the Stock Option Plan
to executive officers and directors of the Company or a subsidiary (including
any executive consultant of the Company and its subsidiaries), whether or not
they are employees. During 1994, 2,445,000 options were granted under the Stock
Option Plan at an exercise price of $9.33 a share (the fair value of the
Company's common stock on the dates of the grants). No options were granted in
1995. During 1996, options to purchase 465,001 shares were granted under the
Stock Option Plan at an exercise price of $11.08 a share (the fair value of the
Company's common stock on the dates of the grants). During 1997, options to
purchase 1,498,500 shares were granted under the Stock Option Plan at an
exercise price of $15.58 a share (the fair value of the Company's common stock
on the date of grant). These options vest six months from date of grant and
expire ten years from date of grant.
The Company's Nonqualified Stock Option Plan for Nonemployee, Nonconsultant
Directors (the "Directors' Plan") was adopted by the Board of Directors and
approved by the stockholders in March 1993. Under the Directors' Plan a
nonqualified stock option to purchase 15,000 shares of common stock is
automatically granted to each nonemployee, nonconsultant director of the
Company, in a single grant at the time the director first joins the Board of
Directors. The Directors' Plan authorizes grants of options up to an aggregate
of 150,000 shares of common stock. The exercise price per share is the fair
market value of the Company's common stock on the date on which the option is
granted (the "Grant Date"). The options granted pursuant to the Directors' Plan
may be exercised at the rate of 1/3 of the shares on the first anniversary of
the director's Grant Date and 1/3 of the shares on the second anniversary of the
director's Grant Date and 1/3 of the shares on the third anniversary of the
director's Grant Date, subject to certain holding periods required under rules
of the Securities and Exchange Commission. Options granted pursuant to the
Directors' Plan expire ten years from their Grant Date. Pursuant to the
Director's Plan, in March 1993 options to purchase 15,000 shares of common stock
at the public offering price of $9.33 a share were granted to each of three
Directors of the Company.
The Directors' Plan is administered by the Stock Option Committee of the Board
of Directors. Pursuant to the Directors' Plan, in June 1994 an option to
purchase 15,000 shares of common stock at $7.67 a share was granted to Peter D.
Halstead upon his appointment to the Board. In April 1996, an option to purchase
15,000 shares of common stock at $12.17 a share was granted to Joseph J. Whalen
upon his appointment to the Board.
To date, options to purchase 4,408,501 shares under the Company's 1993 Stock
Option Plan for Executive Officers and Directors have been granted, 22,500 of
which have expired due to failure to exercise and 22,500 of which have been
exercised as more fully set forth below. Options to purchase 75,000 shares have
been granted under the Company's Non-qualifed Stock Option Plan for
Non-employee, Non-consultant Directors 30,000 of which have expired due to
failure to exercise and 15,000 of which have been exercised as more fully set
forth below.
On May 7, 1998, John M. Bucher, a retired director of the Company, exercised
options to purchase 22,500 shares of common stock pursuant to the Company's 1993
Stock Option Plan for Executive Officers and Directors and options to purchase
15,000 shares of common stock pursuant to the Company's Non-qualified Stock
Option Plan for Non-employee, Non-consultant Directors. The exercise price of
30,000 and 7,500 options was $9.33 and $11.08 per share, respectively. Mr.
Bucher elected to pay the exercise price by surrendering a total of 22,776
shares of common stock issued upon the exercise of such options (13,995 under
the 1993 Stock Option Plan for Executive Officers and Directors and 8,781 under
the Non-qualified Stock Option Plan for Non-employee, Non-consultant Directors)
thereby reducing the number of shares to be issued to 14,724. After giving
effect the exercised options, the Company's outstanding common stock was
increased to 27,566,452 shares.
On September 16, 1998 the Company canceled all of the 4,393,501 options to
purchase shares of the Company's common stock outstanding under its 1993 Stock
Option Plan for Executive Officers and Directors, as well as the Company's
Nonqualified Stock Option Plan for Non-employee, Non-consultant Directors and
issued 4,393,501 new options in their place. The newly issued options were
granted with an exercise price equal to the closing market price of the
Company's stock as of September 16, 1998 (the "date of grant"). This results in
a new measurement date whereby the newly issued options vest six months from
date of grant and expire ten years from date of grant. All other terms and
conditions of the newly issued options are similar to the canceled options.
Except as disclosed herein above, no other options under either the 1993 Stock
Option Plan for Executive Officers and Directors or the Non-qualified Stock
Option Plan for Non-employee, Non-consultant Directors have been exercised to
date.
Common stock dividends declared and unpaid at December 31, 1998 amounted to
$1,034, and are included in accounts payable and accrued expenses.
37
Effective January 1, 1996, the Company adopted the provisions of Statement No.
123, Accounting for Stock-Based Compensation. As permitted by the Statement, the
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method. To date, all options were granted with exercise price
equal to the fair market price of the Company's Stock at Grant Date,
accordingly, no compensation expense has been recognized. Options issued with an
exercise price below the fair value of the Company's common stock on the date of
grant will be accounted for as compensatory options. The difference between the
exercise price and the fair value of the Company's common stock will be charged
to expense over the shorter of the vesting or service period. Options issued at
fair value are non-compensatory. Had the fair value method of accounting been
applied to the Company's stock option plans, which requires recognition of
compensation cost ratably over the vesting period of the underlying equity
instruments, net income would have been reduced by $9,433 or $.34 per share
basic and $.33 per share diluted in 1998, $6,959 or $.25 per share basic and
$.24 per share diluted in 1997 and $1,473 or $.06 per basic share and $.05 per
share diluted in 1996. This pro forma impact only takes into account options
granted since January 1, 1995. The average fair value of options granted during
1998, 1997 and 1996 was $3.56, $7.74 and $5.28, respectively. The fair value was
estimated using the Black-Scholes option pricing model based on the market price
at grant date of $10.25, $15.58 and $11.08 in 1998, 1997 and 1996, respectively
and the following weighted average assumptions: risk-free interest rate of
4.95%, 7.11% and 6.22% expected life of 7, 10 and 10 years, volatility of 35%,
28% and 31% and dividend yield of 1.5%, 1.0% and 1.2% in 1998, 1997 and 1996,
respectively.
In 1996 there was a non-recurring charge of $1,500 for the initial public
offering expense of Interpool Limited, which was withdrawn in the fourth
quarter.
The Company used $52,871 of net proceeds from the sale of the Debentures to the
Trust to redeem 509,964 shares of the Company's 5 3/4% Cumulative Convertible
Preferred Stock (the "Preferred Stock") on March 10, 1997 at a redemption price
of 103.675% per share of the liquidation value. As a result of the redemption of
shares of Preferred Stock, the Company recorded a one-time charge to retained
earnings of $6,716 or 24 cents per share on a basic basis and 23 cents per share
on a diluted basis.
On March 10, 1997, a total of 248,730 shares, or $24,873 in aggregate
liquidation value, of the Company's 5 3/4% Cumulative Convertible Preferred
Stock (representing 32.78% of the outstanding shares of Preferred Stock) were
converted into a total of 1,596,446 shares of Common Stock.
On March 27, 1997, the Company effected a three-for-two stock split. All prior
periods have been restated for this stock split.
(13) 1998 quarterly financial data (unaudited):
1st 2nd 3rd 4th
--- --- --- ---
Revenues $42,832 $44,506 $46,115 $48,863
Income before extraordinary loss $8,110 $9,374 $10,055 $10,075
Basic income per share $0.29 $0.34 $0.36 $0.37
Diluted income per share $0.28 $0.33 $0.35 $0.35
1997 quarterly financial data (unaudited):
1st 2nd 3rd 4th
--- --- --- ---
Revenues $38,176 $39,784 $40,962 $42,503
Income before extraordinary loss $9,094 $8,827 $7,924 $7,246
Basic income per share $0.31 $0.32 $0.29 $0.26
Diluted income per share $0.29 $0.31 $0.28 $0.25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 is hereby incorporated by reference to
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed on or
about April 19, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is hereby incorporated by reference to
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed on or
about April 19, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this Item 12 is hereby incorporated by reference to
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed on or
about April 19, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is hereby incorporated by reference to
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed on or
about April 19, 1999.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) FINANCIAL STATEMENTS
INTERPOOL, INC.
Report of Independent Public Accountants
Consolidated Balance Sheets--At December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other 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
1.1 -- Purchase Agreement between Interpool, Inc. and Smith Barney Inc.,
as initial purchaser, dated July 24, 1997 relating to the issuance
of the Company's 7.35% Notes due 2007 (incorporated by reference to
the Company's Current Report on Form 8-K dated July 27, 1997).
1.2 -- Purchase Agreement between Interpool, Inc. and Smith Barney Inc.,
as initial purchaser, dated July 31, 1997 relating to the issuance
of the Company's Quarterly Report on Form 10-Q for the period ended
Sepember 30, 1997).
3.1 -- Form of Restated Certificate of Incorporation of the Company
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
3.2 -- Form of Restated Bylaws of the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
4.1 -- Form of Certificate representing the Common Stock incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
4.2 -- Indenture between Interpool, Inc. and United States Trust Company of
New York, as trustee, relating to the Notes, dated July 29, 1997
incorporated herein by reference to the Company's Form S-4 filed on
October 23, 1997.
4.3 -- Registration Rights Agreement between Interpool, Inc. and Smith
Barney Inc., as initial purchaser, dated July 29, 1997 incorporated
herein by reference to the Company's Form S-4 filed on October 23,
1997.
4.4 -- Indenture between Interpool, Inc. and United States Trust Company of
New York, as trustee, relating to the Notes, dated August 5, 1997
incorporated herein by reference to the Company's Form S-4 filed on
October 24, 1997.
4.5 -- Registration Rights Agreement between Interpool, Inc. and Smith
Barney Inc., as initial purchaser, dated August 5, 1997 incorporated
herein by reference to the Company's Form S-4 filed on October 24,
1997.
10.1 -- Purchase Agreement dated as of January 30, 1993 by and between Sequa
Capital Corp. and the Company, as amended as of March 5, 1993
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.2 -- Restructuring Agreement as of August 5, 1992 among the Company, Trac
Lease, Radcliff Group, Interpool Limited, Sequa Capital Corp.,
Martin Tuchman, Raoul J. Witteveen, Warren L. Serenbetz, Warren L.
Serenbetz, Jr., Paul H. Serenbetz, Stuart W. Serenbetz and Clay R.
Serenbetz incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
10.3 -- Amended and Restated Term Credit Agreement dated as of February 19,
1993 between the Company and Swiss Bank Corporation incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.4 -- Promissory Note of the Company dated February 11, 1993 to United
Jersey Bank/Central N.A. incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
40
10.5 -- Employment Agreement dated as of January 1, 1992 by and between
Raoul J. Witteveen and the Company incorporated herein by reference
to the Company's Registration Statement on Form S-1 declared
effective by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.6 -- Employment Agreement dated as of January 1, 1992 by and between
Radcliff Group and the Company incorporated herein by reference to
the Company's Registration Statement on Form S-1 declared effective
by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.7 -- Consultation Services Agreement dated as of January 1, 1992 by and
between Radcliff Group and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.9 -- Form of Stock Option Plan for Executive Officers and Directors
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.10 -- Form of Stockholders' Agreement dated as of May 4, 1993, among the
Company and Messrs. Martin Tuchman, Raoul J. Witteveen, Warren L.
Serenbetz, Warren L. Serenbetz, Jr., Clay R. Serenbetz, Paul H.
Serenbetz, Stuart W. Serenbetz and Arthur L. Burns and the Serenbetz
Trust incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.12 -- Form of Non-Compete Agreement dated as of May 4, 1993, by and
between The Ivy Group and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on December 7, 1993 (Reg. No.
33-71538).
10.13 -- Lease Agreements by and between 211 College Road Associates and
Interpool Limited and 211 College Road Associates and Microtech
Leasing. incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
10.14 -- Lease Agreement dated December 30, 1986 between Princeton Intermodal
Equipment Trust I and Trac Lease. incorporated herein by reference
to the Company's Registration Statement on Form S-1 declared
effective by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.15 -- Lease Agreements between The Ivy Group and Trac Lease incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.16 -- Amendment No. 1, dated August 10, 1992, to Secured Promissory Note
and Chattel Mortgage, Security Agreement and Assignment by and
between The Ivy Group and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.17 -- Chassis Lease Agreement dated as of August 15, 1992 by and between
Eurochassis L.P. and Trac Lease incorporated herein by reference to
the Company's Registration Statement on Form S-1 declared effective
by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.18 -- Form of Transfer and Subscription Agreement among Radcliff Group,
Martin Tuchman, Raoul J. Witteveen, Warren L. Serenbetz, Warren L.
Serenbetz, Jr., Clay R. Serenbetz, Paul H. Serenbetz, Stuart W.
Serenbetz, the Serenbetz Trust and the Company incorporated herein
by reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.19 -- Form of Exchange and Subscription Agreement by and between the
Company and Arthur L. Burns incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
10.20 -- Demand promissory notes of the Company payable to Martin Tuchman,
Warren L. Serenbetz and Princeton International Properties
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.23 -- Indemnity Agreement between the Company and other directors
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.26 -- Agreement between the Company and Arthur L. Burns regarding certain
litigation incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
10.27 -- Indenture between the Company and IBJ Schroeder Bank & Trust
Company, as Trustee, dated January 27, 1997 incorporated herein by
reference to the Company's Annual Report on Form 10-K for the period
ended 12/31/96.
10.28 -- First Supplemental Indenture between Interpool, Inc. and IBJ
Schroeder Bank & Trust Company dated January 27, 1997 incorporated
herein by reference to the Registrant's Annual Report on Form 10-K
for the period ended 12/31/96.
10.29 -- Series A Capital Securities Guarantee Agreement dated January 27,
1997 incorporated herein by reference to the Company's Annual Report
on Form 10-K for the period ended 12/31/96.
10.30 -- Agreement of Merger dated March 15, 1996 among Trac Lease, Inc.,
Trac Lease Merger Corp. and the Company incorporated herein by
reference to the Company's Annual Report on Form 10-K for the period
ended 12/31/95.
10.31 -- Letter Agreement between The Ivy Group and the Company incorporated
herein by reference to the Registrant's Annual Report on Form 10-K
for the period ended 12/31/95.
41
10.32 -- Chassis Lease Agreement dated January 1, 1998 between The Ivy Group
and Trac Lease, Inc.
10.33 -- Consulting Agreement between Interpool, Inc. and Atlas Capital
Partners dated February 28, 1998 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998).-
12.1 -- Statement regarding computation of ratios of earnings to fixed
charges incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on December 7, 1993 (Reg. No. 33-71538).
21.1 -- Subsidiaries of the Company incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
27. -- Financial Data Schedule.
99.1 -- Press Release dated October 23, 1998 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998).
99.2 -- Press Release dated October 27, 1998 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998).
99.3 -- Press Release dated November 27, 1998.
99.4 -- Press Release dated December 28, 1998.
99.5 -- Press Release dated February 17, 1999.
(b) REPORTS ON FORM 8-K
(b)(1) No reports on Form 8-K were filed during the quarter ended December 31,
1998. During 1998, the Company filed one Current Report on Form 8-K. On February
24, 1998, the Company filed a Current Report on Form 8-K reporting the sale of
$100 million aggregate principal amount of 6 5/8% Notes Due 2003 in a private
transaction pursuant to Rule 144A under the Securities Act of 1933, as amended.
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders of Interpool, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Interpool, Inc. and subsidiaries included
in this Form 10-K and have issued our report thereon dated February 17, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Schedule II is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
New York, New York
February 17, 1999
43
INTERPOOL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
Balance at Charge to Costs Write-offs, Net Balance at
Beginning of Year and Expenses of Recoveries End of Year
Year Ended December 31, 1998 $3,633 $2,142 $1,143 $4,632
====== ====== ====== ======
Year Ended December 31, 1997 $2,506 $1,972 $845 $3,633
====== ====== ==== ======
Year Ended December 31, 1996 $2,099 $1,126 $719 $2,506
====== ====== ==== ======
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERPOOL, INC.
(Registrant)
March 26, 1999 By /s/ Martin Tuchman
-------------------
Martin Tuchman
Chairman of the Board, Chief Executive Officer,
and Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 26, 1999 By /s/ Martin Tuchman
------------------
Martin Tuchman
Chairman of the Board, Chief Executive Officer,
and Director (Principal Executive Officer)
March 26, 1999 By /s/ Raoul J. Witteveen
----------------------
Raoul J. Witteveen
President, Chief Financial Officer and
Director (Principal Financial Officer)
March 26, 1999 By /s/ Warren L. Serenbetz
-----------------------
Warren L. Serenbetz
Director
March 26, 1999 By /s/ Mitchell I. Gordon
----------------------
Mitchell I. Gordon
Director
March 26, 1999 By /s/ Arthur L. Burns
--------------------
Arthur L. Burns
Director
March 26, 1999 By /s/ Peter D. Halstead
---------------------
Peter D. Halstead
Director
March 26, 1999 By /s/ Joseph J. Whalen
--------------------
Joseph J. Whalen
Director
March 26, 1999 By /s/ William Geoghan
-------------------
William Geoghan
Senior Vice President (Principal Accounting Officer)
45
EXHIBIT INDEX
1.1 -- Purchase Agreement between Interpool, Inc. and Smith Barney Inc.,
as initial purchaser, dated July 24, 1997 relating to the issuance of
the Company's 7.35% Notes due 2007 (incorporated by reference to the
Company's Current Report on Form 8-K dated July 27, 1997).
1.2 -- Purchase Agreement between Interpool, Inc. and Smith Barney Inc.,
as initial purchaser, dated July 31, 1997 relating to the issuance of
the Company's 7.20% Notes due 2007 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
3.1 -- Form of Restated Certificate of Incorporation of the Company
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
3.2 -- Form of Restated Bylaws of the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
4.1 -- Form of Certificate representing the Common Stock incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
4.2 -- Indenture between Interpool, Inc. and United States Trust Company
of New York, as trustee, relating to the Notes, dated July 29, 1997
(incorporated by reference to the Company's Form S-4 filed on October
23, 1997).
4.3 -- Registration Rights Agreement between Interpool, Inc. and Smith
Barney Inc., as initial purchaser, dated July 29, 1997 incorporated
by reference to the Company's Form S-4 filed on October 23, 1997.
4.4 -- Indenture between Interpool, Inc. and United States Trust Company of
New York, as trustee, relating to the Notes, dated August 5, 1997
incorporated by reference to the Company's Form S-4 filed on October
24, 1997.
4.5 -- Registration Rights Agreement between Interpool, Inc. and Smith
Barney Inc., as initial purchaser, dated August 5, 1997 incorporated
by reference to the Company's Form S-4 filed on October 24, 1997.
10.1 -- Purchase Agreement dated as of January 30, 1993 by and between Sequa
Capital Corp. and the Company, as amended as of March 5, 1993.
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.2 -- Restructuring Agreement as of August 5, 1992 among the Company, Trac
Lease, Radcliff Group, Interpool Limited, Sequa Capital Corp., Martin
Tuchman, Raoul J. Witteveen, Warren L. Serenbetz, Warren L.
Serenbetz, Jr., Paul H. Serenbetz, Stuart W. Serenbetz and Clay R.
Serenbetz incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
10.3 -- Amended and Restated Term Credit Agreement dated as of February 19,
1993 between the Company and Swiss Bank Corporation incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.4 -- Promissory Note of the Company dated February 11, 1993 to United
Jersey Bank/Central N.A. incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
10.5 -- Employment Agreement dated as of January 1, 1992 by and between Raoul
J. Witteveen and the Company. incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
10.6 -- Employment Agreement dated as of January 1, 1992 by and between
Radcliff Group and the Company incorporated herein by reference to
the Company's Registration Statement on Form S-1 declared effective
by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.7 -- Consultation Services Agreement dated as of January 1, 1992 by and
between Radcliff Group and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.9 -- Form of Stock Option Plan for Executive Officers and Directors
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.10 -- Form of Stockholders' Agreement dated as of May 4, 1993, among the
Company and Messrs. Martin Tuchman, Raoul J. Witteveen, Warren L.
Serenbetz, Warren L. Serenbetz, Jr., Clay R. Serenbetz, Paul H.
Serenbetz, Stuart W. Serenbetz and Arthur L. Burns and the Serenbetz
Trust incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.12 -- Form of Non-Compete Agreement dated as of May 4, 1993, by and between
The Ivy Group and the Company incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on December 7, 1993 (Reg. No. 33-71538).
10.13 -- Lease Agreements by and between 211 College Road Associates and
Interpool Limited and 211 College Road Associates and Microtech
Leasing incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
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10.14 -- Lease Agreement dated December 30, 1986 between Princeton Intermodal
Equipment Trust I and Trac Lease incorporated herein by reference to
the Company's Registration Statement on Form S-1 declared effective
by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.15 -- Lease Agreements between The Ivy Group and Trac Lease incorporated
herein by reference to the Company's Registration Statement on Form
S-1 declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.16 -- Amendment No. 1, dated August 10, 1992, to Secured Promissory Note
and Chattel Mortgage, Security Agreement and Assignment by and
between The Ivy Group and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.17 -- Chassis Lease Agreement dated as of August 15, 1992 by and between
Eurochassis L.P. and Trac Lease incorporated herein by reference to
the Company's Registration Statement on Form S-1 declared effective
by the Commission on May 4, 1993 (Reg. No. 33-59498).
10.18 -- Form of Transfer and Subscription Agreement among Radcliff Group,
Martin Tuchman, Raoul J. Witteveen, Warren L. Serenbetz, Warren L.
Serenbetz, Jr., Clay R. Serenbetz, Paul H. Serenbetz, Stuart W.
Serenbetz, the Serenbetz Trust and the Company incorporated herein by
reference to the Company's Registration Statement on Form S-1
declared effective by the Commission on May 4, 1993 (Reg. No.
33-59498).
10.19 -- Form of Exchange and Subscription Agreement by and between the
Company and Arthur L. Burns incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
10.20 -- Demand promissory notes of the Company payable to Martin Tuchman,
Warren L. Serenbetz and Princeton International Properties
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.23 -- Indemnity Agreement between the Company and other directors
incorporated herein by reference to the Company's Registration
Statement on Form S-1 declared effective by the Commission on May 4,
1993 (Reg. No. 33-59498).
10.26 -- Agreement between the Company and Arthur L. Burns regarding certain
litigation incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on May 4, 1993 (Reg. No. 33-59498).
10.27 -- Indenture between the Company and IBJ Schroeder Bank & Trust Company,
as Trustee, dated January 27, 1997 incorporated herein by reference
to the Company's Annual Report on Form 10-K for the period ended
12/31/96.
10.28 -- First Supplemental Indenture between Interpool, Inc. and IBJ
Schroeder Bank & Trust Company dated January 27, 1997 incorporated
herein by reference to the Registrant's Annual Report on Form 10-K
for the period ended 12/31/96.
10.29 -- Series A Capital Securities Guarantee Agreement dated January 27,
1997 incorporated herein by reference to the Company's Annual Report
on Form 10-K for the period ended 12/31/96.
10.30 -- Agreement of Merger dated March 15, 1996 among Trac Lease, Inc., Trac
Lease Merger Corp. and the Company incorporated herein by reference
to the Company's Annual Report on Form 10-K for the period ended
12/31/95.
10.31 -- Letter Agreement between The Ivy Group and the Company incorporated
herein by reference to the Company's Annual Report on Form 10-K for
the period ended 12/31/95.
10.32 -- Chassis Lease Agreement dated January 1, 1998 between The Ivy Group
and Trac Lease, Inc.
10.33 -- Consulting agreement between Interpool, Inc. and Atlas Capital
Partners dated February 28, 1998 (incorported by reference to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1998).
12.1 -- Statement regarding computation of ratios of earnings to fixed
charges incorporated herein by reference to the Company's
Registration Statement on Form S-1 declared effective by the
Commission on December 7, 1993 (Reg. No. 33-71538).
21.1 -- Subsidiaries of the Company incorporated herein by reference to the
Company's Registration Statement on Form S-1 declared effective by
the Commission on May 4, 1993 (Reg. No. 33-59498).
27. -- Financial Data Schedule.
99.1 -- Press Release dated October 23, 1998 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998).
99.2 -- Press Release dated October 27, 1998 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998).
99.3 -- Press Release dated November 27, 1998.
99.4 -- Press Release dated December 28, 1998.
99.5 -- Press Release dated February 17, 1999.
47