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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 0-24464
THE CRONOS GROUP
(Exact name of Registrant as specified in its charter)
LUXEMBOURG NOT APPLICABLE
(State or other Jurisdiction of incorporation (I.R.S Employer Identification No.)
or organization)
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODES:
(352) 453145
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
Title of each class Name of each exchange on which registered
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
COMMON SHARES, $2 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 23, 2000 (Common Shares) was approximately
$49,744,305.
The number of Common Shares outstanding as of March 23, 2000:
CLASS NUMBER OF SHARES OUTSTANDING
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Common 9,158,378
Portions of the following documents have been incorporated by reference
into this report.
DOCUMENT PARTS IN WHICH INCORPORATED
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Registrant's Registration Statement On Form S-8, dated
February 25, 2000 Part I
Registrant's Current Report On Form 8-K, dated January 21,
2000 Part I
Registrant's Quarterly Report On Form 10-Q, for the Quarter
Ended June 30, 1999 Part II
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THE CRONOS GROUP
TABLE OF CONTENTS
PAGE
----
Introductory Note........................................... ii
PART I
Item 1 -- Description of Business........................... 1
Item 2 -- Properties........................................ 10
Item 3 -- Legal Proceedings................................. 11
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................... 12
PART II
Item 5 -- Market for the Company's Common Equity and Related
Stockholder Matters....................................... 13
Item 6 -- Selected Financial Data........................... 14
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 7A -- Quantitative and Qualitative Disclosures about
Market Risk............................................... 22
Item 8 -- Financial Statements and Supplementary Data....... 23
Item 9 -- Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 23
PART III
Item 10 -- Directors and Executive Officers of Registrant... 24
Item 11 -- Executive Compensation........................... 27
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management............................................ 33
Item 13 -- Certain Relationships and Related Transactions... 35
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 37
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INTRODUCTORY NOTE
Unless the context indicates otherwise, the "Company" means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
"Cronos" means The Cronos Group together with its subsidiaries and predecessors.
"TEU" means twenty-foot equivalent units, the standard unit of physical
measurement in the container industry. All references herein to "$" or "Dollars"
are to United States dollars.
All statements in this report regarding the market for the Company's
container leasing services and the Company's revenues, expenses, and financial
condition, and any statement containing the words "anticipate," "believe,"
"plan," "estimate," "expect," "intend," or other similar expressions, constitute
forward-looking statements. Our actual results of operations may differ
materially from those contained in any forward-looking statement. This
cautionary statement applies to all forward-looking statements wherever they
appear in this report.
An investment in the Common Shares of the Company involves a high degree of
risk. The risks that attend the Company and its business include the following:
The Company is heavily dependent upon third parties to supply it with
the capital needed to acquire containers; such capital may not be available
to the Company to enable it to expand its fleet of containers.
The Company is in a dispute with a group of container owners who claim
that the Company owes it $2.6 million.
The Company settled an SEC investigation in November 1999. The Company
agreed to cease and desist from committing or causing any future violation
of certain antifraud, reporting, record keeping, and internal control
provisions of the Federal securities laws.
The market for the Company's outstanding shares of Common Stock is not
liquid. The Company's four largest groups of shareholders control
approximately 60% of its outstanding Common Shares. For 1999, the average
daily trading volume in the Company's shares was 9,288 shares, or
approximately 0.1% of the Company's outstanding shares.
For a fuller statement of the risk factors attendant to an investment in
the Company's Common Shares, see the section entitled "Risk Factors" in the
Registration Statement on Form S-8 that the Company filed with the SEC on
February 25, 2000. For a discussion of the container leasing industry and the
Company's business, see "Description of Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" herein. For a
discussion of the Company's legal proceedings, see "Legal Proceedings" herein;
and for a discussion of the market for the Company's Common Shares, see "Market
for the Company's Common Equity and Related Shareholder Matters" herein.
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PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme) organized in
Luxembourg with its registered office at 16, Allee Marconi, Boite Postale 260,
L-2120 Luxembourg (telephone (352) 453145). The Company is registered with the
Luxembourg Registrar of Companies under registration number R.C.S. Lux. B.
27489. Cronos Containers Limited, the Company's principal container leasing
subsidiary, is a UK corporation located at Orchard Lea, Winkfield Lane,
Winkfield, Windsor, Berkshire, SL4 4RU, England.
Cronos is the successor to Intermodal Equipment Associates ("IEA") and
Leasing Partners International ("LPI"). IEA began managing and leasing dry cargo
containers in 1978, primarily under master leases. LPI was established in 1983
to manage and lease refrigerated containers. In 1990, LPI acquired IEA and the
companies combined their operations under the new name Cronos. In December 1995
and January 1996, the Company and Barton Holding Ltd., a selling shareholder,
sold in a public offering (the "Public Offering") 3,643,000 Common Shares of the
Company.
Cronos is one of the world's leading lessors (by aggregate TEU capacity) of
intermodal marine containers. It owns and manages a fleet of dry cargo,
refrigerated, tank and other specialized containers. Through an extensive global
network of offices and agents, Cronos leases both its own and other owners'
containers to over 400 ocean carriers and transport operators, including all of
the 20 largest ocean carriers.
INDUSTRY BACKGROUND
A marine cargo container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. Containers are manufactured to conform to worldwide standards of
container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long X 8' wide X 8'6" high (one TEU) or 40' long X 8' wide X 8'6" high (two
TEU). Standardization of the construction, maintenance and handling of
containers, allows containers to be picked up, dropped off, stored and repaired
effectively throughout the world. This standardization is the foundation on
which the container industry has developed.
Standard dry cargo containers are rectangular boxes with no moving parts,
other than doors and are typically made of steel or aluminum. They are
constructed to carry a wide variety of cargoes ranging from heavy industrial raw
materials to light-weight finished goods. Specialized containers include, among
others, refrigerated containers for the transport of temperature-sensitive
goods, tank containers for the carriage of liquid cargo and cellular palletwide
containers ("CPCs") with extra width. Dry cargo containers currently constitute
approximately 87% (in TEU) of the worldwide container fleet. Refrigerated
containers and tank containers currently constitute approximately 8% (in TEU) of
the worldwide container fleet, with open-tops and other specialized containers
constituting the remaining 5%.
One of the primary benefits of containerization has been the ability of the
shipping industry to effectively lower freight rates due to the efficiencies
created by standardized intermodal containers. Containers can be handled much
more efficiently than loose cargo and are typically shipped via several modes of
transportation, including truck, rail and ship. Containers require loading and
unloading only once and remain sealed until arrival at the final destination,
significantly reducing transport time, labor and handling costs and losses due
to damage and theft. Efficient movement of containerized cargo between ship and
shore reduces the amount of time that a ship must spend in port and reduces the
transit time of freight moves.
The logistical advantages and reduced freight rates brought about by
containerization have been major catalysts for world trade growth since the late
1960's, resulting in increased demand for containers. The world's container
fleet has grown from an estimated 270,000 TEU in 1969 to approximately 13
million TEU by mid-1999.
The container leasing business is cyclical, and depends largely upon the
rate of increase in world trade. The container leasing industry has experienced
cyclical downturns during the last fifteen years.
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BENEFITS OF LEASING
Leasing companies own approximately 46% of the world's container fleet with
the balance owned predominantly by shipping lines. Shipping lines, which
traditionally operate on tight profit margins, often supplement their owned
fleet of containers by leasing a portion of their equipment from container
leasing companies, and in doing so, achieve the following financial and
operational benefits:
Leasing allows the shipping lines to utilize the equipment they need
without having to make large capital expenditures;
Leasing offers a shipping line an alternative source of financing in a
traditionally capital-intensive industry;
Leasing enables shipping lines to expand their routes and market
shares at a relatively low cost without making a permanent commitment to
support their new structure;
Leasing allows shipping lines to respond to changing seasonal and
trade route demands, thereby optimizing their capital investment and
storage costs.
TYPES OF LEASES
FINANCE LEASES are usually long-term in nature and require relatively low
levels of customer service. They ordinarily require fixed payments over a
defined period and provide customers with an option to purchase the subject
containers at the end of the lease term. Per diem rates typically include an
element of repayment of capital and therefore are higher than rates charged
under either long-term or short-term leases.
MASTER LEASES are usually short-term leases under which a customer reserves
the right to lease a certain number of containers as needed under a general
agreement between the lessor and the lessee. Such leases provide customers with
greater flexibility by allowing customers to pick-up and drop-off containers
where and when needed, subject to restrictions and availability, on pre-agreed
terms. The commercial terms of master leases are negotiated annually. Master
leases also define the number of containers that may be returned within each
calendar month, the return locations and applicable drop-off charges. Due to the
increased flexibility they offer, master leases usually command higher per diem
rates and generate more ancillary fees (including pick-up, drop-off, handling
and off-hire fees) than term leases.
TERM LEASES are for a fixed period of time and include both long and
short-term commitments, with most extending from three to five years. Term lease
agreements may contain early termination penalties that apply in the event of
early redelivery. In most cases, however, equipment is not returned prior to the
expiration of the lease. Term leases provide greater revenue stability to the
lessor, but at lower lease rates than master leases. Ocean carriers use
long-term leases when they have a need for identified containers for a specified
term. Short-term lease agreements have a duration of less than one year and
include one-way, repositioning and round-trip leases. They differ from master
leases in that they define the number and the term of the containers to be
leased. Ocean carriers generally use one-way leases to manage trade imbalances
(where more containerized cargo moves in one direction than another) by picking
up a container in one port and dropping it off at another location after one or
more legs of a voyage.
The terms and conditions of the Company's leases provide that customers are
responsible for paying all taxes and service charges arising from container use,
maintaining the containers in good and safe operating condition while on lease
and paying for repairs, excluding ordinary wear and tear, upon redelivery. Some
leases provide for a "damage protection plan" whereby lessees, for an additional
payment (which may be in the form of a higher per diem rate), are relieved of
the responsibility of paying some of the repair costs upon redelivery of the
containers. The Company has historically provided this service on a limited
basis to selected customers. Repairs provided under such plans are carried out
by the same depots, under the same procedures, as are repairs to containers not
covered by such plans. Customers are also required to insure leased containers
against physical damage, loss and against third party liability for loss,
damage, bodily injury or death.
The percentage of equipment on term leases as compared to master leases
varies widely among leasing companies, depending upon each company's strategy on
margins, operating costs and cash flows.
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Lease rates depend on several factors including the type of lease, length
of term, maintenance provided, type and age of the equipment and market
conditions.
COMPANY STRATEGY
Cronos targets operating leases, with an emphasis on master leases for its
dry cargo containers and term leases for refrigerated and tank containers.
LEASE PROFILE
Cronos offers flexible leasing arrangements primarily through master leases
on dry cargo containers. Cronos' specialized containers are generally leased on
longer-term leases because the higher cost, value and complexity of this
equipment make it more expensive to frequently redeliver and lease out.
PERCENTAGE OF FLEET ON-HIRE
---------------------------------------------
DRY FREIGHT
TYPE OF LEASE DRY CARGO REFRIGERATED TANK SPECIALS
- ------------- --------- ------------ ---- -----------
Master............................................. 73% 47% 16% 11%
Term............................................... 20% 49% 84% 47%
Finance............................................ 7% 4% -- 42%
---- ---- ---- ----
Total......................................... 100% 100% 100% 100%
==== ==== ==== ====
CUSTOMERS
Cronos is not dependent upon any particular customer or group of customers.
None of the Company's customers accounts for more than 10% of its revenue and
the ten largest customers accounted for approximately 48% of the total TEU
fleet-on-hire. Substantially all of Cronos' customers are billed and pay in
United States dollars.
Cronos sets maximum credit limits for all customers, limiting the number of
containers leased to each customer according to established credit criteria.
Cronos continually tracks its credit exposure to each customer. Cronos' credit
committee meets quarterly to analyze the performance of existing customers and
to recommend actions to be taken in order to minimize credit risks. Cronos uses
specialist third party credit information services and reports prepared by local
staff to assess credit applications.
The Company is subject to unexpected loss in rental revenue from lessees of
its containers that default under their container lease agreements.
FLEET PROFILE
Cronos focuses on supplying to its customers high-quality containers,
manufactured to specifications that exceed International Standards Organization
standards and designed to minimize repair and operating costs. Cronos operates
primarily dry cargo and refrigerated containers but, since 1993, it has
diversified into tanks and other specialized containers. Cronos believes that
this fleet diversification enables it to increase business with its customers by
supplying a wide range of their equipment requirements.
During 1999, the size of the total fleet increased by 8,400 TEU
representing new container production of 19,000 TEU net of disposals of 10,600
TEU. Total new container production in 1999 represented an investment of $25.9
million. Approximately $22.6 million, or 87%, of the new container investment
related to dry cargo containers. Of the balance of new container purchases, $1.4
million was invested in CPCs, $1.3 million was invested in flatracks and the
remaining $0.6 million was invested primarily in roll-trailers.
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CRONOS CONTAINER FLEET (IN TEU THOUSANDS)
AT DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Dry Cargo............................................. 346.6 337.8 345.9 322.0 250.2
Refrigerated.......................................... 13.6 14.7 16.0 16.2 14.3
Tank.................................................. 2.0 2.0 2.0 1.7 1.0
Roll-Trailer.......................................... 1.9 2.2 2.0 1.7 --
CPCs.................................................. 3.1 2.4 2.4 -- --
Other Dry Freight Specials............................ 2.7 2.3 1.5 1.2 0.1
----- ----- ----- ----- -----
Total Fleet...................................... 369.9 361.4 369.8 342.8 265.6
===== ===== ===== ===== =====
Dry cargo containers are the most commonly used type of container in the
shipping industry. Over 95% of Cronos' dry cargo fleet is constructed of all
Corten (R) steel (i.e., Corten (R) roofs, walls, doors and undercarriage), which
is a high-tensile steel yielding greater damage and corrosion resistance than
mild steel. The Company believes that, among its major competitors, it has the
highest percentage of dry cargo containers constructed of all Corten (R) steel.
Refrigerated containers are used to transport temperature-sensitive
products, such as meat, fruit, vegetables and photographic film. All of Cronos'
refrigerated containers have high-grade stainless steel interiors. The majority
of Cronos' 20' refrigerated containers have high-grade stainless steel walls,
while most of the 40' refrigerated containers are steel framed with aluminum
outer walls to reduce weight. As with the dry cargo containers, all refrigerated
containers are designed to minimize repair and maintenance and maximize damage
resistance. Cronos' refrigerated containers are designed and manufactured to
include the latest generation refrigeration equipment, with the most recently
built units controlled by modular microprocessors. Cronos did not buy new
refrigerated containers in the three years ended December 31, 1999 due to the
weak refrigerated container leasing market resulting from oversupply.
Cronos' tank containers are constructed in compliance with International
Maritime Organization ("IMO") standards and recommendations. The tanks purchased
by Cronos to date have all been IMO-1 type tanks constructed to comply with IMO
recommendations that require specific pressure ratings and shell thicknesses.
These containers are designed to carry highly-flammable materials, corrosives,
toxics and oxidizing substances. They are also capable of carrying non-hazardous
materials and foodstuffs. They have a capacity of 21,000-24,000 litres and are
generally insulated and equipped with steam or electrical heating.
Dry freight special containers, a small but growing segment of the world
container fleet, include rolltrailers, CPCs, open-top and flatrack containers.
Cronos diversified into dry freight specials in 1996, when it acquired
Intermodal Leasing AB, a Swedish company with a fleet of approximately 800
rolltrailers, a type of heavy-duty chassis used for moving cargo onto and off
ships. Cronos markets this product on a worldwide basis through its network of
offices and agents, and has increased its rolltrailer fleet to 1,930 TEU at the
end of 1999. Cronos owns the patents of the CPC, a specialized container
designed specifically for the carriage of European short sea cargo on
"Europallets". Since 1996, Cronos has added 3,115 TEU of CPCs into its container
fleet.
PURCHASING POLICY
Cronos' purchasing policy is driven by market requirements and anticipated
future demand, including demand generated by trade growth and the replacement of
containers retired from fleets around the world. The Company believes that the
worldwide manufacturing capacity for all container types is adequate to meet its
current and near-term requirements.
Cronos purchases dry cargo containers from manufacturers in China, Korea,
Taiwan, Indonesia, Thailand, India, Malaysia, Turkey and South Africa as part of
its policy to source container production in locations where it can meet
customer demands most effectively. No single manufacturer supplied more than 28%
of Cronos' dry cargo container purchases during 1999.
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Cronos' refrigerated containers were purchased mainly from Korean
manufacturers. The majority of its refrigeration units were purchased from
Carrier Transicold, the primary supplier of container refrigeration units in the
United States.
To date, all of the Company's tank containers have been purchased from
United Kingdom and South African manufacturers.
REPAIR AND MAINTENANCE
All containers are inspected and repaired when redelivered by customers who
are obligated to pay for all damage repairs, excluding wear and tear, according
to standardized industry guidelines. Depots in major port areas perform repair
and maintenance that is verified by independent surveyors or the Cronos
technical and operations staff.
Before any repair or refurbishment is authorized on older containers in the
Cronos fleet, the Cronos technical and operations staff reviews the age,
condition and type of container and its suitability for continued leasing.
Cronos compares the cost of such repair or refurbishment with the prevailing
market resale price that might be obtained for that container and makes the
appropriate decision whether to repair or sell the container. Cronos is
authorized to make this decision for most of the owners for whom it manages
equipment and makes these decisions by applying the same standards to the
managed containers as to its own containers.
MARKET FOR USED CONTAINERS
Cronos estimates that the period for which a dry cargo or refrigerated
container may be used as a leased marine cargo container ranges from 10 to 15
years. Tank containers generally may be used for 12 to 18 years.
Cronos disposes of used containers in a worldwide market in which buyers
include wholesalers, mini-storage operators, construction companies and others.
The market for used refrigerated and tank containers is not as stable as the
market for used dry cargo containers. Although a used refrigerated container
will command a higher price than a dry cargo container, a dry cargo container
will achieve a higher percentage of its original price. Historically, the
Company has not derived a material proportion of its revenues from selling used
containers due to the age profile of its fleet.
OPERATIONS
Cronos' sales and marketing operations are conducted through Cronos
Containers Limited ("CCL"), a wholly-owned subsidiary based in the United
Kingdom. CCL is supported in this role by area offices and dedicated agents
located in San Francisco, California; Iselin, New Jersey; Hamburg; Antwerp;
Genoa; Gothenburg, Sweden; Singapore; Hong Kong; Sydney; Tokyo; Taipei; Seoul;
Rio de Janeiro; Shanghai and Madras, India.
Cronos also maintains agency relationships with over 25 independent agents
around the world, who are generally paid a commission based upon revenues
generated in the region or the number of containers that are leased from their
area. These agents are located in jurisdictions where the volume of Cronos'
business necessitates a presence in the area but is not sufficient to justify a
fully-functioning Cronos office or dedicated agent. Agents provide marketing
support to the area offices covering the region, together with limited
operational support.
In addition, Cronos relies on the services of over 300 independently owned
and operated depots around the world to inspect, repair, maintain and store
containers while off-hire. The Company's area offices authorize all container
movements into and out of the depot and supervise all repairs and maintenance
performed by the depot. The Company's technical staff sets the standards for
repair of the Cronos fleet throughout the world and monitors the quality of
depot repair work. The depots provide a link to the Company's operations, as the
redelivery of a container into a depot is the point at which the container is
off-hired from one customer and repaired in preparation for re-leasing to the
next.
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Cronos' global network is integrated with its computer system and provides
24-hour communication between offices, agents and depots. The system allows
Cronos to manage and control its fleet on a global basis, providing Cronos with
the responsiveness and flexibility necessary to service the master lease market
effectively. This system is an integral part of Cronos' service, as it processes
information received from the various offices, generates billings to lessees and
generates a wide range of reports on all aspects of the Company's leasing
activities. The system records the life history of each container, including the
length of time on-hire, repair costs, as well as port activity trends, leasing
activity and equipment data per customer. The operations and marketing data is
fully interfaced with Cronos' finance and accounting system to provide revenue,
cost and asset information to management and staff around the world. Cronos
intends to continue to enhance its computer system as needs arise in the future.
COMPETITION
Competition among container leasing companies is based upon several
factors, including the location and availability of inventory, lease rates, the
type, quality and condition of the containers, the quality and flexibility of
the service offered and the confidence in and professional relationship with the
lessor. Other factors include the speed with which a leasing company can prepare
its containers for lease and the ease with which a lessee believes it can do
business with a lessor or its local area office. Not all container leasing
companies compete in the same market as some supply only dry cargo containers
and not specialized containers, while others offer only long-term leases. Cronos
has historically targeted three particular markets: the master lease dry cargo
container market, the refrigerated container market and the tank container
market. In recent years, however, the Company has expanded into other
specialized container products and other types of leases.
Cronos competes with various container leasing companies in the markets in
which it conducts business, including Transamerica Leasing, GE Seaco, Triton
Container International Ltd., Textainer Corp. and others. Mergers and
acquisitions have been a feature of the container leasing industry for over a
decade and the leasing market is essentially comprised of three distinct groups:
the very large (in TEU terms) market leaders Transamerica Leasing and GE Seaco,
who between them, with fleets of around 1 million TEU each in mid-1999, control
in excess of one third of the total leased fleet; a substantial middle tier of
companies possessing fleets in the 200,000 to 850,000 TEU range, and the smaller
more specialist fleet operators. In recent years, several major leasing
companies, as well as numerous smaller ones, have been acquired by competitors.
Cronos believes that the current trend toward consolidation in the container
leasing industry will continue, up to a point. There appears to be an upper
limit to the size of the optimum fleet, beyond which dis-economies of scale
and/or barriers against further market share development become apparent.
Furthermore, ocean carriers have a tendency to support a number of lessors
simultaneously, in order to maximize competition and increase the number of
available locations for redelivery of containers. Economies of scale, worldwide
operations, diversity, size of fleet and financial strength are increasingly
important to the successful operation of a container leasing business.
Additionally, as containerization continues to grow, as regions such as South
America and the Indian sub-continent become ever bigger generators of
containerized cargo, customers may demand more flexibility from leasing
companies, particularly regarding per diem rates, pick-up and drop-off
locations, and the availability of containers.
Some of Cronos' competitors have greater financial resources than Cronos
and may be more capable of offering lower per diem rates on a larger fleet. In
Cronos' experience, however, ocean carriers will generally lease containers from
more than one leasing company in order to minimize dependence on a single
supplier. Furthermore, by having as many suppliers as possible, the carrier is
able to maximize the number of off-hires and off-hire locations available, as
typically each supplier may limit the number of containers which can be
off-hired by location. The advantage to the carrier is that this prevents the
carrier from being burdened with an excess number of off-hired containers, which
incur both storage and per diem charges, in a low demand market.
OPERATING SEGMENTS
Cronos has three operating segments which are determined based on source of
container funding:
1. US Public Limited Partnerships ("US Limited Partnerships"),
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2. Other Container Owners, and
3. Owned Containers.
Cronos uses various financing programs within its three segments. These
financing programs enable Cronos to expand its fleet without being dependent
upon any single source of financing. Cronos believes it is important to
diversify its financing sources both by market and type of financial instrument.
This diversification reduces its reliance on individual financial markets and
provides for a more balanced financing structure.
The following chart summarizes the composition of the Cronos fleet (based
on original equipment cost) at December 31 of each of the years indicated:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
US Limited Partnerships.............................. 33% 34% 35% 38% 45%
Other Container Owners............................... 45% 41% 40% 29% 34%
Owned Containers..................................... 22% 25% 25% 33% 21%
---- ---- ---- ---- ----
Total........................................... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
As of December 31, 1999, no single owner, other than the Company, held more
than 13% of the Cronos fleet (based upon original equipment cost).
All containers, whether owned or managed, are leased as part of a single
global fleet, without regard to ownership. No customer generates more than 10%
of a segment's revenues or of the total revenues of the Company. The Company
evaluates the performance of its operating segments based on operating profit or
loss. Substantially all of the Company's lease revenue is earned on containers
used in global trade routes. This revenue is deemed to be earned based on the
physical location of the containers while on lease. Accordingly, the Company
believes that it does not possess discernible geographic reporting segments as
defined in Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information". See Note 2 to the 1999
Consolidated Financial Statements.
Segment revenues from external customers, operating profit or loss and
total assets are disclosed in the Company's Financial Statements and are
incorporated herein by reference.
US LIMITED PARTNERSHIPS
Cronos has been raising capital through its investment syndication
activities since 1979 through the organization and sponsorship of public limited
partnership offerings. To date, Cronos has sponsored 16 of these public limited
partnerships. Cronos has raised over $478 million from over 37,000 investors,
providing the means to purchase 181,000 TEU of dry cargo containers, 3,500 TEU
of refrigerated containers and 300 TEU of tank containers. A majority of the
limited partners in a partnership can remove the general partner, thereby
terminating the agreement with Cronos. However, upon any such removal, the
general partner is entitled to payment, generally over five years, of the
present fair market value of its interest in the partnership.
As an operating company, Cronos believes that its substantial experience in
the container leasing industry has been integral to the successful syndication
of public limited partnerships. However, no public offerings have been made in
the US since early 1997.
The US Limited Partnerships provide compensation to Cronos consisting of
the following fees and commissions:
- Acquisition fees: equal to 5% of the original cost of equipment purchased
by the partnerships, recognized over a 12-year period;
- Base management fees: equal to 7% of gross lease revenue for operating
leases and 2% of gross lease revenue for direct financing leases;
- General partner share: equal to 5% of distributable cash generated by the
partnerships' operating activities;
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- Incentive fees: equal to 15% of distributable cash after the limited
partners have received a return of their adjusted capital contributions
and distributions in an amount equal to a cumulative compounded rate
between 8 to 10% per annum (depending on the program);
- Reimbursed administrative expenses: for certain overhead and operating
expenses.
Management and acquisition fees, as well as syndication commissions
(representing amounts earned on the sale of Limited Partnership interests)
earned by the Company, were $8.6 million, $11.3 million, and $12 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
OTHER CONTAINER OWNERS
In addition to US Limited Partnerships, Cronos manages containers pursuant
to agreements negotiated directly with corporations, partnerships and private
individuals located in Europe, Asia, the United States and South Africa. Cronos'
obligations to investors in the partnerships and the investor programs are
substantially similar. The terms of the agreements vary from 1 to 15 years. The
agreements generally contain provisions which permit earlier termination under
certain conditions upon 60-90 days' notice. Under the agreements with Other
Container Owners, the container owner can generally terminate the agreement if
average payments by Cronos are less than a certain percentage (specified in each
agreement) of total capital invested. Cronos believes that early termination is
unlikely in normal circumstances.
These management agreements generally provide compensation to Cronos
consisting of management fees of between 5% and 20% of the net lease revenue
generated by the containers. Cronos also earns an acquisition fee of
approximately 2.5% to 5% of the aggregate original equipment cost of the
equipment managed for the owners where Cronos has negotiated the purchase of the
equipment. In certain cases, an incentive fee may also be earned. Acquisition
fees under the investor programs are generally recognized in Cronos' statements
of operations over periods ranging from 7 to 15 years, representing the life of
the agreements to which they relate.
Total fees earned by the Company from Other Container Owners were $5.9
million, $7.4 million and $7.3 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The containers managed for these owners may be combined into pools with
containers of similar age and type and managed pursuant to generally similar
management agreements. The owners of the containers in each pool share revenues
and expenses, which are allocated pro rata in order to minimize the effect of
possible over-utilization or under-utilization of any particular containers.
Pooling was designed to minimize conflicts of interest and promote
administrative convenience.
Revenues and expenses are allocated among owners based upon the aggregate
original equipment cost of the containers owned by each owner and the number of
days that such containers were in the pool, compared to the total aggregate
original equipment cost of all containers in the pool and the total number of
days in the period.
OWNED CONTAINERS
Cronos uses various forms of debt funding to finance its owned fleet
including bank loans, private placements, and capital leases. Container
ownership provides the Company with the ability to generate lease revenues over
the life of the container, matched with relatively fixed costs of interest and
depreciation expenses. Most of the Company's long term debt facilities have
principal maturities of less than seven years, after which containers financed
under such facilities provide increased cash flows. In general, the Company
believes that container ownership is more profitable over the life of the
container when compared to the corresponding profits generated from container
management. However, unlike container management, container ownership can often
require an initial cash investment in order to secure cost effective debt
financing.
From time to time, Cronos also owns containers on a temporary basis until
such time that the containers are sold to its US Limited Partnerships and Other
Container Owner Programs. Most containers targeted for transfer to managed
programs are purchased new by Cronos, and sold to a managed container owner
within six months. This strategy allows Cronos more flexibility to negotiate and
buy containers strategically, based on market conditions
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and later sell these containers to third party owners after the initial lease
profile is established for a particular group of containers.
ENVIRONMENTAL
Countries that are signatories to the Montreal Protocol on the environment
agreed in November 1992 to restrict the use of environmentally destructive
refrigerants, banning production (but not use) of chlorofluorocarbon compounds
("CFCs") beginning in January 1996. CFCs are used in the operation, insulation
and manufacture of refrigerated containers. All of Cronos' refrigerated
containers purchased since June 1993 use non-CFC refrigerant gas in the
operation and insulation of the containers, although a reduced quantity of CFCs
is still used in the container manufacturing process. The replacement
refrigerant used in the Company's new refrigerated containers may also become
subject to similar governmental regulations. Depending on market pressures and
future governmental regulations, certain of the Company's refrigerated
containers may require retrofitting with non-CFC refrigerants. Cronos' technical
staff has cooperated with refrigeration manufacturers in conducting
investigations into the most effective and economical retrofit plan. In the
future, the Company may bear the costs related to retrofitting certain of its
Owned Containers, which constitute approximately 9% of its total owned
refrigerated container fleet. Cronos believes that any such further expenses,
should they be required, would not be material to its financial position or
results of operations. In addition, refrigerated containers that are not
retrofitted may command lower prices in the used container market.
EMPLOYEES
As of December 31, 1999, Cronos had 100 employees worldwide, 27 were
located in the United States, 56 in Europe and 17 in Asia. None of Cronos'
employees is covered by a collective bargaining agreement.
RECENT DEVELOPMENTS
On September 21, 1999, the Company received an unsolicited merger proposal
from the President of Interpool, Inc. ("Interpool"). Interpool is a competitor
of the Company. Cronos' container fleet consists of 369,900 TEUs, both owned and
managed for third parties. Interpool's fleet consists of approximately 500,000
TEUs. Whereas the Company concentrates primarily on the short-term and master
lease market, meaning that most of the Company's leases have terms of less than
one year, Interpool concentrates on the longer-term lease market, with the bulk
of its fleet of containers leased under leases of terms of three years or more.
By its proposal, Interpool proposed a merger of Cronos with Interpool's
50%-owned Nevada subsidiary, Container Applications International, Inc. ("CAI").
Interpool proposed, subject to conditions, that the shareholders of Cronos would
receive $5.00 per share in the transaction. Interpool's proposal was subject to
numerous conditions, including the conduct of "confirmatory" due diligence, the
absence of a material adverse effect prior to closing, the negotiation of a
definitive acquisition agreement, and the obtaining of regulatory and other
approvals.
While Interpool indicated in its letter a willingness to discuss its
proposal and its structure, Interpool gave the Company 24 hours to provide a
"satisfactory response," or Interpool threatened to take its proposal "directly
to [the Company's] shareholders". On September 23, 1999, Interpool filed its
preliminary proxy statement with the SEC proposing an alternative slate of
nominees for the Board of Directors of Cronos, whose sole purpose would be to
merge Cronos with and into CAI pursuant to the Interpool proposal.
Promptly after the Company received Interpool's September 21st proposal,
the Board of Directors of the Company instructed the Company's financial
advisors, First Union Securities, Inc. ("First Union"), to evaluate it. On
October 4 and 8, 1999, the Board met and unanimously determined that the
Interpool proposal, in its then current form, be rejected as inadequate and not
in the best interest of the Company and its shareholders. At the same time, the
Board instructed First Union to pursue strategic alternatives to enhance
shareholder value, including a possible sale of the Company.
The Company has entered into confidentiality and standstill agreements with
several parties, and has supplied these parties with financial and other
information about the Company. On January 4, 2000, the Company
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also entered into a confidentiality agreement with Interpool, whereby the
Company agreed to provide Interpool with access to the same information as the
Company made available to other interested parties. Interpool also agreed not to
pursue a transaction with Cronos on an unsolicited basis until April 30, 2000.
Interpool may pursue a transaction with the Company on an unsolicited basis
earlier than April 30, 2000, in the event that Cronos enters into a letter of
intent or an agreement in principle to merge, or engages in a business
combination or like transaction with another entity, or if another entity or
Cronos makes a tender or an exchange offer for 25% or more of the outstanding
shares of Common Stock of Cronos.
The Company, with its advisor, First Union, has continued to hold
discussions with Interpool and other interested parties. However, at this time,
the Company is unable to predict whether a transaction will result from these
discussions.
INSURANCE
Cronos' lease agreements typically require lessees to obtain insurance to
cover all risks of physical damage and loss of the equipment under lease, as
well as public liability and property damage insurance. However, the precise
nature and amount of the insurance carried by each ocean carrier varies from
lessee to lessee.
In addition, Cronos has purchased secondary insurance effective in the
event that a lessee fails to have adequate primary coverage. This insurance
covers liability arising out of bodily injury and/or property damage as a result
of the ownership and operation of the containers, as well as insurance against
loss or damage to the containers, loss of lease revenues in certain cases and
costs of container recovery and repair in the event that a customer goes into
bankruptcy. Cronos believes that the nature and amounts of its insurance are
customary in the container leasing industry and subject to standard industry
deductions and exclusions.
ITEM 2 -- PROPERTIES
Cronos owns the real property known as Orchard Lea, located west of London,
England. Orchard Lea consists of a 22,820 square foot office building on four
acres of land and is the head office of Cronos' container leasing operations.
The Company is negotiating an agreement to sell its Orchard Lea office building
to an unaffiliated third party for approximately $10.8 million, payable in cash
at the closing. After payment of expenses and retirement of applicable mortgage
debt, the Company would realize proceeds of approximately $4.5 million. Under
the terms of a further loan agreement, the Company would utilize such proceeds
to repay debt. The sale is scheduled to close in April 2000. The Company will
lease back 10,342 square feet in the office building from the buyer in the form
of two leases for 7,000 square feet and 3,342 square feet respectively, for a
full term of 3 years, and at a market rental rate. Both agreements contain terms
that enable the Company or the purchaser to terminate the leases at the end of
two years and the second lease grants the Company and the purchaser an
additional option to end after 6 months. As the sale is subject to the
fulfillment of closing conditions, there can be no assurance that it will be
consummated.
Cronos also leases approximately 12,160 square feet of office space in San
Francisco, California, where its US Limited Partnership activities are based.
Cronos also conducts container leasing operations from offices in Iselin, New
Jersey; Hamburg; Genoa; Gothenburg; Hong Kong; Singapore and Sydney generally
under shorter-term leases of varying durations. The containers owned and managed
by Cronos are described under Item 1 -- "Description of Business -- Company
Strategy -- Fleet Profile, Operating Segments -- US Limited Partnerships, Other
Container Owners and Owned Containers", above. As of December 31, 1999, Cronos
owned 41,658 TEU of dry cargo containers, 6,300 TEU of refrigerated containers,
730 TEU of tank containers and 5,268 TEU of other specialized equipment. As of
December 31, 1999, Cronos managed a total of 346,557 TEU of dry cargo
containers, 13,576 TEU of refrigerated containers, 2,010 TEU of tank containers
and 7,724 TEU of other specialized equipment.
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ITEM 3 -- LEGAL PROCEEDINGS
DISPUTE WITH THE CONTRIN GROUP
The Company manages containers for investment entities sponsored by or
affiliated with Contrin Holding S.A., a Luxembourg holding company (collectively
"Contrin"). Approximately 2% (measured by TEUs) of the fleet of managed
containers is owned by members of the Contrin Group. The Company is in a dispute
with Contrin over funds that Contrin claims to have remitted to Cronos for the
purchase of containers. Contrin claims that in 1994 it transmitted $2.6 million
to Cronos for the purchase of containers. The Company believes that these funds
were not received by the Company but were diverted to an account in the name of
and/or controlled by a former chairman of the Company, Stefan M Palatin, and
that this was known or should have been known by Contrin. The Company also
believes that the bank that received the funds is at fault. Contrin's counsel
has advised the Company that Contrin will institute proceedings for the recovery
of the $2.6 million against Cronos, together with accrued interest. The Company
is unable to predict the outcome of the dispute.
THE SEC'S NOVEMBER 15, 1999 CEASE-AND-DESIST ORDER
On November 15, 1999, the Company consented to the entry by the SEC of an
administrative cease-and-desist order (the "Order"). Without admitting or
denying the findings made by the SEC in the Order, the Company agreed to cease
and desist from committing or causing any future violation of certain antifraud,
reporting, record keeping, and internal control provisions of the Federal
securities laws. The SEC's investigation of the Company began in February 1997
and was triggered by the actions of Mr. Palatin. Cronos' Board removed Mr.
Palatin as CEO in May 1998 and, in July 1998, Mr. Palatin resigned from the
Board. While Mr. Palatin is no longer an officer or director of the Company, he
continues to control approximately 20% of the outstanding common shares of the
Company.
The SEC made certain findings by its Order. The Company neither admitted
nor denied the findings made by the SEC. The SEC found that Cronos, under the
domination and control of Mr. Palatin, misrepresented, through affirmative
misstatements and omissions in its public statements and filings with the SEC,
transactions it had with Mr. Palatin for the period from December 1995 through
1997, including --
That Mr. Palatin had intercepted payments between Cronos and one of
its major customers (which Mr. Palatin also controlled);
That Cronos paid Mr. Palatin millions of dollars in 1994 before Cronos
first sold its shares of Common Stock to the public;
That Mr. Palatin had sold shares in Cronos' initial public offering
through another entity that he controlled;
That Cronos paid additional monies to Mr. Palatin shortly after the
1995 offering;
That Mr. Palatin did not own certain collateral that he pledged to
secure loans he owed to Cronos; and
That Cronos systematically fired or demoted employees and directors
who challenged or questioned Mr. Palatin's transactions or the disclosures
of the Company related thereto.
While the Order did not impose any fine or penalty against Cronos, the
Company is unable to predict what impact, if any, it will have on its future
business or whether it will lead to future litigation involving Cronos. Under
the Order, the Company has designated an agent for service of process with
respect to any proceeding instituted by the SEC to enforce the Order or with
respect to any future investigation of the Company by the SEC. In addition, the
entry of the Order precludes the Company and persons acting on its behalf from
relying upon certain protections accorded to forward-looking statements by the
Securities Act of 1933 and the Securities Exchange Act of 1934 until November
14, 2002.
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COLLECTION OF PALATIN NOTES
In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York (Case No. 604963/99), for payment of the
remaining balances due under two promissory notes, both dated July 14, 1997, by
and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin, as
payor.
On February 8, 2000, the Supreme Court of the State of New York entered its
default judgment against Mr. Palatin. Pursuant to the judgment, the Payee is to
recover from Mr. Palatin $6.2 million, plus interest at 9% per annum from June
21, 1999 to February 8, 2000 in the amount of $0.4 million, for a total recovery
of $6.6 million.
The Payee currently is pursuing execution of the judgment against Mr.
Palatin's beneficial ownership of the Common Shares of the Company. According to
filings made with the SEC by the shareholder of Klamath Enterprises S.A.
("Klamath"), Mr. Palatin is the beneficial owner of the 1,793,798 outstanding
shares of Common Stock of the Company owned of record by Klamath. On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts against Mr. Palatin and against the
Company's transfer agent, EquiServe Limited Partnership, preliminarily enjoining
them from selling, transferring, assigning, or otherwise encumbering, disposing
of, or diminishing the value of the Common Shares of the Company held of record
by Klamath.
The Company is also pursuing an attachment order in the Swiss courts
against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the Common Shares of the Company owned by Klamath.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of Common Shares beneficially owned in
the Company by Mr. Palatin to the Payee or by a liquidation of the shares in an
amount sufficient to fully discharge the judgment. The Company is unable to
predict at the present time whether it will succeed in achieving its objectives.
SPECIAL LITIGATION COMMITTEE
The Board of Directors of the Company established a Special Litigation
Committee ("Committee") of the Board in July 1998 to examine the relationships
between Mr. Palatin and Contrin Holding S.A., Barton Holding Ltd. ("Barton"),
and affiliated persons. The Committee is also investigating transactions between
the Company and its present and former officers and directors since January 1,
1995, to determine whether improper self-dealing occurred between the Company
and such persons. The Committee intends to complete its investigation by March
31, 2000. The Committee has the power, for and on behalf of the Company, and in
consultation with counsel, to pursue the recovery of any damages the Committee
concludes may have been suffered by the Company as a result of the transactions
or conduct the Committee investigates.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 annual meeting of shareholders on January 13,
2000, in Luxembourg. At the meeting, five directors were elected, and the
Company's 1999 Stock Option Plan and the appointment of Deloitte Touche Tohmatsu
(Deloitte & Touche SA) as the Company's independent auditors for the 1999 fiscal
year were approved. For a complete report on the matters submitted to a vote of
the shareholders, see the Company's Current Report on Form 8-K, dated January
21, 2000.
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PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 23, 2000, there were outstanding 9,158,378 Common Shares. They
were held of record by approximately 446 holders.
Prior to December 1995, there was no trading market for the Company's
Common Shares. Since the Company's Public Offering, the Common Shares have been
quoted and traded over-the-counter on the NASDAQ National Market System under
the symbol "CRNSF". In March 1999, the Company announced that it would comply
with the reporting requirements applicable generally to US public companies and
would therefore trade under the symbol "CRNS". There is no trading market for
the Common Shares outside the United States. The table below shows the high and
low reported closing prices for the Common Shares on the NASDAQ National Market
System for the last two years for the quarterly periods ending on the dates
indicated. Closing prices are market quotations and reflect inter dealer prices,
without retail mark up, mark down or commission and may not necessarily
represent actual transactions.
PRICE RANGE
(DOLLARS)
----------------
HIGH LOW
------ ------
March 31, 1998.............................................. $7.250 $5.125
June 30, 1998............................................... $7.125 $5.000
September 30, 1998.......................................... $5.969 $4.875
December 31, 1998........................................... $6.625 $3.375
March 31, 1999.............................................. $5.938 $4.125
June 30, 1999............................................... $4.875 $3.500
September 30, 1999.......................................... $4.625 $3.500
December 31, 1999........................................... $5.625 $4.563
There are currently no Luxembourg foreign exchange control restrictions on
the payment of dividends on the Common Shares or on the conduct of Cronos'
operations. In addition, there are no limitations on holding or voting
applicable to foreign holders of Common Shares, imposed by law, by the Company's
Articles of Incorporation or otherwise, other than those restrictions which
apply equally to Luxembourg holders of Common Shares. No dividend declarations
have been made by the Company since its initial public offering in December
1995.
Under the terms of certain loan agreements, the Company is restricted from
declaring or making dividend payments unless it achieves specified financial
criteria.
The following summary of the material Luxembourg tax consequences is not a
comprehensive description of all of the tax considerations that are applicable
to the holders of Common Shares, and does not deal with the tax consequences
applicable to all categories of holders, some of which may be subject to special
rules.
Under present Luxembourg law, as long as the Company maintains its status
as a holding company, no income tax, withholding tax (including with respect to
dividends), capital gains tax or estate inheritance tax is payable in Luxembourg
by shareholders in respect of the Common Shares, except for shareholders
domiciled, resident (or, in certain circumstances, formerly resident) or having
a permanent establishment in Luxembourg. The reciprocal tax treaty between the
United States and Luxembourg limiting the rate of any withholding tax is
therefore inapplicable.
UNREGISTERED SALES OF SECURITIES
On August 2, 1999, MeesPierson N.V., a Dutch financial institution
("MeesPierson"), and First Union National Bank, a national banking association
("FUNB"), lent $50 million to a special purpose subsidiary organized by the
Company, the proceeds of which were used to repay existing indebtedness of the
Company and its subsidiaries. The Company described this financing in its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
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In connection with the August 1999 refinancing, each of MeesPierson and
FUNB were issued 150,000 of the Company's authorized but unissued Common Shares
(300,000 shares in total), and the Company entered into a Warrant Agreement with
MeesPierson and FUNB. The issuance of the Common Shares was made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act").
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth consolidated financial information for the
Company as of and for the periods noted. The balance sheet and statement of
operations data for each of the five years for the period ended December 31,
1999, have been derived from the Consolidated Financial Statements of the
Company. The table should be read in conjunction with Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the 1999 Consolidated Financial Statements and related notes thereto included
elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gross lease revenue......................................... $132,140 $157,546 $160,848 $154,011 $150,429
Commissions, fees and other operating income................ 5,949 4,955 5,545 7,460 6,942
Interest income............................................. 1,011 1,154 861 1,333 1,329
Equity in earnings of affiliates............................ -- -- -- 1,397 1,895
Gain on sale of investment.................................. 1,278 -- 321 5,260 --
-------- -------- -------- -------- --------
TOTAL REVENUES.............................................. 140,378 163,655 167,575 169,461 160,595
======== ======== ======== ======== ========
Direct operating expenses................................... 31,179 35,318 34,217 34,535 26,938
Payments to container owners................................ 63,943 75,527 73,945 72,894 77,073
Depreciation and amortization............................... 16,200 18,714 19,033 14,258 10,676
Selling, general and administrative expenses................ 16,569 21,164 22,683 23,834 24,133
Financing and recomposition expenses(1)..................... -- 5,375 7,384 2,149 --
Interest expense............................................ 10,809 15,718 17,758 11,368 11,238
Provision against amounts receivable from related
parties(2)................................................ -- -- 3,909 -- --
Reversal of unrealized holding gain on available for sale
securities(3)............................................. -- 1,929 -- -- --
Impairment losses(4)........................................ -- 6,500 11,668 -- --
-------- -------- -------- -------- --------
TOTAL EXPENSES.............................................. 138,700 180,245 190,597 159,038 150,058
======== ======== ======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES........................... 1,678 (16,590) (23,022) 10,423 10,537
Income taxes (benefit)...................................... (236) 306 -- 2,441 3,175
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................................... 1,914 (16,896) (23,022) 7,982 7,362
Preferred dividends......................................... -- -- -- -- 856
-------- -------- -------- -------- --------
Net income (loss) available for common shares............... $ 1,914 $(16,896) $(23,022) $ 7,982 $ 6,506
-------- -------- -------- -------- --------
Net income (loss) per common share (basic and diluted)...... $ 0.21 $ (1.91) $ (2.60) $ 0.90 $ 1.21
-------- -------- -------- -------- --------
Shares used in:
- -- basic net income (loss) per share calculations........... 8,983 8,858 8,858 8,853 5,383
- -- diluted net income (loss) per share calculations......... 8,998 8,858 8,858 8,853 5,383
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 8,701 $ 9,281 $ 14,455 $ 17,278 $ 24,243
Total assets................................................ 231,867 279,979 327,145 399,301 266,485
Long-term debt and capital lease obligations................ 93,401 61,195 88,682 141,435 89,600
Total debt and capital lease obligations.................... 109,978 148,466 171,399 198,989 106,620
Shareholders' equity........................................ 60,370 56,087 73,713 95,576 85,349
- ---------------
(1) In 1998, 1997 and 1996, the Company incurred costs in connection with
certain financing and other transactions, the restructuring of the Board of
Directors, senior management and other employee positions and a contingent
liability. Costs incurred and accrued were charged to the statement of
operations when the Company determined that no future benefit would be
derived from such costs.
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(2) At December 31, 1997, the Company provided $3.9 million against loans to
the then Chairman due to concern over its collectability and the Company's
ability to exercise the pledge over shares put up as collateral for the
loans.
(3) At December 31, 1998, in response to claims made against certain escrow
funds holding Transamerica shares pending final determination of
post-closing reports and adjustments, the Company provided $1.9 million
against the unrealized holding gain of $1.7 million recognized in 1996
together with a $0.2 million charge related to a reduction in the number of
shares held.
(4) At December 31, 1998 and 1997, the Company recorded accounting charges
relating to the impairment of certain long-lived assets as required by the
Statement of Financial Accounting Standards 121.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the 1999 Consolidated Financial
Statements and the notes thereto and the other financial and statistical
information appearing elsewhere in this Annual Report. The 1999 Consolidated
Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by managed container owners or by the Company
itself. These leases, which generate most of the Company's revenues, are
generally operating leases.
The segment information presented in Note 2 to the Company's 1999
Consolidated Financial Statements relates to the portions of the Company's fleet
owned by the Company itself ("Owned Containers"), or by the Company's managed
container programs ("Managed Container Owners") which are comprised of US
Limited Partnerships and Other Container Owners ("Other Container Owners").
Owned Containers include containers held for resale, the financing costs of
which are borne by the Company prior to the sale of such containers to Managed
Container Owners, and are accounted for in the Owned Container segment. The
Company bears the risk of ownership with respect to containers in Owned
Containers but not with respect to the majority of containers in the Managed
Container Owners segments, although the Company bears the risk that the
management agreements could be terminated, resulting in the removal of the
corresponding managed containers from the fleet. At December 31, 1999,
approximately 33%, 45% and 22% of the Company's fleet (by original equipment
cost) was owned by US Limited Partnerships, Other Container Owners and Owned
Containers, respectively.
All containers, whether owned or managed, are operated as part of a single
fleet. The Company has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Company's management agreements with the Managed Container Owners meet the
definition of leases in Statement of Financial Accounting Standards No. 13, they
are accounted for in the Company's financial statements as leases under which
the container owners are lessors and the Company is lessee. The agreements with
container owners generally provide that the Company will make payments to the
container owners based upon the rentals collected from ocean carriers after
deducting direct operating expenses and a management fee. The majority of
payments to container owners are therefore contingent upon the leasing of the
containers by the Company to ocean carriers and the collection of lease rentals.
Minimum lease payments on the agreements which have fixed payment terms are
presented in Note 13(c) to the Company's 1999 Consolidated Financial Statements.
Over 85% of payments to container owners represent a percentage of the rentals
collected from the ocean carriers to whom containers are leased by the Company.
Gross lease revenue represents revenue from operating leases, excluding
billings in advance. These amounts are billed in US dollars on a monthly basis.
Amounts due under master leases are calculated by the Company at the end of each
month and billed approximately 6 to 8 days thereafter. Amounts due under
short-term and long-term leases are set forth in the respective lease agreements
and are generally payable monthly. Changes in gross lease revenue depend
primarily upon fleet growth, utilization rates and per diem rates.
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The Company has expanded its fleet since December 31, 1995 from 265,600 TEU
to 369,900 TEU at December 31, 1999. During 1998 and 1997, the ability of the
Company to purchase new equipment for both the owned and managed fleets was
constrained by the levels of financing available to the Company.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost) at the dates indicated:
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
Utilization................................................. 80% 75% 84%
The short-term objective of the Company is to improve utilization by
offering greater leasing incentives and actively repositioning equipment to
higher-demand locations. The Company continues to take advantage of its
marketing resources in order to seek out leasing opportunities. While this
short-term strategy will increase repositioning expenses, it may also reduce
those expenses related to storing off-hire containers. These measures will also
provide the longer-term advantage of placing the containers where the demand is
greatest.
During the course of 1999, economic reforms in Asia, as well as in Latin
America, have begun to produce gradual improvement in terms of world trade, and
there are preliminary indications that containerized trade volumes from North
America and Europe to Asia, in particular, may be increasing. Intra-Asian trade,
which also had stagnated since the Asian financial crisis began nearly two years
ago, has shown increased activity in recent months. These favorable signs,
however, have yet to produce any significant positive impact on the Company's
operating performance.
In 1998, utilization declined reflecting the deteriorating economic
position in Asian, South American and other markets. Utilization experienced
steady growth during 1997 due to marketing efforts and improved inventory
management.
The Company's average per diem rates have fallen consistently throughout
1999, 1998 and 1997. This reflects the rationalization in the global shipping
industry and competitive market conditions. During the course of 1999, the
Company's combined per diem rate fell by approximately 11% from the combined
rate at December 1998.
Commissions, fees and other operating income includes acquisition fees
relating to the Company's managed container programs, income from direct
financing leases (principally containers leased under lease-purchase
arrangements), fees earned in connection with the manufacture and sale of dry
freight special and other products, fees from the disposal of used containers,
syndication fees relating to the Company's limited partnership offerings and
miscellaneous other fees and income. This item is affected by the size of new
managed programs, the purchase price of containers acquired for new managed
programs, the quantity of dry freight special and other products manufactured
and sold, the number and value of direct financing leases and income from
disposals of used containers. Although acquisition fees are generally received
in cash at the inception of a managed container program and are non-refundable,
they are amortized in the statement of operations on a straight-line basis over
the period of the managed container agreement to which they relate.
Direct operating expenses are direct costs associated with leasing
containers, both owned and managed. These expenses include depot costs such as
repairs, maintenance, handling and storage, non-depot expenses such as
insurance, agent fees and repositioning costs, and other expenses such as
provisions for doubtful accounts and legal costs. Direct operating expenses are
affected primarily by fleet size and utilization. The majority of direct
operating expenses relate to off-hire containers, and therefore these costs are
sensitive to the quantity of off-hire containers as well as the frequency at
which containers are re-delivered.
Payments to container owners reflect the amounts due to Managed Container
Owners, computed in accordance with the terms of the individual agreements.
Selling, general and administrative expenses include all employee and
office costs, professional fees and computer systems costs.
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Operating profit or loss, for reported segments, includes items directly
attributable to specific containers in each of the Company's operating segments,
as well as items not attributable to any specific container but instead are
allocated across operating segments. Items directly attributable to operating
segments include gross lease revenue, direct operating expenses, payments to
container owners, container interest and depreciation expense. Indirect items
allocated across segments include selling, general and administrative expenses
and interest, depreciation and impairment charges on the Company's non-container
assets.
RESULTS OF OPERATIONS
The following chart represents certain key performance measurements,
expressed as a percentage of gross lease revenue:
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
% % %
Payments to container owners................................ 48 48 46
Direct operating expenses................................... 24 22 21
Selling, general and administrative expenses................ 13 13 14
Depreciation and amortization............................... 12 12 12
Interest expense............................................ 8 10 11
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In 1999, the Company implemented a strategy that was designed to reduce
overhead expenses and to refinance short-term debt.
First, the Company made significant reductions to selling, general and
administrative expenses under a program that involved the reorganization of key
activities together with the termination of certain employee positions.
Second, in the first half of the year the Company reduced its short-term
debt by $20.6 million under a program that involved the sale of container
equipment to third party investor programs. The refinancing plan was completed
in August with the closure of a $50 million transaction, the proceeds of which
were used to refinance $47.8 million of debt and capital lease obligations. See
also "Liquidity and Capital Resources -- Capital Resources".
Approximately 91% of new container investment in 1999 was financed within
the Managed Container Owners segments, compared to 85% in 1998. The remaining 9%
in 1999 and 15% in 1998 was financed within the Owned Container segment by
operating cash flow and borrowings.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US Limited Partnerships increased by approximately $0.4 million, or 21%,
from $1.9 million in 1998 to $2.3 million in 1999. Reduced operating profit
before indirect items, reflecting a smaller fleet size and lower average
utilization and per diem rates, were more than offset by lower allocations of
selling, general and administrative expenses and the absence of an impairment
charge in 1999.
Other Container Owners generated an operating profit of $0.2 million in
1999, compared to an operating loss of $0.7 million in 1998. Operating profit
before allocations of indirect items decreased by $1.5 million as the effect of
a larger fleet size was more than offset by the combined effects of lower
average utilization and per diem rates. Indirect allocations of $5.8 million
were $2.4 million lower than in 1998 as a result of the reduction in selling,
general and administrative expenses and without the effect of the $0.8 million
impairment loss recorded in 1998 relating to the Company's real property in
England.
Owned Containers generated an operating profit of $0.9 million in 1999
compared to a loss of $8.1 million in 1998. Of the loss reported in 1998, $5
million was attributable to impairment losses recorded on container assets and
real property. In 1999, the total charge for container depreciation and interest
was $7.3 million lower
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than in 1998 due to the sale of container assets to the Other Container Owner
segment and to the repayment and refinancing of debt. This more than offsets the
$5.7 million decrease in net lease revenue which was caused by a smaller fleet
size together with lower average utilization and per diem rates. In addition,
the reduction in selling, general and administrative expenses and the increase
in the level of commissions and fees and other operating income contributed to
the improvement in operating profit.
Gross lease revenue decreased by approximately $25.4 million, or 16%, to
$132.1 million in 1999. Of the decrease, approximately 91% was caused by the
combined effect of lower average per diem and utilization rates and the balance
was attributable to a smaller average fleet size.
Commissions, fees and other operating income increased to $5.9 million in
1999, an increase of $1 million, or 20%, over 1998. This was primarily due to a
$1.3 million increase in commissions and fees earned in connection with the
manufacture and sale of dry freight special and other products partly offset by
a $0.3 million reduction in income from direct financing leases and a $0.1
million reduction in fees from the disposal of containers.
Investment gains of $1.3 million represent the cash received that had been
held pending post-closing reports and adjustments related to the Agreement and
Plan of Merger between Transamerica Corporation and Trans Ocean Limited in 1996.
Direct operating expenses of $31.2 million were $4.1 million, or 12%, lower
than in 1998. A $2.4 million, or 18%, increase in inventory related costs,
reflecting a larger off-hire fleet, was more than offset by reductions in
activity related costs of $2.3 million, or 15%, and by reduced charges for legal
expenses and doubtful accounts of $4.2 million, or 61%.
Payments to container owners decreased to $63.9 million in 1999, a decrease
of $11.6 million, or 15%, over the prior year. Payments to Other Container
Owners were $39.7 million in 1999, a decrease of $4 million, or 9%, over 1998
due to a $5.3 million reduction in net lease revenue for this segment. An
increase in the average fleet size, due to transactions involving the sale of
equipment from the Owned to the Other Container Owner segment in the first half
of 1999 together with new container production in the second half of the year,
was more than offset by lower average utilization and per diem rates. Payments
to US Limited Partnerships decreased by $7.6 million to $24.3 million, a 24%
decrease when compared to 1998. The $10.8 million reduction in gross lease
revenue for the segment was caused by lower average utilization and per diem
rates and a smaller dry cargo container fleet.
Depreciation and amortization decreased to $16.2 million in 1999, a
reduction of $2.5 million, or 13%, compared to 1998. This was primarily due to
the sale of equipment in the first six months of the year.
Selling, general and administrative expenses were $16.6 million in 1999,
compared to $21.2 million in 1998, a decrease of $4.6 million, or 22%. Manpower
costs were $2.4 million, or 21%, lower due to the completion of the
restructuring program announced in December 1998. The Company also achieved cost
savings over 1998 of 61% for legal and other professional fees, 26% for
information technology expenses, 11% for occupancy expenses and 20% for
communication expenses.
Interest expense decreased to $10.8 million in 1999, a decrease of $4.9
million, or 31%, over 1998, reflecting a $38.5 million reduction in the total
debt balance during the course of the year and a lower average interest rate due
to the refinancing of short-term debt.
Income taxes. The Company recorded an income tax benefit of $0.2 million
in 1999 reflecting losses that have arisen in the Company's US operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the size of the total fleet decreased by 8,400 TEU,
representing disposals of 11,200 TEU, net of new container production of 2,800
TEU. Total new container production in 1998 represented an investment of $9.8
million compared with $92.0 million in 1997. Approximately $3.8 million, or 39%,
of the new container investment before disposals related to dry cargo
containers, compared to $68.0 million, or 74%, in 1997. Of the
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remaining new container purchases, $2.7 million was invested in flatracks, $2.0
million was invested in roll-trailers and $1.3 million in tank containers.
Approximately 85% of new container investment in 1998 was financed within
the Managed Container Owners segments, compared to 69% in 1997. The remaining
balance of 15% in 1998 and 31% in 1997 was financed within the Owned Container
segment by operating cash flow and borrowings.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US Limited Partnerships declined by approximately $0.3 million, or 11%,
from $2.2 million in 1997 to $1.9 million in 1998 due to lower net lease
revenues generated from a smaller fleet size, offset partially by lower
allocations of selling, general and administrative expenses.
Other Container Owners generated an operating loss of $0.7 million in 1998,
compared to an operating profit of $0.9 million in 1997. Increased net lease
revenues resulting from a larger fleet size, were offset by higher allocations
of selling, general and administrative expenses and an allocation of impairment
losses in 1998 of $0.8 million related to the Company's real property in
England. Operating profit before allocations of indirect items increased
slightly due to a larger fleet under management
Owned Containers generated a loss from operations in 1998 of $8.1 million
compared to a loss of $7.1 million in 1997. Lower net lease revenues resulting
from a softer leasing market as well as a smaller owned fleet and higher
interest rates on container debt contributed to the decline in this segment's
performance. Additionally, the Company took an impairment charge of $4.5 million
in 1998 on refrigerated and selected dry cargo containers, in anticipation of a
sale of these assets to various third party investor programs in the first half
of 1999. These sales reflected the Company's strategy of refinancing its
short-term debt and reducing the Company's cost of debt financing. In 1997, the
Company booked a $7.4 million impairment charge to write down the carrying value
of refrigerated containers.
Gross lease revenue decreased by approximately 2% in 1998, primarily due to
lower average utilization rates on dry cargo containers, a smaller average
refrigerated container fleet and lower average per diem rates on most product
types. Gross lease revenue from dry cargo containers decreased by 2% in 1998 and
represented approximately 73% of the overall total, unchanged from 1997.
Refrigerated container gross lease revenue declined by $2.8 million, or 9%, to
$29.9 million in 1998 due to a reduction in average fleet size following a
program of targeting uneconomic equipment for disposal during the year.
Refrigerated container gross lease revenue represented 19% of the overall total
compared to 20% in 1997. Gross lease revenue from tank containers increased by
$1.2 million to $8.3 million, an increase of 17% over 1997, due to improved
utilization and a larger average fleet size. The roll-trailer fleet contributed
$2.9 million, or 2%, to total gross lease revenue in 1998 compared to $2.8
million, or 2%, in 1997.
Commissions, fees and other operating income decreased to $5.0 million in
1998, a decrease of $0.6 million, or 11%, over 1997. This was primarily due to
reduced income from direct financing leases which was partly offset by increased
fees from the disposal of containers and increased property rental income.
Direct operating expenses increased to $35.3 million in 1998, an increase
of $1.1 million, or 3%, over 1997. Reductions in storage, repositioning,
handling and agent costs were more than offset by increases in repair costs and
in charges in respect of dry cargo and refrigerated container legal expenses and
doubtful accounts. Dry cargo container storage costs decreased by $1.0 million,
or 10%, to $8.9 million reflecting stronger exchange rates and the negotiation
of lower storage rates in several locations. As a percentage of gross lease
revenue, direct operating expenses increased to 22% in 1998 from 21% in 1997.
Payments to container owners increased to $75.5 million in 1998, an
increase of $1.6 million, or 2%, over the prior year. Payments to Other
Container Owners were $43.6 million in 1998, an increase of $6.1 million, or
16%, over 1997 due to a larger average fleet size which more than offset lower
average dry cargo container utilization and per diem rates. The increase in the
average fleet size was mainly due to transactions involving the sale of
equipment from the Owned to the Other Container Owner segment in the second half
of 1997 together with new container production. Payments to US Limited
Partnerships decreased by $4.6 million to $31.9 million, a 12% decrease compared
to 1997. The $6.6 million reduction in gross lease revenue for the segment was
caused by lower average utilization and per diem rates and a smaller dry cargo
container fleet which more than offset a
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$1.3 million reduction in direct operating expenses. The US Limited Partnership
fleet declined from 138,600 TEU at December 1997 to 128,700 TEU at December 1998
as a result of the disposal of older container equipment, including sales of
equipment to the Other Container Owner segment. At December 1998, the managed
container fleet comprised 75% of the total fleet, by original equipment cost,
which was almost unchanged from 1997.
Depreciation and amortization decreased slightly to $18.7 million in 1998,
a reduction of $0.3 million, or 2%, compared to 1997, due to a smaller average
Owned Container fleet which was partly offset by an increase in the depreciation
charge for refrigerated containers following a change in the depreciation policy
at the beginning of 1998.
Selling, general and administrative expenses were $21.2 million in 1998,
compared to $22.7 million in 1997, a decrease of $1.5 million, or 7%, due to
lower manpower, professional service and communication costs.
Financing and recomposition expenses decreased to $5.4 million in 1998, a
reduction of $2.0 million, or 27%. During 1998, $3.4 million of charges were
incurred related to professional, financing and termination costs together with
a $2.0 million provision in connection with a restructuring plan. Charges
incurred during 1997 were comprised of a $3.4 million provision against a
contingent liability (see Note 16 to the 1999 Consolidated Financial Statements)
and $4.0 million in costs related to professional and financing fees.
Interest expense decreased to $15.7 million in 1998, a decrease of $2.0
million, or 11%, over 1997 due to a lower average debt balance which was partly
offset by a higher average interest rate. The average debt balance was $160.9
million in 1998 compared to $185.1 million in 1997, a decrease of $24.2 million.
The reduction in the average debt balance was due to debt repayments of $22.1
million from operating cash during 1998 together with container sales from the
Owned Container fleet to the managed container fleet in the second half of 1997.
Reversal of unrealized holding gain on available for sale securities
represented a $1.9 million charge to reduce the anticipated proceeds from
investment securities held in escrow accounts.
Impairment losses of $6.5 million in 1998 comprised a $4.5 million charge
related to container equipment and a $2.0 million adjustment to record a
property at estimated market value.
Income taxes of $0.3 million in 1998 represented charges against profits
arising in European and Asian marketing offices. There was no income tax charge
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The funding sources available to the Company and its consolidated
subsidiaries include operating cash flow and borrowings. The Company's operating
cash flow is derived from lease revenues generated by the Company's fleet and
fee revenues from its managed container programs. The Company's working capital
requirements generally relate to day-to-day fleet support and servicing the
current portion of long-term debt outstanding. The Company derives all of its
operating income and cash flow from its subsidiaries. Dividends of $3.2 million
were paid to the Company by its subsidiaries during 1998. There were no such
dividends in 1999.
The Company purchases new containers for its own account and for resale to
its managed container programs. In recent years the Company has targeted
container purchases to take advantage of strategic purchasing and leasing
opportunities, once the related financing was secured. During 1998 and 1997 the
ability to purchase new containers was limited by the reduced levels of
financing available to the Company.
Cash from Operating Activities. Net cash provided by operating activities
was $15 million and $15.2 million in 1999 and 1998, respectively. Net cash used
by operating activities was $20.6 million in 1997. The cash generated in 1999
represented cash provided by operations together with a $6.5 million reduction
in the net amounts due from lessees and a release of $4.9 million of deposits
from escrow accounts of which $2.7 million was utilized to make payments to
third party container owners. During 1999, cash was primarily utilized to pay
amounts due to container owners and to reduce the balance of Other amounts
payable and accrued expenses by $9.4 million, including payments of amounts due
under a restructuring plan and under the terms of loan extension agreements. The
net cash generated in 1998 reflected cash generated from operations and $7.9
million of
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proceeds from new container equipment for sale. The net cash used in 1997
reflected payments to container manufacturers of $26.4 million together with the
addition of new container equipment for resale of $6.7 million.
Cash for Investing Activities. The Company uses cash for investing
activities to acquire containers for its owned fleet, to purchase property and
other assets related to the operation of its worldwide office network and on
occasion to acquire subsidiaries and other investments. Net cash provided by
investing activities was $18.9 million and $44.6 million in 1999 and 1997,
respectively. Net cash used in investing activities was $1.4 million in 1998.
During 1999, $21.7 million was generated by the sales of container equipment and
finance lease equipment, primarily to third party container owners. Cash
payments in 1998 included acquisitions of container equipment and computer
equipment of $1.8 million and $1.1 million, respectively. Included in cash paid
in 1997 was $38.7 million relating to the purchase of owned container equipment
and $3.7 million relating to loans made to the then Chairman. Cash received in
1997 related to proceeds from the sale of container equipment of $61.5 million
and proceeds from the sale of an investment in finance lease equipment of $25.1
million. Also included in cash received in 1997 was the return of $1.5 million
paid by the Company purportedly related to professional fees relating to a
proposed strategic alliance.
Cash from Financing Activities. The Company uses cash from financing
activities to fund capital acquisition requirements and short-term purchasing
requirements of new containers held for resale. Net cash used in financing
activities was $34.5 million, $19 million and $26.7 million in 1999, 1998 and
1997, respectively. In 1999, the Company utilized the proceeds of a $50 million
loan to refinance $47.8 million of indebtedness. In addition to this, debt and
capital lease obligations included $20.6 million of repayments in connection
with transactions involving container equipment sales. In 1998, net cash used by
financing activities included $22.1 million of debt and capital lease repayments
from operating cash.
CAPITAL RESOURCES
On August 2, 1999, the Company refinanced approximately $47.8 million of
its short-term and other indebtedness by establishing a Loan Facility (the "Loan
Facility") with MeesPierson N.V., a Dutch financial institution, as agent for
itself and First Union National Bank (collectively, the "Lenders"). The borrower
under the Loan Facility was Cronos Finance (Bermuda) Limited ("Cronos Finance"),
a newly-organized, wholly-owned, special purpose subsidiary of the Company.
Cronos Finance borrowed $50 million under the Loan Facility for the purpose of
acquiring containers from three other direct or indirect wholly-owned
subsidiaries (the "Sellers") of the Company and paying certain fees associated
with the establishment of the Loan Facility and the fees of certain former
lenders. The Sellers utilized the cash proceeds from the sale of the containers
to Cronos Finance to repay $47.8 million in principal due by the Sellers to
eight different creditors or groups of creditors of the Group, including all
indebtedness owed to a group of banks for which Fleet Bank, N.A. acted as agent.
For establishing the Loan Facility, the Lenders were paid an arrangement
fee of 1.50% of the facility amount, issued 300,000 shares of Common Stock of
the Company (150,000 shares to each Lender) and each granted a warrant to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$4.41 per share.
In conjunction with the new facility, the Company has agreed to new
financial covenant levels with all of its current lenders and has obtained
waivers of non-compliance under current financial covenants. In addition, as
part of the facility, all lenders have agreed that the new covenant levels will
not be tested until the first quarter of 2000.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures for containers in 1999, 1998 and 1997 were $2.7
million, $1.8 million and $38.7 million, respectively. Other capital
expenditures in 1999, 1998 and 1997 were $0.2 million, $1.1 million, and $0.6
million, respectively.
During the year ended December 31, 1996, the Company advanced $5.5 million
to the then Chairman of the Group, of which $5.5 million was outstanding as of
December 31, 1996. In January 1997, the Company advanced a further $3.7 million.
As at December 31, 1997, no payments had been received against these loans. In
October
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1996, $1.5 million was placed into an escrow account, purportedly in respect of
professional fees relating to a proposed strategic alliance. This alliance did
not take place and the escrow funds were released to the Company in January
1997. In June 1999, $5.3 million was received from the sale of the Company's
stock held as collateral on the loans and was utilized in reducing the
indebtedness to the Company under these loans. See Item 13 -- "Certain
Relationships and Related Transactions" below.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and how it is designated. A variable cash flow
hedge of a forecasted transaction is initially recorded as comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Gains and losses from foreign currency exposure hedges are
reported in other comprehensive income as part of the cumulative translation
adjustment. Gains and losses from fair value hedges are recognized in earnings
in the period of any changes in the fair value of the related recognized asset
or liability or firm commitment. Gains and losses on derivative instruments that
are not designated as a hedging instrument are recognized in earnings in the
period of change. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and should not be
applied retroactively to financial statements for prior periods. The Company is
assessing the impact that SFAS 133 will have in accounting for its derivative
transactions and hedging activities.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 was
to have been effective in the first quarter of 2000. On March 24, 2000, the
Staff of the SEC announced that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000 may take an additional three months to
implement SAB No. 101. The Company is evaluating the impact, if any, of SAB No.
101 on the Company's financial statements.
YEAR 2000
The Company did not experience nor does it currently anticipate any
material adverse effects on the Company's business, results of operations or
financial condition as a result of Year 2000 issues involving its internal use
systems, third party products or any of its software products. Costs incurred in
preparing for Year 2000 issues were expensed as incurred. The Company does not
anticipate any additional material costs in connection with Year 2000 issues.
INFLATION
Management believes that inflation has not had a material adverse effect on
the Company's results of operations.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item should be read in conjunction with and by reference to Note 14 to
the 1999 Consolidated Financial Statements.
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The following table sets forth principal cash flows and related weighted
average interest rates by expected maturity dates for debt and capital lease
obligations at December 31, 1999:
EXPECTED MATURITY DATE OF DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------------------------
2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- -------- -------
(US DOLLAR EQUIVALENT, IN THOUSANDS)
Long-term debt and capital lease
obligations:
Fixed rate ($US).................... $ 4,019 $ 4,143 $ 3,769 $ 3,649 $12,119 $ --
Average interest rate %............. 8.7 8.6 8.6 8.6 8.6 --
Fixed rate (GBP).................... -- -- $ 5,750 -- -- --
Average interest rate %............. 9.8 9.8 9.8 -- -- --
Variable rate ($US)................. $12,558 $12,148 $12,362 $13,131 $24,494 $1,836
Average interest rate %............. 7.6 7.6 7.6 7.6 7.5 7.5
Interest rate risk: outstanding borrowings are subject to interest rate
risk. At December 31, 1999, 70% of total borrowings had floating interest rates.
The Company performed an analysis of borrowings with variable interest rates to
determine their sensitivity to interest rate changes. In this analysis, the same
change was applied to the current balance outstanding leaving all other factors
constant. It was found that if a 10% increase was applied to market rates, the
expected effect would be to reduce annual cash flows by $0.6 million.
Exchange rate risk: substantially all of the Company's revenues are billed
and paid in US dollars and approximately 78% of costs in 1999 were incurred and
paid in US dollars. Of the remaining costs, approximately 82% are individually
small, unpredictable and incurred in various denominations and thus are not
suitable for cost effective hedging. From time to time, Cronos hedges a portion
of the expenses that are predictable and are principally in UK pounds sterling.
In addition, almost all of the Company's container purchases are paid for in US
dollars.
As exchange rates are outside of the control of the Company, there can be
no assurance that such fluctuations will not adversely affect its results of
operations and financial condition. By reference to 1999, it is estimated that
for every 10% fall in value of the US dollar, the effect would be to reduce cash
flows by $1.4 million in any similar year.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1999 Independent Auditors' Report
1998 Report of Independent Public Accountants
The financial statements listed in this Item 8 are set forth herein beginning on
page F1:
Consolidated Balance Sheets -- At December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors, in general, delegates the daily management of the
Company's business to the Company's executive officers. The following table sets
forth information with respect to the executive officers and directors of the
Company.
YEAR INITIALLY ELECTED
NAME AGE OR APPOINTED POSITION
- ---- --- ---------------------- --------
OFFICERS AND DIRECTORS:
Dennis J Tietz................. 47 1998 Chairman of the Board of Directors and
Chief Executive Officer
Peter J Younger................ 43 1997 Director, Executive Vice President and
Chief Financial Officer
Maurice Taylor................. 39 1998 Outside Director
Charles Tharp.................. 49 1999 Outside Director
Stephen N Walker............... 45 1999 Outside Director
Robert M Melzer................ 59 2000 Outside Director
John M Foy..................... 54 1999 Senior Vice President
Nico Sciacovelli............... 50 1999 Senior Vice President
John C Kirby................... 46 1999 Senior Vice President
DENNIS J TIETZ. Mr. Tietz, age 47, was appointed Chief Executive Officer
of the Company on December 11, 1998, and Chairman of the Board of Directors on
March 30, 1999, to fill the vacancies created by the resignation of Rudolph J
Weissenberger as Chief Executive Officer and Chairman of the Board. Mr. Tietz
will serve as a director until the annual meeting in 2001 and his successor is
elected. From 1986 until his election as Chief Executive Officer of the Company,
Mr. Tietz was responsible for the organization and marketing of investment
programs managed by Cronos Capital Corp. ("CCC"), (formerly called Intermodal
Equipment Associates), a subsidiary of the Company. From 1981 to 1986, Mr. Tietz
supervised container lease operations in both the United States and Europe.
Prior to joining CCC in 1981, Mr. Tietz was employed by Trans Ocean Leasing
Corporation, San Francisco, California, a container leasing company, as regional
manager based in Houston, with responsibility for leasing and operational
activities in the US Gulf. Mr. Tietz holds a B.S. degree in Business
Administration from San Jose State University. Mr. Tietz is a licensed principal
with the National Association of Securities Dealers ("NASD").
PETER J YOUNGER. Mr. Younger, age 43, was elected to the Board of
Directors of the Company on January 13, 2000. Mr. Younger will serve as a
director until the annual meeting in 2001 and his successor is elected. Mr.
Younger was appointed as Executive Vice President of the Company in April 1999
and its Chief Financial Officer in March 1997. From 1991 to 1997, Mr. Younger
served as Vice President of Finance for Cronos Containers Ltd., located in the
UK. From 1987 to 1991 Mr. Younger served as Vice President and Controller for
CCC in San Francisco. Prior to 1987, Mr. Younger was a certified public
accountant and a principal with the accounting firm of Johnson, Glaze and Co. in
Salem, Oregon. Mr. Younger holds a B.S. degree in Business Administration from
Western Baptist College, Salem, Oregon.
MAURICE TAYLOR. Mr. Taylor, age 39, was appointed to the Board of
Directors of the Company as an outside director on July 9, 1998. Mr. Taylor will
serve as a director until the annual meeting for the year 2000 and his successor
is elected. Mr. Taylor, based in Geneva, Switzerland, is and has been an
independent consultant in international trade finance for the last five years.
He serves on the boards of numerous privately-held trading companies in Europe.
Mr. Taylor holds a B.A. degree in Mathematical Economics from Brown University.
CHARLES THARP. Mr. Tharp, age 49, was appointed to the Board of Directors
of the Company as an outside director on March 31, 1999, to fill the vacancy
created by the resignation of Dr. Axel Friedberg. Mr. Tharp will serve as a
director until the annual meeting for the year 2000 and his successor is
elected. Mr. Tharp is based in Washington D.C. and has for the last four years
acted as a consultant to pension funds and foundations on international
investment policy, fiduciary issues, and financial management. Mr. Tharp is a
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director of The Info/Change Foundation, Washington D.C. He held several
positions, including Executive Director (the Chief Executive Officer) of the
Pension Benefit Guaranty Corporation, a federal agency, from 1982 to 1985. Mr.
Tharp has served on the boards of insurance companies, pension funds, and real
estate holding companies in California, Ohio, and Bermuda. Mr. Tharp holds a
B.A. degree in History from Yale University and an M.A. in Jurisprudence from
Oxford University, England.
STEPHEN NICHOLAS WALKER. Mr. Walker, age 45, was appointed to the Board of
Directors of the Company as an outside director on October 5, 1999, to fill the
vacancy created by the resignation of Ernst-Otto Nedelmann, and was elected to
the Board by the shareholders at the January 13, 2000 meeting. Mr. Walker will
serve as a director until the annual meeting in 2002 and his successor is
elected. Since 1995, Mr. Walker has served as Senior Vice President of
Investments of Paine Webber Inc. From 1982 until he joined PaineWebber, he
served as Senior Vice President of Investments of Prudential Securities Inc. Mr.
Walker holds an M.A. degree in Jurisprudence from Oxford University, England.
ROBERT M MELZER. Mr. Melzer, age 59, was elected to the Board of Directors
of the Company as an outside director on January 13, 2000, and will serve as a
director until the annual meeting in 2002 and his successor is elected. Mr.
Melzer served as President and Chief Executive Officer of Property Capital
Trust, Inc., a publicly-traded real estate investment trust ("REIT"), from 1992
until May 1999 when the company completed its plan to dispose of its investments
and distributed the proceeds to its shareholders. Since May 1999, Mr. Melzer has
devoted his business activities to consulting and to serving as a director or
trustee of various business and charitable organizations. Mr. Melzer serves as a
director of Genesee & Wyoming, Inc., a short-line railroad holding company; a
director of Beacon Capital Partners, Inc., a REIT; a trustee of MGI Properties,
a REIT; and chair of the board of trustees of Beth Israel Deaconess Medical
Center. Mr. Melzer holds a B.A. degree in Economics from Cornell University and
an M.B.A. from the Harvard Business School. The Board proposed Mr. Melzer as a
candidate for director in its preliminary proxy statement filed with the SEC on
August 24, 1999, and, on October 21, 1999, appointed Mr. Melzer as a non-voting
member of the Board's Transaction Committee, which was organized to assess the
proposal made by Interpool, Inc. to acquire the Company and to consider
alternative means of enhancing shareholder value. See "Description of
Business -- Recent Developments" above.
JOHN M FOY. Mr. Foy, 54, was appointed Senior Vice President Americas, on
April 1, 1999. Mr. Foy is responsible for lease marketing and operations in
North and South America, Asia and Australia, and is based in San Francisco. Mr.
Foy was appointed Vice President, Americas in 1993. From 1985 to 1993, Mr. Foy
was Vice President/Pacific with responsibility for dry cargo container lease
marketing and operations in the Pacific Basin. From 1977 to 1985, Mr. Foy was
Vice President of Marketing for Nautilus Leasing Services in San Francisco with
responsibility for worldwide leasing activities. From 1974 to 1977, Mr. Foy was
Regional Manager for Flexi-Van Leasing, a container lessor, in the Western
United States. Mr. Foy holds a B.A. degree in Political Science from University
of the Pacific, and a Bachelor of Foreign Trade from Thunderbird Graduate School
of International Management.
NICO SCIACOVELLI. Mr. Sciacovelli, 50, was appointed Senior Vice President
Europe, Middle East and Africa on April 1, 1999. Mr. Sciacovelli is responsible
for lease marketing and operations in those areas. He is based in Genoa, Italy.
In 1997, Mr. Sciacovelli was appointed as Vice President/Europe with
responsibility for leasing operations in the European area. From 1983 to 1997,
Mr. Sciacovelli was Director of Marketing for Southern Europe, the Middle East
and Africa. Prior to 1983, Mr. Sciacovelli was employed by Interpool, Inc., a
container lessor, as Marketing Manager with responsibility for container leasing
in Italy.
JOHN C KIRBY. Mr. Kirby, 46, was appointed Senior Vice President for
Operations on April 1, 1999. Mr. Kirby is responsible for container purchasing,
contract and billing administration, container repairs and leasing-related
systems and is based in the United Kingdom. Mr. Kirby previously served as Vice
President of Operations from 1992. From 1986 to 1992, Mr. Kirby was Director of
European Operations, a position he had held with IEA. Prior to joining IEA as
European Technical Manager in 1985, Mr. Kirby was employed by CLOU Containers, a
leasing company, as Technical Manager based in Hamburg, Germany. Mr. Kirby holds
a Professional Engineering Qualification from the Mid-Essex Technical College in
England.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors and executive officers must file reports with the
SEC indicating the number of shares of the Company's Common Stock they
beneficially own and any changes in their beneficial ownership. Copies of these
reports must be provided to the Company. Based solely on written representations
from the Company's directors and executive officers and a review of the copies
of beneficial ownership reports furnished to the Company, the Company believes
that all of the directors, executive officers and 10% shareholders of the
Company complied with such reporting requirements during the 1999 fiscal year,
except Messrs. Melzer and Walker, and Hans-Ulrich Ming, individually and as
Trustee of the Trust for the benefit of Stefan M Palatin, each of whom
inadvertently failed to timely file an initial statement on Form 3.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established Audit, Compensation, Special Litigation, and
Transaction Committees.
The Audit Committee consists of Directors Melzer, as its chair, Taylor and
Walker. The Audit Committee has general oversight responsibility with respect to
the Company's financial reporting, reviews the results and scope of the audit
and other services provided by the Company's independent auditors, and is
responsible for recommending to the Board the appointment of the Company's
independent auditors.
The Compensation Committee is comprised of Directors Tharp, as its chair,
Walker and Taylor. The Compensation Committee is responsible for establishing
and supervising the compensation and benefit plans for the officers and key
employees of the Company.
The Special Litigation Committee is comprised of Directors Taylor, as its
chair, Walker and Melzer. This Committee has been established to review
transactions between the Company and present and former management to determine
if management engaged in any misfeasance or improper self dealing. The Committee
is also responsible for supervising the Company's efforts to recover the
indebtedness owed to the Company by its former Chairman, Mr. Palatin.
The Transaction Committee consists of Directors Walker, as its chair,
Melzer, Taylor and Tharp. It was organized on October 8, 1999, to supervise the
efforts of the Board, working in conjunction with counsel and the Company's
financial advisors, First Union, to pursue strategic alternatives to enhance
shareholder value, and to oversee discussions between Cronos and interested
parties.
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ITEM 11 -- EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information concerning the cash and
non-cash compensation (stated in U.S. dollars) received for services rendered in
the fiscal years ended December 31, 1999, 1998, and 1997 by (i) the Company's
Chief Executive Officer during 1999, and (ii) the four most highly compensated
executive officers of the Company (other than the Chief Executive Officer) in
office on December 31, 1999.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- ----------------------------------------------------------------------------------- -----------------------------
(a) (b) (c) (d) (e) (g) (i)
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND SALARY BONUS COMPENSATION SARS COMPENSATION(1)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ ------------ ---------- ----------------
OFFICERS:
Dennis J Tietz............................ 1999 453,923 -- 38,819 -- 5,000
Chairman and Chief Executive Officer 1998 237,824 71,435 27,790 300,000 5,000
1997 232,250 59,774 7,220 -- 5,000
Peter J Younger........................... 1999 250,000 -- 19,769 200,000 --
Director, Executive Vice President and 1998 205,352 61,443 10,614 -- --
Chief Financial Officer 1997 177,963 43,290 9,688 -- --
John M Foy................................ 1999 187,000 -- 14,155 -- 5,000
Senior Vice President 1998 153,114 25,356 20,847 -- 5,000
1997 149,525 41,268 17,754 -- 4,750
Nico Sciacovelli.......................... 1999 179,127 -- 2,264 -- --
Senior Vice President 1998 183,477 28,098 995 -- --
1997 139,665 26,991 -- -- --
John C Kirby.............................. 1999 157,616 -- 19,275 -- 6,297
Senior Vice President 1998 122,030 35,990 13,888 -- 5,199
1997 113,015 28,950 10,757 -- 4,856
- ---------------
(1) Column (i) represents retirement plan contributions made by Cronos on
behalf of the named officers.
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OPTION GRANT TABLE
The following Option Grant Table includes columns designated "Potential
Realizable Value". The calculation of these columns is based on hypothetical 5%
and 10% growth assumptions established by the rules of the Securities and
Exchange Commission (the "Commission"). There is no way to anticipate what the
actual growth rate of the Company's Common Stock will be.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AND ASSESSED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- --------------------------------------------------------------------------------------------------- ----------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- -------- ----------
Peter J Younger....................... 200,000 100% $4.375 Oct. 2009 713,172 1,653,899
Reported in this table are Stock Appreciation Rights ("SARs") awarded to
the named officer. SARs allow the recipient to share in any increase in the
value of a specified amount of the Company's Common Stock without acquiring
ownership of such stock nor the rights associated with ownership. Under the
terms of the agreement, the Company granted the named officer the option to
acquire 200,000 SARs. The grant date was October 13, 1999.
STOCK OPTION TABLE
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END ($)
SHARES ---------------------------- ----------------------------
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Dennis J Tietz...................... -- -- 321,600 -- 187,500 --
Peter J Younger..................... -- -- 10,800 200,000 -- 125,000
John M Foy.......................... -- -- 10,800 -- -- --
Nico Sciacovelli.................... -- -- 5,400 -- -- --
John C Kirby........................ -- -- 10,800 -- -- --
COMPENSATION OF DIRECTORS
In 1999, outside directors received quarterly retainers of $6,250, fees of
$6,000 per board meeting attended in person, fees of $1,000 for every board
meeting attended via telephone conference facilities and reasonable travel and
entertainment expenses. In addition, Messrs. Taylor, Tharp and Walker each
earned $30,000 in 1999 for their services on the Transaction Committee of the
Company. Mr. Melzer, as a non-voting member of the Transaction Committee, earned
$20,000.
SAR GRANT TO OUTSIDE DIRECTORS. On October 13, 1999, the Board approved
the grant to each existing non-employee director of the Company, and to Mr.
Melzer, stock appreciation rights ("SARs") on 15,000 "share units", with a grant
price of $4.094, the closing price of Company's Common Stock on August 4, 1999.
A "share unit" is defined as the equivalent of one share of Common Stock of the
Company. As of the date of the award of the SARs to the outside directors,
October 13, 1999, the closing price of the Company's Common Stock was $4.875 per
share. The share units vest over a period of three years, with one-third of the
share units vesting on each of the first three anniversaries of the date of
grant, October 13, 1999, or seven days before the next
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scheduled annual meeting of shareholders for that year, whichever date first
occurs. If a grantee of share units resigns from the Company or is terminated
(other than for cause) by the Company within twelve months following a "change
in control", then the share units become fully exercisable, at anytime within 90
days after the date of such resignation or termination (if not exercised within
said time period, then the share units lapse and terminate). The share units
similarly vest in the event that a grantee is terminated by the Company without
cause, or upon a grantee's permanent disability or death. A "change in control"
is defined to include the acquisition by any person or related group of persons
of 20% or more of the Common Stock of the Company. The share units are also
fully exercisable upon any merger of the Company with another corporation or the
sale of substantially all of the assets of the Company. The share units may be
redeemed only for cash, not for shares of Common Stock of the Company. A grantee
is entitled to an "award payment" at the time of exercise of share units, equal
to the excess if any, of the fair market value of a share of Common Stock on the
date of exercise over the grant price, multiplied by the number of exercised
share units. The number of share units is subject to adjustment in the event of
any subdivision of the outstanding shares of the Common Stock of the Company,
the declaration of a dividend payable in Common Stock of the Company, or like
events. In all events, the share units may not be exercised beyond October 12,
2009. The grant of share units to an outside director does not entitle the
director to any rights as a shareholder of the Company.
EMPLOYMENT AGREEMENTS
DENNIS J TIETZ. When Mr. Tietz was hired as Chief Executive Officer on
December 11, 1998, he and the Company entered into an Employment Agreement (the
"Agreement"). The initial term of the Agreement was to expire December 31, 2000.
Under the Agreement, Mr. Tietz was to be paid a base salary of $235,000, subject
to annual increases as determined by the Board, but in no event less than the
increase in the consumer price index. Under the Agreement, Mr. Tietz was to
receive bonus compensation at such times, and in such amounts, as the Board
determines. Mr. Tietz was also entitled to receive from Cronos Capital Corp.
("CCC"), a subsidiary of the Company and the general partner of the U.S. limited
partnerships sponsored by the Company, 3% of the fees and distributions payable
by the partnerships to CCC for the life of the partnerships.
At the time the Company entered into the Agreement with Mr. Tietz, it also
granted him a stock option to acquire 300,000 shares of the Company's Common
Stock, at an exercise price of $4.375 per share, the closing price of the Common
Shares of the Company on December 11, 1998.
The Agreement also provided for a severance payment to Mr. Tietz upon his
termination without "cause" or upon Mr. Tietz's termination of the Agreement
"for good reason."
In June of 1999 the Board increased Mr. Tietz's base salary to $300,000,
payable in monthly installments. Shortly after Interpool made its proposal to
the Company described under "Description of Business -- Recent Developments"
above, the Compensation Committee of the Board commenced negotiations with
Messrs. Tietz and Younger with a view to securing their services by extending
their Employment Agreements, conforming Mr. Younger's Employment Agreement
(which had been entered into in 1998) to the general provisions of the
Employment Agreement with Mr. Tietz, and providing incentive compensation to
both to encourage them to pursue a transaction that would enhance shareholder
value. On March 24, 2000, the Compensation Committee of the Board and the full
Board (with Messrs. Tietz and Younger abstaining from the vote) approved revised
Employment Agreements with Messrs. Tietz and Younger.
Under the Amended and Restated Employment Agreement (the "Amended
Agreement") with Mr. Tietz, the term of his employment shall continue until
December 31, 2001, with any further extensions to occur upon the written
agreement of both the Company and Mr. Tietz. The Amended Agreement provides for
Mr. Tietz to be nominated to the Company's Board of Directors and nominated to
serve as Chairman of the Board for the term of the agreement. He shall continue
to receive a base salary of $300,000 per year, with increases to commence
January 1, 2001, in the discretion of the Board, but not less than the increase
in the consumer price index. Mr. Tietz is to receive an annual bonus, in an
amount of up to 50% of his annual base salary, to be calculated on the basis of
performance goals established by the Compensation Committee, in its discretion.
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In addition, Mr. Tietz is entitled to receive a lump sum cash bonus (the
"Transaction Bonus") upon the attainment of certain targets in the event of any
"change in control" of the Company. A change in control is generally defined as
the acquisition by any beneficial owner of 50% or more of the then-outstanding
Common Shares of the Company, a merger or consolidation of the Company with and
into another entity, or the sale of all or substantially all of the assets of
the Company. The Transaction Bonus is calculated by first multiplying the
consideration received by the Company's shareholders as a result of any such
transaction by a fraction determined by the following formula:
X - Y
X 0.25
------------
10
where "X" equals the price per share received by the holders of the
Company's Common Shares and "Y" equals $5.40.
Under his Amended Agreement, Mr. Tietz's Transaction Bonus shall be equal
to 60% of the amount determined in accordance with the foregoing formula, and
under his Amended Employment Agreement, Mr. Younger's Transaction Bonus shall be
equal to 40% of the amount determined in accordance with the foregoing formula.
Under the Amended Agreements with Messrs. Tietz and Younger, the amounts
payable by the Company to them as Transaction Bonuses shall be reduced, dollar
for dollar, so as to avoid the imposition of any excise tax upon the Company
imposed by Section 4999 of the Internal Revenue code.
Under the Amended Agreement, the Company may, at any time, discharge Mr.
Tietz from active service, upon no more than 30 days' advance notice, by
providing a notice of termination. Mr. Tietz may terminate the Amended Agreement
at any time upon the occurrence of certain events, such as a change in his
duties or position. Under the Amended Agreement, Mr. Tietz is also entitled to
three percent of the fees and distributions payable by the U.S. limited
partnerships to CCC, the general partner, for the life of the partnerships. Mr.
Tietz receives additional benefits, including an automobile.
If, at any time, Mr. Tietz's employment is terminated for an event or
events as defined in the Amended Agreement, then Mr. Tietz will be entitled to a
severance payment (the "Severance Payment") from the Company. (The event or
events as defined in the Amended Agreement are as follows: (a) the Company
terminates Mr. Tietz's employment without "cause," (b) Mr. Tietz terminates his
employment with the Company "for good reason," or (c) Mr. Tietz resigns, with or
without good reason, within the thirty-day period commencing one year following
an "equity change in control" of the Company. An equity change in control is
generally defined as the acquisition by any person or related group of persons
of 20% or more of the Common Stock of the Company.) The severance payment will
be made in a lump sum within 30 days of Mr. Tietz's last day of active service.
It will comprise all accrued obligations plus a pro-rated portion of his annual
salary and bonus for the year of termination. In addition, if Mr. Tietz agrees,
for a period of 24 months following his last day of active service, not to
solicit or interfere with any relationship between the Company and any customer,
supplier, investor, or limited partner of the Company or its affiliates, and
agrees not to solicit any existing employee of the Company to accept any
position with any other company that currently engages in business with the
Company, then Mr. Tietz shall be entitled to receive an additional lump sum
payment in a dollar amount equal to his annual salary and bonus.
PETER J YOUNGER. The Company and Mr. Younger entered into an Employment
Agreement as of July 1, 1998 (the "Agreement"). The Agreement was for an
indefinite term, and could generally not be cancelled except upon two-years'
prior written notice. Under the Agreement Mr. Younger was entitled to a base
salary, effective January 1, 1999, of US $250,000 per year, and was entitled to
an annual bonus under the terms and conditions of any bonus plan established by
the Company for all employees.
On March 24, 2000, upon the approval of the Compensation Committee of the
Board and the full Board (with Messrs. Tietz and Younger abstaining), the
Company entered into an Amended and Restated Employment Agreement with Mr.
Younger (the "Amended Agreement"). The Amended Agreement generally contains the
same terms and provisions as set forth in Mr. Tietz's Revised Agreement, subject
to the following material differences. The Amended Agreement provides for Mr.
Younger to be nominated to the Company's Board of Directors to serve as a member
of the Board for the term of the agreement. Mr. Younger's base salary is
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34
$250,000. He also is entitled to a bonus, determined in the discretion of the
Compensation Committee, in an amount of up to 50% of his base salary, on the
basis of the achievement of performance goals established by the Committee. With
respect to any transaction bonus payable to Messrs. Tietz and Younger upon a
"change in control" of the Company, Mr. Younger is entitled to 40% of the amount
determined by the formula, described above with respect to Mr. Tietz's Amended
Agreement. In light of the fact that Mr. Younger currently resides in England,
under his Amended Agreement (as was true under his original Employment
Agreement), Mr. Younger is entitled to reimbursement from the Company for any
additional income taxes payable by him on his income as a result of currently
being resident in the United Kingdom over and above what he would pay on his
employment income were he a resident of the State of California. Mr. Younger was
granted stock appreciation rights as of October 13, 1999, described below. In
addition, Mr. Younger is entitled to participate in all present and future
option plans with other officers of the Company, in the discretion of the
Compensation Committee.
SAR GRANT TO MR. YOUNGER. To grant Mr. Younger incentive compensation, and
to retain his services to the Company, the Board resolved on October 13, 1999,
to grant to Mr. Younger stock appreciation rights ("SARs") on 200,000 "share
units". A "share unit" is defined as the equivalent of one share of Common Stock
of the Company. The grant of the SARs to Mr. Younger entitles him to receive
cash payments from the Company as provided for in his Stock Appreciation Rights
Agreement. The share units are redeemable only for cash, not for shares of
Common Stock of the Company. The share units were granted to Mr. Younger at a
grant price of $4.375 per share unit, the equivalent exercise price of the
common shares subject to Mr. Tietz' option. As of the date of the award of the
SARs to Mr. Younger, October 13, 1999, the closing price of the Company's Common
Stock was $4.875 per share. The share units are exercisable by Mr. Younger over
a period of three years, with one-third of the share units exercisable on each
of the first three anniversaries of the date of grant. If Mr. Younger resigns
from the Company within twelve months following a "change in control", then the
share units become fully exercisable, at any time within 90 days after the date
of such resignation (if not exercised within said time period, then the share
units lapse and terminate). The share units similarly vest in the event that Mr.
Younger is terminated by the Company without cause, or upon Mr. Younger's
permanent disability or death. A "change in control" is defined to include the
acquisition by any person or related group of persons of 20% or more of the
Common Stock of the Company. The share units are also fully exercisable upon any
merger of the Company with another corporation or the sale of substantially all
of the assets of the Company.
Upon any exercise of the share units, Mr. Younger is entitled to a cash
payment by the Company in the amount of the excess, if any, of the then fair
market value of a share of Common Stock of the Company over the grant price of
the share units, multiplied by the number of share units then being exercised.
The number of share units is to be adjusted in the event of any subdivision of
the Company's outstanding shares, the declaration of a dividend payable in
Common Stock of the Company, or like events. In all events, the share units
granted to Mr. Younger expire if not exercised on October 12, 2009. The grant of
the share units to Mr. Younger does not entitle him to exercise any rights as a
shareholder of the Company.
JOHN M FOY. The Company and Mr. Foy entered into an Employment Agreement,
effective April 1, 1999, (the "Agreement") which was amended on December 1,
1999. The term of the Agreement, as amended, is until November 30, 2001. The
Company may not cancel the Agreement prior to its expiration except for illness
or other incapacity that continues for a period of more than six months or the
non-performance of or willful misconduct by Mr. Foy in the performance of his
duties. In the event of the termination of the Agreement by the Company without
"cause", Mr. Foy will be paid an amount equal to the greater of his annual
salary under the Agreement for the balance of the term under the Agreement or
that amount called for by the severance policy of the Company. The severance
policy of the Company calls for the employee to be paid an amount equal to the
product obtaining by multiplying the employees monthly salary at the time of the
termination by the number of years that the employee has worked for the Company,
with a maximum severance payment of one year's salary. The Company will pay Mr.
Foy a base salary ("Base Salary") of US $156,176 a year, increased, effective as
of January 1, 1999, to US $187,000 a year. The Base Salary may be increased in
the discretion of the Company. Mr. Foy will receive bonus compensation at such
times, and in such amounts, as the Company may determine. On February 4, 2000,
the Company granted Mr. Foy a stock option to acquire 80,000 shares of the
Company's Common Stock, at an exercise price of $5.25 per share. The options
will vest and be exercisable as follows: 25% on February 2001; 50% on February
2002; 75% on February 2003 and 100% on February 2004.
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NICO SCIACOVELLI. Under the terms of his employment, Mr. Sciacovelli is
entitled to a base salary ("Base Salary") of ITL 345,701,314 a year
(approximately US $180,000). The Base Salary may be increased in the discretion
of the Company. Mr. Sciacovelli will receive bonus compensation at such times,
and in such amounts, as the Company may determine. Mr. Sciacovelli receives
additional benefits, including an automobile. Mr. Sciacovelli's employment may
be terminated by either party serving not less than three months written notice.
The Company and Mr. Sciacovelli are currently negotiating the terms of an
Employment Agreement which they expect to finalize in April 2000.
JOHN C KIRBY. The Company and Mr. Kirby entered into an Employment
Agreement, effective April 1, 1999, (the "Agreement") which was amended on
January 20, 2000. The term of the Agreement as amended is until November 30,
2001 and thereafter shall continue until terminated by either party serving not
less than three months written notice. The Company may not cancel the Agreement
prior to its expiration except for illness or other incapacity that continues
for a period of more than six months or the non-performance of or willful
misconduct by Mr. Kirby in the performance of his duties. The Company will pay
Mr. Kirby a base salary ("Base Salary") of GBP L97,890 a year (approximately US
$157,000). The Base Salary may be increased in the discretion of the Company.
Mr. Kirby will receive bonus compensation at such times, and in such amounts, as
the Company may determine. Mr. Kirby receives additional benefits, including an
automobile. On February 4, 2000, the Company granted Mr. Kirby a stock option to
acquire 80,000 shares of the Company's Common Stock, at an exercise price of
$5.25 per share. The options, which will vest and be exercisable as follows: 25%
on February 2001, 50% on February 2002, 75% on February 2003 and 100% on
February 2004.
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ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 23, 2000, there were 9,158,378 Common Shares, $2 par value (the
"Common Shares"), issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of the Company's Common
Shares as of March 23, 2000, by (i) each person who, to the knowledge of the
Company, is the beneficial owner of more than 5% of the outstanding common
stock, (ii) Directors, (iii) executive officers, and (iv) Directors and
executive officers as a group. Unless otherwise indicated, each of the persons
listed in the table has sole voting and investment power with respect to the
shares shown.
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED(1) PERCENT OF CLASS
- -------------- --------------------------- --------------- ----------------
Common Shares, par value $2 Stefan M Palatin(2)................ 1,793,798(2) 19.6%
Blavin Parties..................... 1,529,136(3) 16.7%
Central Wechsel -- und Creditbank
AG................................. 1,075,000(4) 11.7%
Waveland Parties................... 1,039,500(5) 11.4%
Rudolf J Weissenberger............. 578,667(6) 6.3%
Quadrangle Offshore (Cayman) LLC... 507,400(7) 5.5%
Dennis J Tietz..................... 321,600(8) 3.5%
Peter J Younger.................... 10,800(9) *
Robert M Melzer.................... 10,000 *
S. Nicholas Walker................. -- --
Charles Tharp...................... -- --
Maurice Taylor..................... -- --
John M Foy......................... 10,800(9) *
John C Kirby....................... 10,800(9) *
Nico Sciacovelli................... 5,400(10) *
All executive officers and
directors as a group............... 369,400 4.0%
- ---------------
(1) Except as otherwise specifically noted, the number of shares stated as
being owned beneficially includes (a) all options and warrants under which
persons could acquire Common Shares currently and within 60 days following
the date hereof and (b) shares held beneficially by spouses, minor children
or grandchildren.
(2) According to the Form 3, dated April 16, 1999, of Hans-Ulrich Ming,
individually and as trustee for the benefit of Stefan M Palatin, these
shares are held of record by Klamath, a Panamanian company of which Mr.
Palatin is known to be a beneficial owner.
(3) According to the Schedule 13D, dated September 24, 1999, of Blavin &
Company, Inc. and Paul W Blavin, as principal for Blavin & Company, Inc.,
these shares are held of record by PWB Value Partners, L.P., and advisory
clients of Blavin & Company, Inc.
(4) According to the Schedule 13D Amendment No. 1, dated March 10, 1998, of
Central Wechsel -- und Creditbank AG, these shares were held of record by
Enavest Holding S.A. ("Enavest"), a Panamanian company of which Stefan M
Palatin is believed to be the beneficial owner. However, pursuant to the
terms of a pledge agreement between Central Wechsel -- und Creditbank AG
and Enavest following the default of the repayment of a loan by Enavest,
these shares are held of record by Central Wechsel -- und Creditbank AG.
(5) According to their Schedule 13D Amendment No. 2, dated July 8, 1999, these
shares are held of record by Waveland Partners, L.P., Waveland Capital
Management, L.P., Clincher Capital Corporation, Waveland Capital
Management, LLC, Waveland Partners, Ltd., and Waveland International, Ltd.
(6) According to his Form 3, dated December 21, 1998, Mr. Weissenberger is the
record holder of 12,000 shares and indirectly holds 566,667 shares owned by
Lude Management Corp.
(7) According to the Schedule 13G, dated March 13, 2000, of Lawrence A Heller,
Quadrangle Offshore (Cayman) LLC is the beneficial owner of these shares.
33
37
(8) Mr. Tietz may purchase 21,600 shares by exercising outstanding options
before November 24, 2001, and may purchase an additional 300,000 shares by
exercising outstanding options on or before December 10, 2008.
(9) Messrs. Younger, Foy and Kirby may each purchase 10,800 shares by
exercising outstanding options on or before November 24, 2001.
(10) Mr. Sciacovelli may purchase 5,400 shares by exercising outstanding options
on or before November 24, 2001.
* Less than one percent.
34
38
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Group had the following transactions with related parties that should
be read in conjunction with Notes 16 and 20 to the 1999 Consolidated Financial
Statements.
I. During 1998, an ocean carrier in which Eivind A Eriksen, a former
director and Chief Operating Officer of the Company, was a non executive
director, ceased doing business. The ocean carrier leased containers from the
Company. At December 31, 1998, a specific provision of $0.6 million,
representing the total amount due from the carrier of $1.2 million, less
expected insurance proceeds, was included in the allowance for doubtful
accounts. In 1999, the total amount due from the ocean carrier increased by $0.1
million. During the year ended December 31, 1999, insurance proceeds of $0.6
million were received and the remaining balance of $0.7 million was charged to
operations.
II. During the year ended December 31, 1998, payments totalling $0.2
million were made to Dr. Freidberg, a former outside director of the Company,
for legal fees. In addition Dr. Friedberg has submitted a statement to the
Company for the balance due for legal services rendered to the Company from
November 30, 1997 to December 31, 1998 in the amount $0.1 million which is
currently being reviewed by the Special Litigation Committee.
III. As of January 1, 1996, $4.7 million was owed to the Group under an
unsecured loan agreement with Barton Holding Ltd. ("Barton"), the former
preferred shareholder. This amount bore interest at 9% and was repayable in
installments on March 31, 1996 and June 30, 1996.
During 1996, Mr. Palatin purportedly guaranteed the performance by Barton
of its obligations under the loan agreement, including repayment of interest and
principal according to the terms prescribed in the agreement. Mr. Palatin's
guarantee purported to pledge 1,030,303 Common Shares owned by him in The Cronos
Group. However, the owner of record of these shares was Lambert Business Inc.
incorporated under the laws of Panama.
On June 30, 1996, principal and interest on the Group's loan to Barton in
the amount of $5 million came due, but no repayment thereon was received.
In August 1996, the Company and Mr. Palatin entered into a new Loan
Agreement and related Pledge Agreement, each dated as of July 1, 1996, pursuant
to which Mr. Palatin borrowed $5.5 million from the Company which was used to
repay the principal and interest due on June 30, 1996, on the loan to Barton and
an additional $0.5 million advance. This loan bore interest at 9% per annum and
was due on December 30, 1996. No principal or interest payments were received in
1996. At December 31, 1996, the outstanding loan due from Mr. Palatin was $5.5
million. In July 1997, in connection with the execution of an amendment to a
bank facility (the "Bank Facility"), the Palatin loan was increased to $5.9
million, representing principal and interest due on the original loan, and was
assigned to a subsidiary of the Group, together with all the Company's rights in
respect of this loan, including the collateral rights concerning the purported
pledge of 1,030,303 Common Shares. The date of December 31, 1997, was agreed as
the revised repayment date for the loan, but no principal or interest payments
were received.
In January 1997, the Group advanced an amount of $3.7 million to Mr.
Palatin under the same terms as the Loan Agreement dated July 1, 1996. This loan
bore interest at 9% per annum and was secured by a further pledge of 1,000,000
Common Shares beneficially owned by him in The Cronos Group. This loan was
replaced in July 1997 by a new loan in a like amount from a subsidiary of the
Group to Mr. Palatin, pursuant to the Bank Facility. This new loan bore interest
at 9% per annum and was secured, together with all other obligations of Mr.
Palatin to this subsidiary company, by the pledge of 1,000,000 shares. The loan
was due to be repaid on October 31, 1997, but no interest or principal payments
were received. Consequently title to the 1,000,000 shares was established by the
banks providing certain of the Group's term loans which totalled $33.1 million
at December 31, 1998.
Interest of $0.7 million, $0.9 million and $0.8 million became due under
Mr. Palatin's outstanding loans for the years ended December 31, 1999, 1998 and
1997, respectively. These amounts have not been recognized in income.
In view of these circumstances and the doubt concerning the Board's ability
to exercise the pledge over the remaining 1,030,303 shares, a provision of $3.9
million was made on December 31, 1997, against Mr. Palatin's
35
39
outstanding loans. In March 1999, title to 463,636 of the 1,030,303 shares was
granted as security to the banks under the Bank Facility.
At December 31, 1998, the carrying value of Mr. Palatin's loans was $5.5
million. In June 1999, $5.3 million of proceeds from the sale of the Company's
stock held as collateral on the Palatin loans were utilized in reducing Mr.
Palatin's indebtedness to the Company. The remaining balance of $0.2 million was
charged to operations. During 1999, the Company took action to seek recovery of
the amounts owed to the Company (see Item 3 -- "Legal Proceedings").
IV. Included in Financing and recomposition expenses in 1998 and 1997 were
amounts totalling $0.2 million which were attributed to Mr. Palatin.
On the resignation of Mr. Palatin in 1998, the Group retained $0.2 million
of outstanding payroll to be held as possible settlement against any claims.
In December 1999, the $0.2 million payable to Mr. Palatin was offset
against the $0.2 million payable to the Group.
V. Amounts of $0.03 million, $0.4 million and $0.6 million were paid for
services, for the years ended December 31, 1999, 1998 and 1997, respectively,
under the terms of an information technology agreement with a company to which
Mr. Palatin indicated that he was related. In November 1999, the Group was
advised by a third party that they had purchased all of the equity of the
information technology company that was previously owned by Mr. Palatin.
VI. As indicated in Note 16 to the 1999 Consolidated Financial Statements,
it has been asserted by a representative of Contrin that Mr. Palatin has
financial and other interests in companies that were involved in the trading of
containers with participants in certain Austrian investment entities. The
relationship or otherwise between these companies and the Group cannot be
substantiated by management at present. The public records regarding these
companies do not disclose their beneficial ownership. One of the companies in
question, Transocean Equipment Manufacturing and Trading Limited ("TOEMT"), has
been regarded by management as a subsidiary of Contrin and is so characterised
in certain commercial correspondence. Contrin, through three management
companies, administered the Austrian investment entities. The Group has
responded to a request for information from the liquidator relating to the
trading transactions with that company.
VII. TOEMT, which is currently in liquidation in the United Kingdom, has
been separately registered in the same name in both the United Kingdom and the
Isle of Man. At December 31, 1999, the Company had $0.5 million of amounts
payable to container owners on deposit in an escrow bank account pending
resolution of certain matters relating to the liquidation process. The Company
has recently become aware that more than one creditor of TOEMT may claim an
interest in the distributions made by the Company with respect to the containers
owned by TOEMT. At the present time, the Company has insufficient information to
evaluate the competing claims or to determine whether the Company may have any
liability to the competing creditors for the prior distributions made with
respect to the TOEMT containers.
36
40
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
1999 Independent Auditors' Reports
1998 Report of Independent Public Accountants
Consolidated Balance Sheets -- At December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable regulations of
the Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a) (3) Exhibits
EXHIBIT INDEX
NUMBER EXHIBIT PAGE
- ------ ------- ----
3.1 Coordinated Articles of Incorporation (incorporated by
reference to Exhibit 1.1 to the Company's Annual Report on
Form 20-F for the year ended December 31, 1997 (File No.
0-24464)).
3.2 Policies and procedures with respect to the indemnification
of directors and officers of the Company, as adopted by the
Board of Directors on August 4, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, dated November 24, 1999).
4.1 Rights Agreement, dated as of October 28, 1999, between the
Company and BankBoston, N.A., as Rights Agent (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A dated October 29, 1999).
10.1 Amended and Restated Credit Agreement, dated as of June 24,
1997, by and among Cronos Containers N.V., Cronos Containers
Ltd., Cronos Equipment Ltd., Cronos Containers Inc., Cronos
Capital Corp., and Cronos Equipment (Bermuda) Limited, as
joint and several borrowers, each of the banks that is or
may become a party thereto, Fleet Bank, N.A., as agent for
the banks, and The Cronos Group, as guarantor (the "Credit
Agreement") (incorporated by reference to Exhibit 1.2 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.2 First Amendment to the Credit Agreement, dated as of July
14, 1997 (incorporated by reference to Exhibit 1.3 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.3 Second Amendment to the Credit Agreement, dated as of
December 3, 1997 (incorporated by reference to Exhibit 1.4
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.4 Third Amendment to the Credit Agreement, dated as of June
30, 1998 (incorporated by reference to Exhibit 1.5 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
37
41
NUMBER EXHIBIT PAGE
- ------ ------- ----
10.5 Confirmation of Guaranties, Agreement and Power of Attorney
by The Cronos Group, dated June 30, 1998, pertaining to the
Credit Agreement (incorporated by reference to Exhibit 1.6
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.6 Deed in lieu of foreclosure relating to shares given as
collateral to the Palatin loans (incorporated by reference
to Exhibit 10.6 in the Company's Annual Report on Form 10-K
for the period ended December 31, 1998).
10.7 Forbearance Agreement and Fourth Amendment to Amended and
Restated Credit Agreement dated March 31, 1999 (incorporated
by reference to Exhibit 10.7 in the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.8 Note Purchase Agreement among Cronos Equipment (Bermuda)
Limited, The Cronos Group and Sun Life Insurance Company of
America, dated as of December 29, 1994 (the "Sun Agreement")
(incorporated by reference to Exhibit 1.7 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No. 0-24464)).
10.9 Amendment to the Sun Agreement, dated as of November 1, 1997
(incorporated by reference to Exhibit 1.8 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No 0-24464)).
10.10 Second Amendment to the Sun Agreement dated as of January
26, 1999 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1998).
10.11 Lambert Confirmation, Acknowledgement and Consent of
Collateral Assignment (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1998).
10.12 Amendment to the Revolving Credit Facility between Cronos
Containers Limited and China International Marine Containers
(Group) Company Limited, dated March 24, 1999 (incorporated
by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.13 Guarantee, dated as of July 30, 1999, by and between the
Company and MeesPierson, as agent on behalf of itself and
First Union (incorporated by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.14 Loan Agreement, dated as of July 30, 1999, by and between
Cronos Finance (Bermuda) Limited ("CFBL") as issuer, and
MeesPierson, as agent, on behalf of itself and First Union,
as initial noteholders (incorporated by reference to Exhibit
10.21 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999).
10.15 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of
MeesPierson (incorporated by reference to Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.16 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of First
Union (incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.17 Issuer Stock Pledge Agreement [CFBL], dated as of July 30,
1999, by and between the Company and MeesPierson, as agent
on behalf of itself and First Union (incorporated by
reference to Exhibit 10.24 to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1999).
10.18 Stock Pledge Agreement [Cronos Holdings/Investments (U.S.),
Inc.], dated as of July 30, 1999, by and between the Company
and MeesPierson, as agent on behalf of itself and First
Union (incorporated by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
38
42
NUMBER EXHIBIT PAGE
- ------ ------- ----
10.19 Warrant Agreement dated as of July 30, 1999 ("Warrant
Agreement") by and between the Company and MeesPierson N.V
("MeesPierson") and First Union National Bank ("FUNB")
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.20 Amendment No.1 to Warrant Agreement, dated as of August 11,
1999, by and among the Company, MeesPierson, and FUNB
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30,1999).
Executive Compensation Plans and Arrangements
10.21 Stock Appreciation Rights Agreement by and between the
Company and Peter J Younger, dated as of October 13, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3, dated November 24,
1999).
10.22 The Cronos Group Management Equity Investment Plan, dated as
of July 25, 1994 (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the period
ended December 31, 1998).
10.23 Stock Appreciation Rights Agreement by and between the
Company and S Nicholas Walker and each other party listed on
the schedule thereto, dated October 13, 1999. E1
10.24 1999 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8,
dated February 25, 2000).
10.25 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999. E13
10.26 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000. E23
10.27 Amended and Restated Employment Agreement between Cronos and
Peter J Younger dated March 24, 2000. E37
10.28 Amended and Restated Employment Agreement between Cronos and
Dennis J Tietz dated March 24, 2000. E60
21.1 List of principal wholly-owned subsidiaries at December 31,
1999. E82
22.1 The Company's Form 8-K dated January 21, 2000, reporting on
matters submitted to a vote of shareholders.
27.1 Financial Data Schedule. E84
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the
Company's Registration Statement on Form S-8 dated February
25, 2000. E85
(b) Reports on Form 8-K
On November 3, 1999, a Current Report on Form 8-K was filed by the Company
reporting the Company's decision to approve and adopt a Shareholder Rights
Plan.
On November 16, 1999, a Current Report on Form 8-K was filed by the Company
announcing that it had agreed to a settlement of the SEC's private
investigation of the Company.
39
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CRONOS GROUP
/s/ DENNIS J TIETZ
By:
--------------------------------------
Dennis J Tietz
Chairman of the Board and
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
By /s/ DENNIS J TIETZ Chairman of the Board and March 29, 2000
- ------------------------------------------ Chief Executive Officer
Dennis J Tietz (Principal Executive Officer)
By /s/ PETER J YOUNGER Director, Executive Vice President, March 29, 2000
- ------------------------------------------ Chief Financial Officer, and
Peter J Younger Chief Accounting Officer
(Principal Financial and Accounting
Officer)
By /s/ ROBERT M MELZER Director March 29, 2000
- ------------------------------------------
Robert M Melzer
By /s/ MAURICE TAYLOR Director March 29, 2000
- ------------------------------------------
Maurice Taylor
By /s/ CHARLES THARP Director March 29, 2000
- ------------------------------------------
Charles Tharp
By /s/ STEPHEN NICHOLAS WALKER Director March 29, 2000
- ------------------------------------------
Stephen Nicholas Walker
40
44
THE CRONOS GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND INDEPENDENT AUDITORS' REPORTS
F-1
45
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheet of The Cronos
Group (a Luxembourg holding company) and its subsidiaries (collectively the
"Group") as of December 31, 1999, and the related consolidated statements of
operations, cash flows and shareholders' equity for the year then ended. These
consolidated financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of The Cronos Group
and its subsidiaries as of December 31, 1999 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, CA
February 25, 2000
F-2
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheet of The Cronos
Group (a Luxembourg holding company) as of December 31, 1998, and the related
consolidated statements of income, cash flows and shareholders' equity for the
two years ended December 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Cronos Group as of December 31, 1998 and the consolidated results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles in the United
States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
14 to the Consolidated Financial Statements of the Form 10-K for the year ended
December 31, 1998, The Cronos Group is currently negotiating the refinancing of
a loan of approximately $25.8 million, which had a final maturity date of
January 8, 1999 and loans of $12.7 million and $9.2 million which have final
maturity dates of September 30 and November 30, 1999, respectively, to permit
the realization of assets and the liquidation of liabilities in the ordinary
course of business. The Company cannot predict what the outcome of the
negotiations will be. These conditions raise substantial doubt that the group
will be able to continue as a going concern. Management plans in respect of this
matter are also described in Note 14 to the Consolidated Financial Statements of
the Form 10-K for the year ended December 31, 1998. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
We draw attention also to Notes 1r, 3, 17 and 21 to the Consolidated
Financial Statements of the Form 10-K for the year ended December 31, 1998.
Allegations have been made which may result in the Group becoming defendants in
lawsuits alleging various financial improprieties in the operation of certain
third party Austrian investment entities and their sponsoring companies.
/s/ Moore Stephens
Moore Stephens
St. Pauls House
Warwick Lane
London EC4P 4BN
April 8, 1999
F-3
47
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTES 1999 1998 1997
---------- ----------- ----------- -----------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Gross lease revenue............................... $132,140 $157,546 $160,848
Commissions, fees and other operating income:
US Limited Partnerships......................... 1,356 1,347 1,384
other related parties........................... -- -- 20
unrelated parties............................... 4,593 3,608 4,141
Interest income................................... 1,011 1,154 861
Gain on sale of investment:
gain on conversion of investment................ 9ii 613 -- 106
realized holding gain........................... 9ii 665 -- 215
-------- -------- --------
TOTAL REVENUES.................................... 140,378 163,655 167,575
-------- -------- --------
Direct operating expenses......................... 31,179 35,318 34,217
Payments to container owners:
US Limited Partnerships......................... 24,288 31,922 36,478
Other container owners.......................... 39,655 43,605 37,467
Amortization of intangible assets................. 11 683 683 742
Depreciation...................................... 15,517 18,031 18,291
Selling, general and administrative expenses...... 16,569 21,164 22,683
Financing and recomposition expenses.............. 4 -- 5,375 7,384
Interest expense.................................. 10,809 15,718 17,758
Provision against amounts receivable from related
parties......................................... 20 -- -- 3,909
Reversal of unrealized holding gain on available
for sale securities............................. 3(b)iv,9ii -- 1,929 --
Impairment losses................................. 1(r),3(a) -- 6,500 11,668
-------- -------- --------
TOTAL EXPENSES.................................... 138,700 180,245 190,597
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................. 1,678 (16,590) (23,022)
Income taxes (benefit)............................ 5 (236) 306 --
-------- -------- --------
NET INCOME (LOSS)................................. 1,914 (16,896) (23,022)
Other comprehensive income, net of tax -
Unrealized holding gain (loss) on available for
sale securities................................. 848 (730) 1,159
-------- -------- --------
COMPREHENSIVE INCOME (LOSS)....................... $ 2,762 $(17,626) $(21,863)
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND
DILUTED)........................................ 1(f) $ 0.21 $ (1.91) $ (2.60)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
48
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
NOTES 1999 1998
---------- --------- ---------
(US DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
ASSETS
Cash and cash equivalents................................ $ 8,701 $ 9,281
Amounts due from lessees (net)........................... 1(h) 26,739 33,215
Amounts receivable from container owners, including
amounts due from related parties of $5,857 and $7,738
at December 31, 1999 and 1998, respectively............ 9,147 10,265
New container equipment for resale....................... 1(i),7 2,535 315
Net investment in direct financing leases, including
amounts due within twelve months of $1,004 and $1,365
at December 31, 1999 and 1998, respectively............ 8 1,090 3,504
Investments, including investments in related parties of
$34 and $55 at December 31, 1999 and 1998,
respectively........................................... 3(b)iv, 9 1,707 1,458
Container equipment, net of accumulated depreciation of
$67,573 and $59,640 at December 31, 1999 and 1998,
respectively........................................... 3(a)i, 10 137,547 168,243
Building and other equipment, net of accumulated
depreciation of $11,615 and $10,139 at December 31,
1999 and 1998, respectively............................ 11,807 13,273
Intangible assets........................................ 3(a)ii, 11 13,405 14,088
Other amounts receivable from related parties (net)...... 20 -- 5,500
Other assets including prepayments....................... 12 19,189 20,837
-------- --------
TOTAL ASSETS............................................. $231,867 $279,979
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
49
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
NOTES 1999 1998
---------- --------- ---------
(US DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners, including amounts
payable to related parties of $12,291 and $13,287 at
December 31, 1999 and 1998, respectively............... $ 26,620 $ 31,314
Amounts payable to container manufacturers............... 3,609 101
Other amounts payable and accrued expenses............... 13,799 23,159
Debt and capital lease obligations, including amounts due
within twelve months of $16,577 and $87,271 at December
31, 1999 and 1998, respectively........................ 13 109,978 148,466
Income taxes............................................. 3,031 3,110
Deferred income taxes.................................... 5 4,027 4,975
Deferred income and unamortized acquisition fees......... 15 10,433 12,767
-------- --------
TOTAL LIABILITIES........................................ 171,497 223,892
======== ========
Commitments and contingencies............................ 16
SHAREHOLDERS' EQUITY
Common shares, par value $2 per share (25,000,000 shares
authorized; shares issued and outstanding, 9,158,378
and 8,858,378 at December 31, 1999 and 1998,
respectively).......................................... 17,18,19 18,317 17,717
Additional paid-in capital............................... 17,18,19 49,928 49,108
Share subscriptions receivable........................... 18(a) (82) (123)
Accumulated other comprehensive income, net of tax....... 1,277 429
Restricted retained earnings............................. 19 1,832 1,772
Accumulated deficit...................................... (10,902) (12,816)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 60,370 56,087
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $231,867 $279,979
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
50
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
NOTES 1999 1998 1997
-------- --------- ---------- ----------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 1,914 $(16,896) $(23,022)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
impairment losses................................... 3(a) -- 6,500 11,668
reversal of unrealized holding gain on available for
sale securities.................................. 3(b)iv -- 1,929 --
depreciation and amortization....................... 16,200 18,714 19,033
decrease in unamortized acquisition fees............ (1,607) (1,907) (1,322)
provision for losses on accounts receivable......... 1,331 4,602 2,245
(gain) loss on disposal of fixed assets............. (79) (1) 129
gain on investment securities....................... -- -- (321)
increase (decrease) in current and deferred income
taxes............................................ (1,027) (234) 837
(increase) decrease in new container equipment for
resale........................................... (2,220) 7,887 (6,717)
(increase) decrease in amounts receivable:
US Limited Partnerships............................. 1,881 (427) 458
other related parties............................... -- -- 3,909
unrelated parties................................... 9,636 (465) (5,327)
increase (decrease) in amounts payable and accrued
expenses:
US Limited Partnerships............................. (996) (2,197) 1,902
other related parties............................... -- -- (747)
unrelated parties................................... (10,045) (2,266) (23,369)
------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... 14,988 15,239 (20,644)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of container equipment....................... (2,650) (1,822) (38,724)
Purchase of property and other equipment.............. (176) (1,052) (598)
Purchase of investment in related parties............. -- -- (39)
Purchase of intangible asset.......................... -- -- (11)
Investment in finance lease equipment................. -- -- (2,443)
Issue of notes to related parties..................... 20 -- -- (3,700)
Proceeds from sales of container equipment............ 20,724 1,155 61,495
Proceeds from sales of property and other equipment... -- 325 --
Proceeds from sale of investment...................... 9ii -- -- 1,953
Proceeds from sale of investment in finance lease
equipment........................................... 1,000 -- 25,121
Repayment of note by related parties.................. 16,20 -- -- 1,500
------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 18,898 (1,394) 44,554
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
51
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTES 1999 1998 1997
----- --------- --------- ---------
(US DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of term debt.................... 13(a) 51,116 3,109 62,141
Repayments of term debt and capital lease
obligations.......................................... (85,582) (22,128) (93,874)
Cash deposits (restricted)............................. -- -- 5,000
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES.................. (34,466) (19,019) (26,733)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (580) (5,174) (2,823)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 9,281 14,455 17,278
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 8,701 $ 9,281 $ 14,455
======== ======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
interest............................................. $ 11,328 $ 16,402 $ 17,605
income taxes......................................... 820 786 492
Cash received during the year for:
interest............................................. 494 1,092 1,272
income taxes......................................... 29 229 1,329
Non-cash investing and financing activities:
container equipment acquired under capital lease..... 1,257 -- 4,143
reduction of debt / Other amounts receivable from
related parties................................... 5,279 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
52
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
UNRESTRICTED
ACCUMULATED RETAINED
ADDITIONAL SHARE OTHER RESTRICTED EARNINGS TOTAL
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE RETAINED (ACCUMULATED SHAREHOLDERS'
SHARES CAPITAL RECEIVABLE INCOME EARNINGS DEFICIT) EQUITY
------- ---------- ------------- ------------- ---------- ------------ -------------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE, DECEMBER 31, 1996.... $17,717 $49,228 $(243) $ -- $1,772 $ 27,102 $ 95,576
Net loss...................... (23,022) (23,022)
Management Equity Investment
Plan ("MEIP") lapses........ (74) 74 --
Unrealized holding gain on
available for sale
securities, net of tax...... 1,159 1,159
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1997.... 17,717 49,154 (169) 1,159 1,772 4,080 73,713
Net loss...................... (16,896) (16,896)
MEIP lapses................... (46) 46 --
Change in unrealized holding
gain on available for sale
securities, net of tax...... (730) (730)
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1998.... 17,717 49,108 (123) 429 1,772 (12,816) 56,087
Net income.................... 1,914 1,914
MEIP lapses................... (41) 41 --
Stock grant................... 600 615 60 1,275
Issue of stock warrants....... 246 246
Change in unrealized holding
gain on available for sale
securities, net of tax...... 848 848
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1999.... $18,317 $49,928 $ (82) $1,277 $1,832 $(10,902) $ 60,370
======= ======= ===== ====== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
53
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) NATURE OF OPERATIONS
The principal activity of The Cronos Group (the "Company") and its
subsidiaries (together, the "Group") is the leasing to ocean carriers of marine
containers which are owned by the Group or managed by the Group on behalf of
other parties.
The Company is incorporated in Luxembourg. The common shares of the Company
are publically traded on the NASDAQ under the symbol "CRNS".
The consolidated financial statements include the accounts of the Company
and its subsidiaries all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated on consolidation.
The Group provides a worldwide service and, accordingly, has significant
foreign operations and assets in key shipping locations, particularly in the
United States, Europe and Asia.
The Group enters into agreements (the "Agreements") with container owners
to manage the leasing of their containers to ocean carriers. These Agreements
have taken two principal forms. Under the first form, the Group, as General
Partner, organizes public limited partnerships in the United States (the "US
Limited Partnerships") and purchases and manages containers on behalf of the US
Limited Partnerships. Under the second form, the Group enters into Agreements
with third parties that provide for the Group to purchase and manage containers
for such third parties. Although the provisions of the Agreements vary, they all
permit the Group to use the containers together with containers owned by the
Group as part of a single fleet, which the Group endeavours to operate without
regard to ownership. The Group has discretion over which ocean carriers,
container manufacturers and suppliers of goods and services it may deal with.
Since the Agreements with container owners meet the definition of leases in
Statement of Financial Accounting Standards ("SFAS") No. 13, they are accounted
for as leases under which the container owners are lessors and the Group is
lessee.
The terms of the Agreements vary from 1 to 15 years. Containers generally
have an expected useful economic life of 12 to 15 years. The Agreements
generally contain provisions which permit earlier termination under certain
conditions upon 60-90 days' notice. For the US Limited Partnerships, a majority
of the limited partners in a partnership can remove the general partner, thereby
terminating the agreement with the Group. Under the Agreements with third
parties, the container owner can generally terminate the Agreement if average
payments by the Group are less than a certain percentage (specified in each
agreement) of total capital invested. The Group believes that early termination
is unlikely in normal circumstances.
The Agreements generally provide that the Group will make payments to the
container owners based upon the rentals collected from ocean carriers after
deducting direct operating expenses and the Group's management fee.
Substantially all payments to container owners are therefore contingent upon the
leasing of the containers by the Group to ocean carriers and the collection of
lease rentals.
The Group also leases containers from lessors under capital leases
agreements.
The Group leases containers to ocean carriers generally under master leases
for dry cargo containers and term leases (mostly 2 to 5 years) for refrigerated
and other specialized containers. Master leases do not specify the exact number
of containers to be leased or the term that each container will remain on-hire
but allow the ocean carrier to pick-up and drop-off containers at various
locations specified in the lease agreement. Lease rentals, which are generally
based upon the number of containers used by the ocean carrier and the applicable
per diem rate, are therefore all contingent rentals.
Term leases provide the ocean carriers with specified container equipment
throughout the term of the lease. The rentals are based upon the number of
containers leased, the applicable per diem rate and the length of the lease,
irrespective of the number of days during which the ocean carrier actually uses
the containers.
F-10
54
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
b) BASIS OF ACCOUNTING
The Group's accounting records are maintained in United States dollars and
the consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("US GAAP").
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
c) GROSS LEASE REVENUE
Gross lease revenue represents amounts invoiced to customers for operating
leases of marine containers excluding advance billings which are recorded as
deferred revenue.
d) COMMISSIONS, FEES AND OTHER OPERATING INCOME
This comprises acquisition fees, syndication commissions, income on direct
financing leases, fees earned in connection with the manufacture and sale of dry
freight special and other products, fees earned on the disposal of used
containers, income from the Group's limited partner interest in US Limited
Partnerships and other income.
Acquisition fees represent amounts paid by container owners when the Group
enters into an Agreement and begins to manage new container equipment on their
behalf. Such fees are generally non-refundable and are deferred and recognized
as income on a straight-line basis over the period of the Agreements to which
they relate.
Syndication commissions represent income earned on the sale of US Limited
Partnership interests and are recognized at the time of sale.
All other items are recognized at the time of sale.
e) INCOME TAXES
Income taxes are accounted for using SFAS No. 109 ("SFAS 109"), "Accounting
for Income Taxes". This statement requires that deferred income taxes be
recognized for the tax consequences of "temporary differences" by applying the
statutory tax rate to the difference between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The effect on
deferred income taxes of a change in tax rates is recognized in income in the
period of enactment.
f) NET INCOME PER COMMON SHARE
Net income (loss) per share data have been calculated in accordance with
SFAS No. 128 ("SFAS 128"), "Earnings per Share".
Basic net income (loss) per share is based on the weighted effect of all
common shares issued and outstanding and is calculated by dividing net income
(loss) available to common shareholders by the weighted average number of shares
outstanding during the period. Diluted net income per share is calculated by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares used in the basic net income per common share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding.
F-11
55
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of basic and diluted net income (loss) per share were as
follows:
1999 1998 1997
---------- ---------- ----------
Net income (loss) available for common shareholders..... $ 1,914 $ (16,896) $ (23,022)
---------- ---------- ----------
Average outstanding shares of common stock.............. 8,983,378 8,858,378 8,858,378
Dilutive effect of:
Executive officer common share options................ 9,197 -- --
Warrants.............................................. 5,780 -- --
Management equity investment plan..................... -- -- --
---------- ---------- ----------
Common stock and common stock equivalents............... 8,998,355 8,858,378 8,858,378
========== ========== ==========
Basic and diluted net income (loss) per share........... $ 0.21 $ (1.91) $ (2.60)
========== ========== ==========
g) CASH EQUIVALENTS
Cash equivalents are highly liquid debt instruments purchased with original
maturities of three months or less. The carrying value approximates fair value.
Cash and cash equivalents are maintained in accounts which, at times, may exceed
federally insured limits. No losses have been experienced in such accounts and
management believes it is not exposed to any significant credit risk. The Group
places its cash equivalents in investment grade, short term debt instruments and
limits the amount of credit exposure to any one commercial issuer.
h) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Amounts due from lessees represent gross lease revenue due from customers,
less an allowance for doubtful accounts. The allowance for doubtful accounts
comprises specific amounts provided against known potentially doubtful accounts
plus a general allowance estimate based on loss experience.
The activity in the allowance for doubtful accounts was:
1999 1998 1997
------ ------ ------
Balance, January 1.......................................... $4,446 $3,106 $3,602
Charge...................................................... 1,331 4,602 2,245
Write-offs, net of recoveries............................... (2,208) (3,262) (2,741)
------ ------ ------
Balance, December 31........................................ $3,569 $4,446 $3,106
====== ====== ======
i) NEW CONTAINER EQUIPMENT FOR RESALE
New container equipment for resale represents new containers purchased by
the Group with an intent to resell to container owners and is stated at the
lower of original unit cost or net realizable value. Such sales are usually made
at original cost and accordingly no gain or loss arises.
Containers not sold to container owners within six months from date of
purchase are transferred to the Group's container equipment. Depreciation is
then calculated from the original date of acquisition. The amount of
depreciation which would have been provided on container equipment for resale,
had it been transferred to long term ownership at the balance sheet date is not
material to the Company's operations.
Rental income earned on container equipment for resale is included within
Gross lease revenue.
F-12
56
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
j) LEASES
i. Group as lessor
Operating leases with customers. The Group enters into leases with
customers, principally as lessor in operating leases. Operating lease rentals
are recognized as gross lease revenue on a straight line basis in accordance
with US GAAP.
Direct financing leases with customers. The Group has entered into direct
financing leases as lessor for container equipment owned by the Group. The net
investment in direct financing leases represents the receivables due from
lessees net of unearned income. Unearned income is amortized to give a constant
return on capital over the lease term.
ii. Group as lessee
Capital leases. Assets held under capital leases are initially reported at
the fair value of the asset categorized within container equipment, with an
equivalent liability categorized as capital lease obligations. The asset is
depreciated over its expected useful life. Finance charges are allocated to
accounting periods over the lease term in accordance with the interest method.
Operating leases. Payments by the Group to container owners are charged to
the statement of operations in each period based upon the amounts paid and
payable under the agreements with container owners, which are collected from
ocean carriers and reduced by direct operating expenses and management fees due
to the Group.
Other operating lease rentals are expensed on a straight-line basis over
the lease term.
k) INVESTMENTS, INCLUDING INVESTMENTS IN RELATED PARTIES
i. Investment securities
Investment securities are classified as either available for sale or
trading securities. Available for sale securities are reported at fair market
value with unrealized gains and losses included in Stockholders' Equity as
Accumulated other comprehensive income. Trading securities are reported at fair
market value with unrealized gains and losses reported in earnings.
ii. Investment in US Limited Partnerships
Investment in US Limited Partnerships represents the Group's general and
limited partner interests in partnerships in which a subsidiary company, Cronos
Capital Corp., acts as a general partner. These are accounted for on the equity
basis.
l) CONTAINER EQUIPMENT
Container equipment is carried at cost less accumulated depreciation.
Containers, both owned by the Group and acquired under capital leases are
depreciated on a straight-line basis as follows:
Effective January 1, 1998, refrigerated container equipment is depreciated
over a useful life of 12 years to a residual value of 15%. Previously,
refrigerated container equipment was depreciated over a useful life of 15 years
to a residual value of 10%.
Dry cargo and other specialized container equipment is depreciated over a
useful life of 15 years to a residual value of 10%.
F-13
57
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
m) BUILDING AND OTHER EQUIPMENT
Building and other equipment is carried at cost less accumulated
depreciation. Depreciation is recorded on a straight-line basis as follows:
Building.................................................... 50 years
Property improvements....................................... 25 years
Other equipment............................................. 3-7 years
Land is not depreciated.
n) INTANGIBLE ASSETS
Intangible assets consist of goodwill, which is amortized over 40 years and
patents that are amortized over a period of 4 to 40 years.
o) TRANSLATION OF FOREIGN CURRENCIES
Substantially all the Group's revenue is denominated in US dollars as are a
significant proportion of total costs, including container purchases.
Accordingly, the functional currency of the Group is the US dollar, the currency
in which the financial statements are prepared.
Transactions denominated in other currencies are translated into US dollars
and recorded at the rate of exchange at the date of the transaction. Balances
denominated in other currencies are translated into US dollars at the rate of
exchange on the balance sheet date. Exchange differences arising are charged or
credited to the statement of operations.
p) STOCK BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued SFAS No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", effective for fiscal
years beginning after December 15, 1995. The Group has adopted disclosure
requirements under SFAS 123 but continues to account for stock based
compensation under Accounting Practices Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" under which no compensation cost has
been recognized.
Amounts received and receivable for the purchase of options under the
contractual arrangements of the MEIP are included within Additional paid-in
capital when the commitment is made by the key employee. Amounts receivable for
the purchase of options are offset against Share subscriptions receivable within
Shareholders' equity.
q) FINANCIAL INSTRUMENTS-DERIVATIVES
The Group enters into interest rate swap transactions from time to time to
hedge a portion of its exposure to floating interest rate debt. These
transactions involve the swapping of a variable rate stream of interest for a
fixed rate stream of interest. Any differential is recognized as an adjustment
to interest expense upon settlement of the outstanding amounts on the due date.
The Group has not entered into any speculative derivative contracts.
r) ASSET IMPAIRMENT
Certain long lived assets of the Group are reviewed when changes in
circumstances require consideration as to whether their carrying value has
become impaired, pursuant to guidance established in SFAS No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed
F-14
58
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Of". Management considers assets to be impaired if the carrying value of the
asset exceeds the future projected cash flows from related operations
(undiscounted and without interest charges). When impairment is deemed to exist,
the assets are written down to fair value or projected discounted cash flows
from related operations. Management also re-evaluates the period of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives.
s) RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to current year presentation. For 1998, net loss and net loss per common share
were previously reported at $16,467 and $1.86, respectively.
t) NEW PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and how it is designated. A variable cash flow
hedge of a forecasted transaction is initially recorded as comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Gains and losses from foreign currency exposure hedges are
reported in other comprehensive income as part of the cumulative translation
adjustment. Gains and losses from fair value hedges are recognized in earnings
in the period of any changes in the fair value of the related recognized asset
or liability or firm commitment. Gains and losses on derivative instruments that
are not designated as a hedging instrument are recognized in earnings in the
period of change. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and should not be
applied retroactively to financial statements for prior periods. The Company is
assessing the impact that SFAS 133 will have in accounting for its derivative
transactions and hedging activities.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 was
to have been effective in the first quarter of 2000. On March 24, 2000, the
Staff of the SEC announced that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000 may take an additional three months to
implement SAB No. 101. The Company is evaluating the impact, if any, of SAB No.
101 on the Company's financial statements.
F-15
59
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2 OPERATING SEGMENT DATA
Segment information is provided in the tables below:
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- --------
YEAR ENDED DECEMBER 31, 1999
Items directly attributable to operating
segments:
gross lease revenue............................ $43,912 $56,533 $ 31,695 $132,140
direct operating expenses...................... (12,386) (13,123) (5,670) (31,179)
------- ------- -------- --------
net lease revenue.............................. 31,526 43,410 26,025 100,961
payments to container owners................... (24,288) (39,655) -- (63,943)
commissions, fees and other operating income... 1,356 2,170 2,423 5,949
depreciation................................... -- -- (13,958) (13,958)
interest expense............................... -- -- (10,267) (10,267)
------- ------- -------- --------
Operating profit before indirect items........... 8,594 5,925 4,223 18,742
Indirect allocations:
interest income................................ -- 638 373 1,011
depreciation................................... (519) (667) (373) (1,559)
interest expense............................... (179) (234) (129) (542)
selling, general and administrative expenses... (5,564) (5,496) (3,153) (14,213)
------- ------- -------- --------
Operating profit................................. $ 2,332 $ 166 $ 941 $ 3,439
======= ======= ======== ========
Segment assets................................... $18,496 $19,726 $150,643 $188,865
======= ======= ======== ========
Expenditure for segment assets................... $ 58 $ 75 $ 3,950 $ 4,083
======= ======= ======== ========
Reconciliation of operating profit for reportable segments to income before
taxes:
Operating profit............................................ $ 3,439
Gain on sale of investment.................................. 1,278
Unallocated selling, general and administrative expenses.... (2,356)
Amortization of intangibles................................. (683)
--------
Income before taxes......................................... $ 1,678
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $188,865
General corporate assets.................................... 43,002
--------
Total assets................................................ $231,867
========
F-16
60
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- --------
YEAR ENDED DECEMBER 31, 1998
Items directly attributable to operating
segments:
gross lease revenue........................... $ 54,677 $ 63,013 $ 39,856 $157,546
direct operating expenses..................... (12,820) (14,325) (8,173) (35,318)
-------- -------- -------- --------
net lease revenue............................. 41,857 48,688 31,683 122,228
payments to container owners.................. (31,922) (43,605) -- (75,527)
commissions, fees and other operating
income..................................... 1,347 2,349 1,259 4,955
depreciation.................................. -- -- (16,403) (16,403)
interest expense.............................. -- -- (15,124) (15,124)
impairment losses............................. -- -- (4,500) (4,500)
-------- -------- -------- --------
Operating profit before indirect items.......... 11,282 7,432 (3,085) 15,629
Indirect allocations:
interest income............................... -- 584 570 1,154
depreciation.................................. (565) (651) (412) (1,628)
interest expense.............................. (206) (238) (150) (594)
selling, general and administrative
expenses................................... (7,884) (7,023) (4,516) (19,423)
impairment losses............................. (694) (800) (506) (2,000)
-------- -------- -------- --------
Operating profit (loss)......................... $ 1,933 $ (696) $ (8,099) $ (6,862)
======== ======== ======== ========
Segment assets.................................. $ 23,872 $ 21,121 $183,822 $228,815
======== ======== ======== ========
Expenditure for segment assets.................. $ 365 $ 421 $ 2,088 $ 2,874
======== ======== ======== ========
Reconciliation of operating profit for reportable segments to loss before
taxes:
Operating loss.............................................. $ (6,862)
Unallocated selling, general and administrative expenses.... (1,741)
Amortization of intangibles................................. (683)
Financing and recomposition expenses........................ (5,375)
Provision against available for sale securities............. (1,929)
--------
Loss before taxes........................................... $(16,590)
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $228,815
General corporate assets.................................... 51,164
--------
Total assets................................................ $279,979
========
F-17
61
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- ---------
YEAR ENDED DECEMBER 31, 1997
Items directly attributable to operating
segments:
gross lease revenue......................... $ 61,235 $ 54,179 $ 45,434 $ 160,848
direct operating expenses................... (14,153) (11,377) (8,687) (34,217)
--------- --------- --------- ---------
net lease revenue........................... 47,082 42,802 36,747 126,631
payments to container owners................ (36,478) (37,467) -- (73,945)
commissions, fees and other operating
income................................... 1,384 1,919 2,242 5,545
depreciation................................ -- -- (16,686) (16,686)
interest expense............................ -- -- (16,628) (16,628)
impairment losses........................... -- -- (7,368) (7,368)
--------- --------- --------- ---------
Operating profit before indirect items........ 11,988 7,254 (1,693) 17,549
Indirect allocations:
interest income............................. -- 480 381 861
depreciation................................ (611) (541) (453) (1,605)
interest expense............................ (315) (279) (234) (828)
selling, general and administrative
expenses................................. (8,878) (6,028) (5,109) (20,015)
--------- --------- --------- ---------
Operating profit (loss)....................... $ 2,184 $ 886 $ (7,108) $ (4,038)
========= ========= ========= =========
Segment assets................................ $ 29,429 $ 19,531 $ 221,925 $ 270,885
========= ========= ========= =========
Expenditure for segment assets................ $ 228 $ 201 $ 43,036 $ 43,465
========= ========= ========= =========
Reconciliation of operating profit for reportable segments to loss before
taxes:
Operating loss.............................................. $ (4,038)
Gain on sale of investment.................................. 321
Unallocated amounts:
interest expense.......................................... (302)
selling, general and administrative expenses.............. (2,668)
Amortization of intangibles................................. (742)
Financing and recomposition expenses........................ (7,384)
Provisions against amounts receivable from related
parties................................................... (3,909)
Impairment losses........................................... (4,300)
--------
Loss before taxes........................................... $(23,022)
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $270,885
General corporate assets.................................... 56,260
--------
Total assets................................................ $327,145
========
The segments shown above depict the different forms of agreements entered
into by the Group with container owners and represent different levels of
profitability and risk to the Group. Although there are a number of different
forms of agreements, they fall into two principal categories -- those with US
Limited Partnerships and those with Other Container Owners. Owned containers are
those in which the Group has the risk of ownership and which are financed by the
Group's own capital resources, debt facilities and capital leases, and include
new container equipment for resale.
F-18
62
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
All revenues and expenses that are specifically identifiable to the
containers within each segment are allocated to that segment. The Group manages
a number of different container products, revenue details on which are given
below. Individual product revenues have been aggregated within the operating
segments reported. A significant portion of the selling, general and
administrative expenses relating to the operation of the entire container fleet
is not identified to segments. Since the Group operates the container fleet as a
homogenous unit, these expenses have been allocated on the basis of the gross
lease revenue in each segment.
Gross lease revenue from external customers by product comprised:
1999 1998 1997
-------- -------- --------
Dry cargo containers..................................... $ 93,813 $114,373 $117,094
Refrigerated containers.................................. 26,413 29,901 32,675
Tanks.................................................... 7,050 8,269 7,054
Other container products................................. 4,864 5,003 4,025
-------- -------- --------
Total.................................................... $132,140 $157,546 $160,848
======== ======== ========
No single customer accounted for 10% or more of total revenues in the years
ended December 31, 1999, 1998 and 1997, respectively.
Almost all of the Group's lease revenue is earned on containers used by its
customers in global trade routes. Accordingly, the Group believes that it does
not possess discernible geographic reporting segments as defined in SFAS No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information".
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
In the fourth quarters of 1998 and 1997 the Group recorded asset impairment
and other charges, the aggregate of which increased 1998 and 1997 net loss by
$11,929 ($1.35 per share) and $19,801 ($2.24 per share), respectively. There
were no asset impairment and other charges in the fourth quarter of 1999.
(a) IMPAIRMENT LOSSES
In December 1998 and 1997, the Group recorded charges relating to the
impairment of certain long-lived assets as required by SFAS 121.
1998 1997
------ -------
Impairment losses comprised:
Container equipment....................................... $4,500 $ 7,368
Goodwill.................................................. -- 4,300
Building.................................................. 2,000 --
------ -------
Total....................................................... $6,500 $11,668
====== =======
i. Container equipment
In December 1998, management considered various proposals that would enable
the Group to meet its short-term debt obligations. The Group concluded that it
would be necessary to undertake certain transactions involving the sale of
container equipment during 1999 and to utilize the proceeds generated to make
short-term debt repayments. The carrying value of the assets identified for sale
was $25,900 at December 31, 1998. The assets were reported as part of the Owned
Container business segment. During sale negotiations with third party container
owners, management concluded that the carrying value of the container equipment
to be disposed of
F-19
63
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
was not recoverable and a charge of $4,500 was made to impairment losses to
record the assets at fair value. The container equipment contributed
approximately $400 to income before income taxes during each of the years ended
December 31, 1998 and 1997, respectively.
In the first six months of 1999, the Group sold equipment to third party
container owners and US Limited Partnerships, with a carrying value of $19,700
(net of impairment charges of $3,800).
The remaining assets with a carrying value of $1,700 (net of impairment
charges of $700) were returned to service in 1999.
In December 1997, in response to market information, management conducted a
review of the carrying value of refrigerated containers. A study of refrigerated
container disposals was undertaken in order to determine fair value. The review
concluded that the carrying value of the equipment was greater than the
undiscounted future cash flows. In accordance with SFAS 121, the Group recorded
a charge of $7,368 to impairment losses to record the assets at fair value. The
assets were reported as part of the Owned Container business segment.
ii. Goodwill
In 1990 goodwill of $15,900 arose on the acquisition of Intermodal
Equipment Associates ("IEA"). As part of the consideration for the purchase
price, the Group acquired access to future US Limited Partnership syndication.
On or about February 1997, the Securities and Exchange Commission ("SEC")
commenced an investigation of the Group (see Note 16). The Group suspended its
syndication activities immediately as management concluded that it would be
inappropriate to continue to raise funds. In December 1997, the Group decided to
terminate its syndication activities in response to the continuing SEC
investigation and concluded that the ability of the Group to organize future
public limited partnerships was impaired. Accordingly, a $4,300 impairment
charge was recorded to write off the element of the carrying value of the
unamortized portion of goodwill attributed by management to the public limited
partnership fund raising capacity of the business. The impairment charge was not
attributed to a business segment.
iii. Building
In December 1998, as part of a review process designed to increase
profitability and improve liquidity, the Group evaluated the possibility of
disposing of the head office of its container leasing operations, located in
England, within a two-year period. Independent valuations were utilized to
determine fair value. As a result of this review, management concluded that the
carrying value of the building exceeded market value and was not recoverable. An
impairment charge of $2,000 was recorded to state the building at fair value and
was allocated to each segment on the basis of gross lease revenue in that
segment. In addition, at December 1998, management concluded that the building
should continue to be held for use and any decision regarding disposal deferred
until a later date.
b) OTHER ADJUSTMENTS
i. Related party loans and contingent liabilities
In December 1997, charges of $3,909 and $3,400 were recorded against
related party loans (see Note 20) and contingent liabilities (see Note 16),
respectively. In addition, a charge of $824 was recorded to reverse interest
income previously recorded on related party loans.
ii. Restructuring program
During 1998, the Group announced a restructuring program, which was
designed to reorganize the Group's key activities into three divisions:
F-20
64
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- Leasing
- Capital Markets and Investor Services
- Finance and Administration
This program, which commenced in December 1998 was substantially completed
by June 1999 and involved the termination of 15 employees from the following
employee groups:
Officers................................................... 3
Leasing & Operations....................................... 9
Administration............................................. 2
Finance.................................................... 1
---
Total...................................................... 15
===
In December 1998, the Group recorded a $2,000 Financing and recomposition
charge in respect of termination and related costs. The charge was included in
Other amounts payable and accrued expenses at December 31, 1998. The first phase
of this program was implemented in December 1998, with the internal replacement
of the Chief Executive Officer and with the redundancy of the Chief Operating
Officer. During 1999, the Group made termination and restructuring payments of
$1,974. A final payment of $26 was made under this program in March 2000.
iii. Financing transactions
At December 31, 1998, Other amounts payable and accrued expenses included
an amount of $1,528 for penalty fees in connection with the failure to repay,
when due, certain loan facilities (see Note 4i).
iv. Available for sale securities
In February 1999, management was advised that there were claims outstanding
against certain of the Transamerica shares held in escrow (see Note 9ii). In
December 1998, a charge of $1,929 was recorded to reduce the carrying value of
these investments to $0.
4 FINANCING AND RECOMPOSITION EXPENSES
Financing and recomposition expenses comprise:
NOTES 1998 1997
------ ------ ------
Contingent liability........................................ 16iv $ -- $3,400
Restructuring plan.......................................... 3(b)ii 2,000 --
Loan penalty fees........................................... 1,803 534
Loan extension costs -- legal and professional fees......... 738 873
Other legal and professional fees........................... 640 884
Audit and compliance........................................ 194 355
Termination payments........................................ -- 533
Financing transactions...................................... -- 505
Provision for amounts on deposit in restricted accounts..... -- 300
------ ------
$5,375 $7,384
====== ======
F-21
65
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
i. LOAN PENALTY FEES
During 1998 and 1997 the Group incurred loan penalty fees relating to the
failure to repay certain loan facilities by the due date and to the subsequent
extension of the loan agreements.
Other amounts payable and accrued expenses included $0 and $1,528 in
respect of loan penalty fees at December 31, 1999 and 1998, respectively. The
Group made payments of $1,426, $541 and $268 in respect of loan penalty fees in
years ended December 31, 1999, 1998 and 1997, respectively. The balance of $102
was credited to operations during the twelve months ended December 31, 1999.
ii. LOAN EXTENSION COSTS -- LEGAL AND PROFESSIONAL FEES
During 1998 and 1997, the Group was charged for legal and other fees that
had been incurred by certain financial institutions in connection with the
negotiation and extension of loan facilities. Balances of $0 and $192 were
included in Other amounts payable and accrued expenses at December 31, 1999 and
1998, respectively. In this regard, the Group made payments of $192, $962 and
$457 in the years ended December 31, 1999, 1998 and 1997, respectively.
iii. OTHER LEGAL AND PROFESSIONAL FEES
In the years ended December 31, 1998 and 1997, the Group incurred legal and
other costs in connection with financing transactions, SEC matters, related
party items and the restructuring of the Board of Directors and other senior
management positions. At December 31, 1999 and 1998, Other amounts payable and
accrued expenses included balances of $0 and $105 related to such costs. The
Group made payments of $0, $745 and $779 during the years ended December 31,
1999, 1998 and 1997, respectively.
iv. AUDIT AND COMPLIANCE
During 1998 and 1997, additional audit and compliance costs were incurred
in connection with the resignation of the independent public accountants of the
Group, the SEC investigation (see Note 16iii) and with SEC filings. Payments of
$194 and $355 were made during the years ended December 31, 1998 and 1997,
respectively.
v. TERMINATION PAYMENTS
In 1997 payments totaling $533 were made in relation to the termination of
two officers of the Group.
vi. FINANCING TRANSACTIONS
In 1997 the Group made payments of $505 in connection with proposed
financing transactions that were terminated during the year. The Group
determined that no future benefit would be derived from such costs.
vii. PROVISION FOR AMOUNTS ON DEPOSIT IN RESTRICTED ACCOUNTS
In 1997, the Group recorded a provision of $300 for liabilities that were
expected to arise relating to amounts on deposit in restricted escrow accounts.
During 1999, the amounts on deposit were successfully released and the $300 was
credited to operations.
F-22
66
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5 INCOME TAXES
The provision (benefit) for income taxes comprises:
1999 1998 1997
------- ------- -------
Current taxes:
Federal................................................... $ 75 $ -- $ 585
State..................................................... -- -- 3
Foreign................................................... 637 309 928
------- ------- -------
712 309 1,516
------- ------- -------
Deferred taxes:
Federal................................................... (1,219) (3) (1,316)
State..................................................... (247) -- (20)
Withholding............................................... -- -- 37
Foreign................................................... 518 -- (217)
------- ------- -------
(948) (3) (1,516)
------- ------- -------
Total provision (benefit) for income taxes.................. $ (236) $ 306 $ --
======= ======= =======
Differences between the provision (benefit) for taxes that would be
computed at the US statutory rate and the actual tax provision (benefit) were:
1999 1998 1997
------- ------- -------
Expected US federal provision (benefit)..................... $ 579 $(5,495) $(7,827)
Foreign income not subject to US corporate taxes............ (1,154) 5,341 7,135
Tax impact of net loss carried forward...................... -- 516 --
State taxes (net of Federal tax benefit).................... (158) -- (56)
Foreign corporate taxes..................................... 1,155 309 711
Tax on unremitted retained earnings of subsidiaries......... -- -- 37
Release of valuation allowance.............................. (345) -- --
Other....................................................... (313) (365) --
------- ------- -------
Actual tax provision (benefit).............................. $ (236) $ 306 $ --
======= ======= =======
F-23
67
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Temporary differences giving rise to the net deferred income tax liability
as of the balance sheet date were:
1999 1998
------- -------
ASSETS
Acquisition fees............................................ $ 2,588 $ 3,098
Losses carried forward...................................... 1,945 3,723
Disallowed interest expense................................. 1,489 --
Alternative minimum tax credit.............................. 75 --
Other....................................................... 208 197
------- -------
Total deferred income tax assets............................ 6,305 7,018
======= =======
LIABILITIES
Depreciation................................................ 7,257 8,327
Partnership income taxable in different periods for book and
tax purposes.............................................. 1,926 2,171
Unremitted retained earnings of subsidiaries................ 265 265
Valuation allowance......................................... 884 1,230
------- -------
Total deferred income tax liabilities....................... 10,332 11,993
------- -------
Net deferred income tax liabilities......................... $ 4,027 $ 4,975
======= =======
Tax losses have arisen in certain US entities. As of December 31, 1999 the
deferred tax asset associated with these losses carried forward will expire as
follows:
2000..................................................... $ 23
2001..................................................... 25
2002..................................................... 46
2003..................................................... 134
2004..................................................... 5
2005 and thereafter...................................... 651
----
Total.................................................... $884
====
At December 31, 1999 the Group had net operating loss carryforwards
available of approximately $1,748, $3,241 and $3,215 for federal, state and
foreign income taxes, respectively, to offset future income tax liabilities. The
expected tax effect of these losses is reflected as a deferred tax asset. A
valuation allowance has been established since the realization of tax benefits
of net operating loss carryforwards is not assured. The amount of the valuation
allowance is reviewed on a quarterly basis.
The Group has a potential deferred income tax liability for tax arising on
unremitted retained earnings of certain subsidiaries. Upon remittance of such
earnings to the parent company, tax may be withheld by certain jurisdictions in
which the Group operates. Management has considered the Group's remittance
intentions in arriving at the related provision for deferred income taxes. The
total potential amount of such deferred income taxes not provided at December
31, 1999 and 1998 was $1,040 and $1,818, respectively, based on unremitted
earnings for which provision has been made of $3,466 and $6,061, respectively.
F-24
68
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6 AMOUNTS DUE FROM LESSEES
As of December 31, 1999 the minimum lease rentals receivable in future
years under term operating leases were:
2000.................................................. $21,224
2001.................................................. 14,546
2002.................................................. 8,349
2003.................................................. 5,561
2004.................................................. 3,611
2005 and thereafter................................... 1,255
-------
Total................................................. $54,546
=======
Contingent rentals approximated 70%, 71% and 69% of gross lease revenue in
the years ended December 31, 1999, 1998 and 1997, respectively.
7 NEW CONTAINER EQUIPMENT FOR RESALE
Activity during the year in new container equipment for resale was:
1999 1998 1997
-------- ------- --------
Beginning of year.......................................... $ 315 $ 8,202 $ 1,485
Container purchases........................................ 20,640 671 34,959
Sold to container owners................................... (18,420) (8,558) (28,242)
-------- ------- --------
End of year................................................ $ 2,535 $ 315 $ 8,202
======== ======= ========
As part of organizing the US public limited partnerships the Group
purchases containers for resale to these partnerships. For the years ended
December 31, 1999, 1998 and 1997 containers amounting to $964, $0 and $2,623,
respectively, were purchased and resold. These transactions were entered into on
normal commercial terms.
8 NET INVESTMENT IN DIRECT FINANCING LEASES
The Group, as lessor, has entered into various leases of equipment that
qualify as direct financing leases.
The minimum lease receivables under these direct financing leases, net of
unearned income, are as follows:
NET LEASE UNEARNED TOTAL LEASE
RECEIVABLES LEASE INCOME RENTALS
----------- ------------ -----------
December 31, 1999:
2000.................................................. $1,004 $110 $1,114
2001.................................................. 86 3 89
------ ---- ------
Total................................................... $1,090 $113 $1,203
====== ==== ======
December 31, 1998....................................... $3,504 $785 $4,289
====== ==== ======
F-25
69
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9 INVESTMENTS, INCLUDING INVESTMENTS IN RELATED PARTIES
1999 1998
------ ------
Investments comprise:
Investment in US Limited Partnerships....................... $ 34 $ 55
Investment securities available for sale:
cost...................................................... 396 974
unrealized holding gain................................... 1,277 429
------ ------
$1,707 $1,458
====== ======
i. INVESTMENT IN US LIMITED PARTNERSHIPS
The Group has a general partnership investment and a further limited
partnership investment in ten sponsored funds. These general and limited partner
investments are accounted for on the equity basis.
ii. INVESTMENT SECURITIES
As of December 31, 1995, investments included an investment interest of
approximately 24% in an affiliated company, Trans Ocean Limited ("TOL"), a
container leasing company incorporated in Delaware, United States.
In 1996, following an Agreement and Plan of Merger between Transamerica
Corporation ("Transamerica") and TOL, the Group was entitled to receive 19.23
Transamerica shares for each TOL common share it held. Of these Transamerica
shares, the Group sold 251,882 in October 1996 for a consideration of $19,288.
The gain recognized on the conversion of the TOL shares in 1996 was $5,260, of
which $726 was realized.
In May 1997, an additional 21,989 shares were released to the Group and
sold for a consideration of $1,953 resulting in a gain of $321.
At December 31, 1998, the Group had an interest in 56,580 shares in
Transamerica. Of these shares, a total 44,254 were held in three escrows pending
final determination of post-closing reports and adjustments. A further 11,336
shares were held in escrow by Transamerica as security for a tax indemnification
agreement.
In February 1999, the Group was advised that claims had been made against
the 44,254 shares, for amounts in excess of the value of the shares held. In
addition, the number of shares held as security for the tax indemnification
agreement was reduced. Therefore, in December 1998, the Group recorded a total
charge of $1,929 to reverse the related unrealized holding gain recorded in
1996. This comprised a charge of $176 to reflect a reduction in the number of
shares originally held, together with a charge of $1,753 to reduce the carrying
value of the 44,254 escrowed shares to $0.
In July 1999, Aegon N.V. ("Aegon") acquired Transamerica. Under the terms
of the takeover agreement, the Group was entitled to receive a cash payment of
$23.40 together with 0.71813 Aegon shares for each Transamerica share.
In September 1999, the Group was notified that one of the three escrows had
been settled and received a cash payment of $278 together with 15,524 shares in
Aegon which were sold for a consideration of $1,000. The Group recognized a
$1,278 gain which is reported on the statement of operations as a gain on
conversion of investment and a realized holding gain. The gain on conversion is
computed as the excess number of shares released from escrow over the number of
shares recognized on the initial merger date multiplied by the approximate share
value on the initial merger date. The realized holding gain is computed as the
total number shares released from escrow multiplied by the share appreciation
between the initial merger date and the date of sale.
F-26
70
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1999, the Group had an interest in 68,531 shares in Aegon.
Of these shares, a total of 50,828 are held in two escrows pending final
determination of post-closing reports and adjustments and a further 16,281
shares were held in escrow under the terms of the tax indemnification agreement.
10 CONTAINER EQUIPMENT
The activity in container equipment for the years ended December 31, 1999
and 1998 was:
COST
Balance, December 31, 1997.................................. $237,746
Additions................................................... 1,822
Disposals................................................... (7,185)
Impairment loss (note 3).................................... (4,500)
--------
Balance, December 31, 1998.................................. 227,883
Additions................................................... 3,907
Disposals................................................... (26,670)
--------
Balance, December 31, 1999.................................. $205,120
========
ACCUMULATED DEPRECIATION
Balance, December 31, 1997.................................. 44,980
Expense..................................................... 16,403
Disposals................................................... (1,743)
--------
Balance, December 31, 1998.................................. 59,640
Expense..................................................... 13,958
Disposals................................................... (6,025)
--------
Balance, December 31, 1999.................................. $ 67,573
========
BOOK VALUE
December 31, 1999........................................... $137,547
========
December 31, 1998........................................... $168,243
========
The depreciation expense in 1997 was $16,686
F-27
71
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11 INTANGIBLE ASSETS
The activity in the intangible assets was:--
PATENTS GOODWILL TOTAL
------- -------- -------
COST
Balance, December 31, 1997.................................. $2,096 $16,231 $18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 1998.................................. 2,096 16,231 18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 1999.................................. $2,096 $16,231 $18,327
====== ======= =======
ACCUMULATED AMORTIZATION
Balance, December 31, 1997.................................. $ 250 $ 3,306 $ 3,556
Expense..................................................... 188 495 683
------ ------- -------
Balance, December 31, 1998.................................. 438 3,801 4,239
Expense..................................................... 188 495 683
------ ------- -------
Balance, December 31, 1999.................................. $ 626 $ 4,296 $ 4,922
====== ======= =======
BOOK VALUE
December 31, 1999........................................... $1,470 $11,935 $13,405
====== ======= =======
December 31, 1998........................................... $1,658 $12,430 $14,088
====== ======= =======
The amortization expense in 1997 was $742.
i. GOODWILL
Goodwill arose on the acquisition in 1990 of Intermodal Equipment
Associates and the acquisition in 1996 of Intermodal Management AB. At December
31, 1997, the Group recorded an impairment loss of $4,300 against the
unamortized portion of goodwill relating to the acquisition of Intermodal
Equipment Associates (see Note 3(a)ii).
The Group acquired Intermodal Management AB and its subsidiary Intermodal
Leasing AB in August 1996. Goodwill arose on the acquisition of $4,644
(1997 -- $412, 1996 -- $4,232).
Goodwill is amortized on a straight line basis over an original period of
40 years.
ii. CELLULAR PALLETWIDE CONTAINER (CPC) & SLIMWALL CPC PATENTS
The Group acquired the patent rights relating to the Cellular Palletwide
Container ("CPC"), the Slimwall CPC and the intellectual property of Cargo Unit
Containers Limited ("CUC") in August 1996 for a total consideration of $2,096.
The cost of the patents is amortized on a straight line basis over a period of
between 4-40 years depending on the patent type as follows:
CPC patents................................................. 4 - 12 years
Cargo Unit Containers Limited -- patents.................... 11 - 17 years
Cargo Unit Containers Limited -- trademark.................. 40 years
12 OTHER ASSETS
Other assets includes the following items:
F-28
72
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
i. In 1998 and 1997, in partial consideration for container sales to a third
party container owner of $3,914 and $25,800, respectively, the Group received a
residual interest in the containers in the form of non-interest bearing loan
notes totaling $7,300. The loan notes fall due for repayment after certain other
loan notes due to third parties have been repaid from funds generated from the
containers which are managed by the Group. It is anticipated that the loan notes
will not be repaid until 2006 at the earliest. The Group has the option to
acquire 75% of the container owning company for $1.00 in August 2006.
The Group has considered the effect of discounting the loan notes but
concluded that the substance of the transaction was that the non-interest
bearing loan notes and purchase of the option were directly related, in that the
transaction would not have been entered into without both elements being
present. Accordingly, management considered that the accounting for both
elements together was a fair presentation of the transaction.
Consistent with this approach, management has conducted a discounting
exercise on the future revenues to be generated from both the loan notes and
exercise of the option, based on historic and projected trends on per diem
revenues, utilization and container disposal proceeds. The Company considers
that the combined present values of both of these instruments are reflected in
the carrying value of the loan notes.
ii. At December 31, 1998, an amount of $1,598 was held in escrow in connection
with a container sale to a third party container owner during 1997. In March
1999, these escrowed funds were received by the Group.
iii. Amounts of $3,798 and $3,704 were held as retention deposits by financial
institutions in connection with long term funding transactions at December 31,
1999 and 1998, respectively. These amounts will be released on dates between
2000 and 2005 in accordance with the terms of the funding transactions (see Note
13(a)).
iv. At December 31, 1999 and 1998, deposits of $2,026 and $4,450, respectively,
were held in escrow accounts relating to amounts due to third party container
owners (see Note 16ii).
v. At December 31, 1998, an amount of $793 was held in escrow related to the
sale in December 1996 of Cronos Investments B.V. During the year the Company
received $652 in settlement of the escrow. No further payments are anticipated
and the remaining balance has been charged to operations.
vi. At December 31, 1999 an amount of $531 was held as a restricted cash
deposit in an escrow account under the terms of a tax indemnification agreement
(see Note 9ii).
F-29
73
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13 DEBT AND LEASE OBLIGATIONS
As of December 31, 1999, the Group had $109,978 of term facilities
(including capital lease financing) under which $109,978 was outstanding.
Interest rates under these facilities ranged from 6.4% to 9.8%. The terms of
these facilities extend to various dates through 2005.
Debt and capital lease obligations, summarized by primary finance
providers, are comprised of:
INTEREST
1999 1998 RATES %
-------- -------- ---------
Debt:
Floating rate debt, due 2004............................ $ 48,125 $ -- 7.6
Fixed rate debt, due 1999 -- 2004....................... 21,399 29,341 8.6 - 9.8
Floating rate debt, due 2004............................ 14,857 17,429 7.7
Floating rate debt, due 1999............................ -- 33,110 10.2
Floating rate debt, due 1999............................ -- 13,906 9.8
Floating rate debt, due 1999............................ -- 10,334 8.0
Other loans, due 1999 -- 2004........................... 13,622 20,387 6.4 - 9.8
-------- --------
Subtotal.................................................. 98,003 124,507
Obligations under capital leases, due 1999 -- 2005........ 11,975 23,959 6.9 - 9.6
-------- --------
Total..................................................... $109,978 $148,466
======== ========
a) DEBT
Debt is comprised of:
1999 1998
------- -------
Long-term debt:
Revolving credit............................................ $ -- $15,134
Bank term loans
fixed rate................................................ 29,698 39,980
variable rate............................................. 68,305 69,393
------- -------
98,003 124,507
Less: current maturities of long term debt.................. 14,390 74,820
------- -------
$83,613 $49,687
======= =======
Bank loans are secured by the Group's container equipment and property,
with installments payable through 2004 and with interest rates fixed or floating
dependent upon the facilities. The weighted average interest rates for the years
ended December 31, 1999, 1998 and 1997 were 8.4%, 9.0%, and 8.5%, respectively.
As of December 31, 1999, the estimated fair value of fixed rate long-term
debt was $29,504 (1998 -- $37,625) for which the carrying value was $29,698
(1998 -- $39,980). The fair value of fixed rate long-term debt has been
calculated using the market rates prevailing at December 31, 1999.
In March 1999, the Group agreed to an amendment to a $20,000 short-term
revolving credit facility which had a maturity date of March 31, 1999, under
which $10,334 was outstanding at December 31, 1998. The amendment converted the
facility to a short-term loan with varying principal payments due between April
and November and a final maturity date of November 1999. This facility was
refinanced in August 1999, as discussed below.
F-30
74
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In March 1999, the Group agreed to a fourth amendment (the "Fourth
Amendment") to a bank facility (the "Bank Facility"), under which the final
maturity date was extended to September 30, 1999. The balance outstanding on the
facility was $33,110 at December 31, 1998. The Group had failed to make
principal payments totaling $33,110, when due, on repayment dates in September
1998 and January 1999. This facility was also refinanced in August 1999, as
discussed below.
In July 1998, the Group agreed to and executed an amendment to a Note
Purchase Agreement, under which $13,900 was outstanding, and which provided for
repayment of 70% of the principal amount on September 30, 1998 and the balance
on January 31, 1999. Neither of these principal payments was made and the
balance outstanding under the facility at December 31, 1998 was $13,900. A
further amendment to the Note Purchase Agreement was executed in 1999 which
extended the final maturity date to September 1999 and also provided for interim
principal payments to be made by April and July. This facility was also
refinanced in August 1999, as discussed below.
On August 2, 1999, the Group refinanced approximately $47,800 of its
short-term and other indebtedness by establishing a Loan Facility (the "Loan
Facility") with MeesPierson N.V., a Dutch financial institution, as agent for
itself and First Union National Bank. The Group borrowed $50,000 under the Loan
Facility for the purpose of acquiring containers from three other direct or
indirect wholly-owned subsidiaries of the Company and paying certain fees
associated with the establishment of the Loan Facility and the fees of certain
former lenders. The cash proceeds were utilized to repay $47,800 in principal
due by the Group to eight different creditors or groups of creditors of the
Group, including all indebtedness owed under the Bank Facility.
In conjunction with the new facility, the Company has agreed to new
financial covenant levels with all of its current lenders and obtained waivers
of non-compliance under the original financial covenants. In addition, as part
of the facility, all lenders have agreed that the new covenant levels will not
be tested until the first quarter of 2000. Management believes that the Group
will be in compliance with all such covenants.
As of December 31, 1999, the annual maturities of debt were:
2000.................................................. $14,390
2001.................................................. 14,612
2002.................................................. 19,954
2003.................................................. 15,046
2004.................................................. 34,001
-------
Total................................................. $98,003
=======
b) CAPITAL LEASE OBLIGATIONS
The cost and net book value of assets acquired through capital leases was
$20,696 and $13,672, respectively, at December 31, 1999, ($43,158 and $29,878,
respectively, at December 31, 1998). Amortization in respect of these leases is
included in depreciation expense. The aggregate capital lease obligations are
secured by container equipment.
F-31
75
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 1999, the minimum lease payments under capital leases
representing interest and principal were:
PRINCIPAL INTEREST TOTAL
--------- -------- -------
2000........................................................ $ 2,187 $ 820 $ 3,007
2001........................................................ 1,679 675 2,354
2002........................................................ 1,927 547 2,474
2003........................................................ 1,734 407 2,141
2004........................................................ 2,612 300 2,912
2005........................................................ 1,836 109 1,945
------- ------ -------
Total....................................................... $11,975 $2,858 $14,833
======= ====== =======
At December 31, 1998 the current maturities under capital leases were
$12,451.
c) OPERATING LEASES
i. Group as lessee
The Group leases container equipment, computer equipment and office space
under operating leases. The total rental expense was $10,339, $8,049 and $6,526
for the years ended December 31, 1999, 1998 and 1997, respectively.
Rental expense for containers, the majority of which is contingent as
described in note 1(a), is shown in the statement of operations as Payments to
container owners. Rental expense for those leases which carry fixed payment
terms was $8,783, $6,456, and $4,978 for the years ended December 31, 1999, 1998
and 1997, respectively.
Rental expense for computer equipment and office space was $1,556, $1,593
and $1,548 for the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999 future minimum lease payments under these
non-cancellable operating leases were:
2000.................................................. $ 9,531
2001.................................................. 9,306
2002.................................................. 8,772
2003.................................................. 5,128
2004.................................................. 4,217
-------
Total................................................. $36,954
=======
ii. Group as lessor
The Group sub-leases containers to ocean carriers under operating leases,
as described in note 1(a). The Group also sub-leases office space and earned
revenue of $250, $211 and $88 for the years ended December 31, 1999, 1998 and
1997, respectively.
Rental income from sub-leasing containers owned by third party container
owners to ocean carriers was $100,445, $117,690 and $115,414 for the years ended
December 31, 1999, 1998 and 1997, respectively (see Note 2). These amounts are
included in Gross lease revenue in the statement of operations.
F-32
76
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future sub-lease rentals for containers leased under operating leases to
ocean carriers under non-cancellable term leases are included in the amounts
shown in Note 6.
14 FINANCIAL INSTRUMENTS-DERIVATIVES
INTEREST RATE SWAP AGREEMENTS
As of December 31, 1999 the Group did not have any outstanding interest
rate swap agreements.
The Group had entered into a limited number of interest rate swap
agreements to hedge the risk associated with the anticipated future cash flows
resulting from changes in interest rates on certain of its floating rate long
term debt. The objective was to swap a variable rate stream of interest for a
fixed rate stream of interest. Any differential was recognized as an adjustment
to interest expense upon settlement of outstanding amounts on the due date of
each quarterly interest rate period. The agreements were with major commercial
banks and expired in 1999.
As a result of these swap agreements interest expense was increased by $0,
$243, and $149 for the years ended December 31, 1999, 1998 and 1997,
respectively.
15 DEFERRED INCOME AND UNAMORTIZED ACQUISITION FEES
Deferred income and unamortized acquisition fees comprise:
1999 1998
------- -------
Advance billings............................................ $ 1,954 $ 2,681
Unamortized acquisition fees................................ 8,479 10,086
------- -------
$10,433 $12,767
======= =======
The recognition of unamortized acquisition fees is not contingent upon the
performance or continuation of any of the agreements to which they relate. On
the termination of an agreement, any unamortized fees are recognized
immediately. As of December 31, 1999 unamortized acquisition fees are scheduled
to be recognized as follows:
2000................................................... $1,798
2001................................................... 1,572
2002................................................... 1,312
2003................................................... 1,138
2004................................................... 900
2005 and thereafter.................................... 1,759
------
Total.................................................. $8,479
======
16 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 20)
i. COMMITMENTS
The Group had outstanding orders to purchase container equipment at
December 31, 1999 of $4,600. These orders relate to containers to be purchased
for container owners and for the Group.
F-33
77
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ii. CONTINGENCIES -- GENERAL
At December 31, 1999, the Group had $1,520 of amounts payable to container
owners on deposit in escrow bank accounts pending resolution of certain issues
relating to management agreements.
iii. CONTINGENCY -- SEC INVESTIGATION
During 1999, 1998 and 1997, the Company was subject to an investigation by
the SEC, a United States regulatory agency. This followed the resignation of the
Company's former auditors, Arthur Andersen, due to its inability to obtain what
they considered to be adequate responses to their enquiries regarding the
payment and return of $1,500.
On November 15, 1999, the Company, without admitting or denying the
findings set forth therein, consented to the entry of an administrative
Cease-and-Desist Order (the "Order") by the SEC. As part of the Order, the SEC
requested that the Company co-operate, and the Company has agreed to co-operate,
with the SEC in any administrative proceeding or related proceeding arising from
the SEC's investigation.
While the Order did not impose any fine or penalty against the Company, the
Company is unable to predict what impact, if any, it will have on future
business or whether it will lead to future litigation involving the Company.
Under the Order, the Company has designated an agent for service of process with
respect to any proceeding instituted by the SEC to enforce the Order or with
respect to any future investigation of the Company by the SEC. In addition, the
entry of the Order precludes the Company and persons acting on its behalf from
relying upon certain protections accorded to forward-looking statements by the
Securities Act of 1933 and the Securities Exchange Act of 1934 for each of the
three years ending November 14, 2002.
Management does not believe that there will be a material impact to ongoing
operations as a result of the investigation.
iv. CONTINGENCIES -- AUSTRIAN ALLEGATIONS
Since 1983, a subsidiary of the Company has managed containers for Austrian
investment entities sponsored by companies owned or controlled by Contrin
Holding S.A., a Luxembourg holding company ("Contrin"), and for Contrin itself.
The Company is in a dispute with Contrin over $2,600 that Contrin claims
was remitted to the Group in 1994 for the purchase of containers, but that the
Group asserts that it did not receive. The Company's former Chairman, Mr.
Palatin, purportedly acknowledged in 1995 the receipt of the $2,600 for the
purchase of containers, but the monies were not deposited into a Group account.
Prior to Contrin's allegation that the former Chairman of the Company had
acknowledged receipt of the $2,600, the Company's current management had not
been aware of the Chairman's purported acknowledgement. In addition, the Group
has determined that a distribution of $400 to third party Contrin investors was
paid by the Group in December 1994 into the same bank account into which the
$2,600 was apparently deposited.
In December 1997, further to legal and other consultations, the Group
recorded an accrual of $3,400 relating to the alleged transfer of $2,600, the
related interest, plus the estimated settlement costs of this and other claims
by Contrin. The Company is unable to predict the outcome of the dispute.
During 1999, the Group paid $200 of legal fees related to the settlement
costs. Such fees were charged against the $3,400 accrual thereby reducing the
contingent liability to $3,200 at December 31, 1999.
As the outcome of these items may be dependent on future legal action,
management is unable to determine the date on which the matter will be resolved.
The Group is consulting with legal counsel and is disputing the claim.
F-34
78
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Contrin investors have also made claims with respect to alleged
transactions between third parties and companies alleged to be connected to Mr.
Palatin, including Transocean Equipment Manufacturing and Trading Limited
("TOEMT"), involving the purchase and sale of containers in a manner designed to
secure a tax mitigation advantage to those third parties. It is alleged that
sums remain owing to the third parties by one or more of these companies in
connection with the pre-arranged trading in containers. Current management of
the Company believes that the Group was not involved in these transactions, that
the Company had no access to the records of the alleged transactions and, so far
as the Company has managed the containers, the Company has acted in accordance
with instructions from authorized representatives of the third parties.
In response to the actions taken by Contrin, the Group terminated certain
of its management agreements with Contrin entities in 1998. New management
agreements were signed in December 1999. The costs associated with terminating
the old, and executing the new, agreements were immaterial.
The gross lease revenue and income before income taxes attributable to the
equipment managed under the terms of the management agreements approximated:
1999 1998 1997
------ ------ ------
Gross lease revenue......................................... $1,696 $2,127 $2,655
------ ------ ------
Income before income taxes.................................. $ 344 $ 334 $ 457
------ ------ ------
Management considers that prudent provision has been made in the financial
statements for the matters noted above. There is a reasonable possibility that a
material change could occur with respect to these commitments and contingencies
within one year of the date of these financial statements. Management estimates
that possible losses could exceed the amount accrued by $1,000.
v. CONTINGENCIES -- TOEMT
TOEMT, which is currently in liquidation in the United Kingdom, has been
separately registered in the same name in both the United Kingdom and the Isle
of Man. At December 31, 1999, the Company had $506 of amounts payable to
container owners on deposit in an escrow bank account pending resolution of
certain matters relating to the liquidation process. The Company has recently
become aware that more than one creditor of TOEMT may claim an interest in the
distributions made by the Company with respect to the containers owned by TOEMT.
At the present time, the Company has insufficient information to evaluate the
competing claims or to determine whether the Company may have any liability to
the competing creditors for the prior distributions made with respect to the
TOEMT containers.
vi. CONTINGENCIES -- ARBITRATION
Under the terms of the relevant management agreement, an arbitration
process was commenced on or around February 1997 by one of the companies that
had sponsored Austrian entities related to distributions made by the Company
through its Austrian attorney. In December 1998, the arbitration panel found
that the management agreements with the Austrian investment entities were valid.
F-35
79
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 COMMON SHARES
1999 1998 1997
--------- --------- ---------
Common shares outstanding:
At beginning of year.................................... 8,858,378 8,858,378 8,858,378
New common shares issued................................ 300,000 -- --
--------- --------- ---------
At end of year.......................................... 9,158,378 8,858,378 8,858,378
========= ========= =========
In August 1999, the Company issued an additional 300,000 common shares and
warrants to purchase 200,000 common shares in connection with the Group's
refinancing of approximately $47,800 of its short term and other indebtedness
(see Note 13(a)). The warrants are exercisable at $4.41 per share and expire on
August 15, 2004, plus ninety days or, if later, the date on which there has been
full repayment of the monies borrowed under the associated refinancing. Using a
Black Scholes model, the fair value of the warrant was determined to be $246 and
such amount was credited to Additional paid-in capital. The corresponding debt
discount has been deferred and is being amortized over the life of the
associated refinancing using the interest method in accordance with SFAS 91.
On December 11, 1998, an option to purchase 300,000 common shares was
granted to the Mr. Tietz on his appointment as Chief Executive Officer (see Note
18(b)).
On October 29, 1999, a Shareholder Rights Plan (the "Plan") was adopted.
Under the Plan one common stock purchase right was distributed as a dividend on
each share of the Company's common stock as of the close of business on October
25, 1999. The rights will be attached to and trade with all certificates
representing shares of common stock. The rights expire on October 28, 2009, and
are redeemable by the Company at any time prior to this date. The Rights will
only be exercisable on the acquisition by any person or related group of persons
of 20% or more of the Company's common stock. The rights will entitle the
holder, with the exception of the acquiring person or group, to purchase a
specified number of the Company's common shares for 50% of their market value at
that time. The rights will not be triggered if the Company's Board of Directors
has previously approved such an acquisition.
All common shares rank equally in respect of shareholder rights.
18 STOCK BASED COMPENSATION
Stock based compensation comprises:
a) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")
In November 1994, the Company introduced the MEIP for key employees of the
Company. A total of 440,000 common shares have been reserved for issuance under
the MEIP. As of December 31, 1999 outstanding options to acquire 108,000 common
shares were held by 14 employees. The main terms of the plan are as follows:
i. The MEIP consists of option units comprising four separate options, each
option granting the right to the key employee to acquire an equal number of
common shares at four different exercise prices. The key employee must pay an
option price to acquire each option. The exercise price for each option was
determined at the date of grant.
ii. Each option vested 25% in the years ended December 31, 1996 and 1995,
respectively. Options may only be exercised in units of each of the four
options. At December 31, 1999, options were exercisable over 56,700 shares.
F-36
80
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
iii. Members of the MEIP may only exercise vested options within seven years of
November 25, 1994, the date of grant. No options were granted in 1999, 1998 or
1997. Unexercised options will expire thereafter. As of December 31, 1999,
unexercised options have a remaining contractual life of 1 year, 11 months.
The granting of the options did not result in additional compensation in
1999 for the key employees who have joined the MEIP. As of December 31, 1999,
the options are estimated to have a $0 market value based on the share price at
that date and the exercise prices. Total compensation cost recognized in the
income statement for MEIP stock-based employee compensation was $0 for each of
1999, 1998 and 1997. The net income (loss) and net income (loss) per share of
the Group would be unchanged if the compensation cost for the MEIP had been
determined in accordance with SFAS 123.
As of December 31, 1999, outstanding unpaid options amounts to $82,
included as Share Subscriptions Receivable within Shareholders' Equity. The cost
of each option and the associated exercise price at December 31, 1999 was as
follows:
NUMBER
OF SHARES OPTION PRICE EXERCISE PRICE
AT DECEMBER 31 PER SHARE PER SHARE
-------------- ------------ --------------
Option 1............................ 27,000 $1.43 $14.30
Option 2............................ 27,000 $1.56 $15.60
Option 3............................ 27,000 $1.69 $16.90
Option 4............................ 27,000 $1.82 $18.20
-------
Total......................................... 108,000
=======
The options purchased by key employees represent a potential ownership
interest, on a fully diluted basis, of 1% of common shares. Options over 48,600
shares lapsed during the year as a result of eligible employees leaving the
Company.
b) STOCK OPTIONS
In December 1998, the Company granted Mr. Tietz, on his appointment as
Chief Executive Officer of the Company, the option to acquire 300,000 shares of
common stock in the Company at an exercise price of $4.375 per share, the
closing price of the common stock on the date of the grant. The term of the
option is ten years, and may be exercised, in whole or in part, at any time from
the date of grant. The fair value of the option at the date of the grant was
$683. In order to determine fair value, the Company used the Black Scholes model
using a risk-free interest rate of 8%, an expected life of 10 years, an expected
volatility of 13.9% and no expected dividends. Payment for the shares is to be
by cash, the surrender of shares of the Company's common stock already owned by
the employee (valued at their fair market value on the date of the surrender),
or an alternate form of payment as may be approved by the Company's Compensation
Committee. The number and price of shares subject to the option will be adjusted
in the event of any stock split, declaration of a stock dividend, or like
changes in the capital stock of the Company. The option is not transferable
other than by will or the laws of descent and distribution. No rights as a
shareholder of the Company shall accrue until such time as the shares are
purchased under the option. There were no options exercised, granted or
forfeited during 1999. There were no significant modifications of outstanding
awards during 1999. If the stock options had been accounted for under SFAS 123
the impact on the Company's net income (loss) and net income (loss) per share
would have been as follows:
F-37
81
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998
------ --------
Net income (loss):
as reported............................................... $1,914 $(16,896)
pro forma................................................. 1,914 (17,346)
Net income (loss) per share (basic and diluted):
as reported............................................... $ 0.21 $ (1.91)
pro forma................................................. $ 0.21 $ (1.96)
c) STOCK APPRECIATION RIGHTS
On October 13, 1999, the Board resolved to grant stock appreciation rights
("SARs") to a key executive on 200,000 share units. A share unit is defined as
the equivalent of one share of common stock of the Company. The grant of the
SARs entitles the grantee to receive cash payments from the Company as provided
for in the SAR agreement. The share units were granted at a grant price of
$4.375 per share unit. As of the date of the award the closing price of the
Company's common stock was $4.875 per share. The share units are exercisable
over a period of three years, with one-third of the share units exercisable on
each of the first three anniversaries of the date of grant.
In addition, on October 13, 1999, the Board approved the grant of 60,000
SARs representing 15,000 share units for each current non executive director,
with a grant price of $4.094. On October 13, 1999, the closing price of the
Company's common stock was $4.875 per share. The share units vest over a period
of three years, with one-third vesting each year on the earlier of the
anniversary of the date of grant, or seven days before the next scheduled annual
meeting of shareholders for that year.
If a grantee of share units resigns from the Company or is terminated
(other than for cause) by the Company within twelve months following a "change
in control", then the share units become fully exercisable, at any time within
90 days after the date of such resignation or termination. If not exercised the
share units shall lapse and terminate. The share units similarly vest in the
event that a grantee is terminated by the Company without cause, or upon a
grantee's permanent disability or death. A "change in control" is defined to
include the acquisition by any person or related group of persons of 20% or more
of the Common Stock of the Company. The share units are also fully exercisable
upon any merger of the Company with another corporation or the sale of
substantially all of the assets of the Company.
The share units may be redeemed only for cash and not for the Company's
common stock. A grantee is entitled to an "award payment" at the time of
exercise of share units, equal to the excess if any, of the fair market value of
a share of Common Stock on the date of exercise over the grant price, multiplied
by the number of exercised share units. The number of share units is subject to
adjustment in the event of any subdivision of the outstanding shares of the
common stock of the Company, the declaration of a dividend payable in common
stock of the Company, or like events. In all events, the share units may not be
exercised beyond October 12, 2009. The grant of share units does not entitle the
grantee to any rights as a shareholder of the Company.
In accordance with SFAS 123 the compensation expense incurred in respect of
SAR's is estimated using the price of the Company's common stock on the balance
sheet date as a surrogate for the price on the date of exercise. A liability is
created for the estimated compensation expense and is adjusted up or down for
each balance sheet date for changes in the price of the Company's stock. The
compensation expense recognized for the year ended December 31, 1999, was $13.
No units were redeemed during the year ended December 31, 1999.
F-38
82
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
d) 1999 STOCK OPTION PLAN
The 1999 Stock Option Plan ("the Plan"), was approved by the Board of
Directors on June 3, 1999, and by the Shareholders at the 1999 Annual Meeting on
January 13, 2000. The Plan is designed to attract, motivate and retain key
employees. The Plan authorizes the issuance of 500,000 shares of common stock
and permits the Company to award to key employees incentive options and
non-qualified stock options. The number of shares available for issuance under
the Plan may be adjusted in the event of any subdivision of the outstanding
shares of the common stock of the Company, the declaration of a dividend payable
in common stock of the Company, or like events. The aggregate number of stock
options that may be awarded to any eligible employee over the term of the Plan
is limited to 80,000 shares. The exercise price of a stock option will be
determined by the Company's Compensation Committee, but will not be less than
the fair market value of the Company's common stock at the date of grant. The
exercise price of a stock option may be paid in cash or previously owned stock
or both. The Plan terminates on December 31, 2002, after which no awards will be
made.
As at December 31, 1999, no awards have been made under the Plan. On
February 4, 2000, the Compensation Committee of the Board authorized the grant
of options for 420,000 shares of common stock to eight officers of subsidiaries
of the Company at an exercise price of $5.25 per share. The options will vest
and be exercisable at the rate of 25% per year over the next four years.
19 RESTRICTED RETAINED EARNINGS
On an annual basis, Luxembourg law requires appropriation of an amount
equal to at least 5% of Net income to a legal reserve until such reserve equals
10% of the stated capital related to the outstanding common and preferred
shares. This reserve is not available for dividends. At December 31, 1998, the
legal reserve represented 10% of the stated capital related to outstanding
common shares. Accordingly, no appropriation to the legal reserve was required
for that year. In August 1999, a further amount of $60 was transferred from
Additional paid-in capital following the issuance of an additional 300,000
shares.
20 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 16)
The Group had the following transactions with related parties during the
three years ended December 31, 1999, 1998 and 1997, respectively:
i. During 1998, an ocean carrier in which a then director of the Company was a
non executive director ceased doing business. The ocean carrier leased
containers from the Company. At December 31, 1998, a specific provision of $553,
representing the total amount due from the carrier of $1,153 less expected
insurance proceeds, was included in the allowance for doubtful accounts. In
1999, the total amount due from the ocean carrier increased by $145. During the
year ended December 31, 1999, insurance proceeds of $648 were received and the
remaining balance of $650 was charged to operations.
ii. In 1996, the Company had an investment in Hinderton Limited ("Hinderton"),
a container investment company incorporated in the Isle of Man. During 1996 the
equity interest was exchanged for subordinated debt. No interest was earned in
any of the periods presented. In 1998 the subordinated debt was assigned to
Hinderton for a nominal consideration. The Group has management agreements
covering the operation of containers owned by Hinderton, under which management
and acquisition fees are receivable. The revenue earned with respect to these
agreements was $399 and $266 for the years ended December 31, 1998 and 1997,
respectively.
iii. During the year ended December 31, 1998, payments totalling $150 were made
to a former non executive director of the Company, for legal fees. In addition
the former non executive director has submitted a statement to the Company for
the balance due for legal services rendered to the Company in the amount of
$100. This item is currently being reviewed by the Special Litigation Committee.
F-39
83
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
iv. As of January 1, 1996, $4,723 was owed to the Group under an unsecured loan
agreement with Barton Holding Ltd. ("Barton"), the former preferred shareholder.
This amount bore interest at 9% and was repayable in installments on March 31,
1996 and June 30, 1996.
During 1996, Mr. Palatin purportedly guaranteed the performance by Barton
of its obligations under the loan agreement, including repayment of interest and
principal according to the terms prescribed in the agreement. Mr. Palatin's
guarantee purported to pledge 1,030,303 Common Shares owned by him in The Cronos
Group. However, the owner of record of these shares was Lambert Business Inc.
which is incorporated under the laws of Panama.
The prospectus dated December 7, 1995, specifies that Barton is an
unaffiliated company. The Group has received no notification of a change in this
regard.
On June 30, 1996, principal and interest on the Group's loan to Barton in
the amount of $4,950 came due, but no repayment thereon was received.
In August 1996, the Company and Mr. Palatin entered into a new Loan
Agreement and related Pledge Agreement, each dated as of July 1, 1996, pursuant
to which Mr. Palatin borrowed $5,461 from the Company which was used to repay
the principal and interest due on June 30, 1996, on the loan to Barton and an
additional $500 advance. This loan bore interest at 9% per annum and was due on
December 30, 1996. No principal or interest payments were received in 1996. At
December 31, 1996, the outstanding loan due from Mr. Palatin was $5,461. In July
1997, in connection with the execution of an amendment to the Bank Facility, the
Palatin loan was increased to $5,900, representing principal and interest due on
the original loan, and was assigned to a subsidiary of the Group, together with
all the Company's rights in respect of this loan, including the collateral
rights concerning the purported pledge of 1,030,303 Common Shares. The date of
December 31, 1997 was agreed as the revised repayment date for the loan, however
no principal or interest payments were received.
In January 1997, the Group advanced an additional amount of $3,700 to Mr.
Palatin under the same terms as the Loan Agreement dated July 1, 1996. This loan
bore interest at 9% per annum and was secured by a further pledge of 1,000,000
Common Shares beneficially owned by him in The Cronos Group. This loan was
replaced in July 1997 by a new loan in like amount from a subsidiary of the
Group to Mr. Palatin, pursuant to the Bank Facility. This new loan bore interest
at 9% per annum and was secured, together with all other obligations of Mr.
Palatin to this subsidiary company, by the pledge of 1,000,000 shares. The loan
was due to be repaid on October 31, 1997, but no interest or principal payments
were received. Consequently title to the 1,000,000 shares was established by the
banks providing certain of the Group's term loans which totalled $33,110 at
December 31, 1998 (see Note 13(a)).
Interest of $704, $864 and $824 became due under Mr. Palatin's outstanding
loans for the years ended December 31, 1999, 1998 and 1997, respectively. These
amounts have not been recognized in income.
In view of these circumstances and the doubt concerning the Board's ability
to exercise the pledge over the remaining 1,030,303 shares, a provision of
$3,909 was made on December 31, 1997, against Mr. Palatin's outstanding loans.
In March 1999, title to 463,636 of the 1,030,303 shares was granted as security
to the banks under the Bank Facility.
At December 31, 1998, the carrying value of Mr. Palatin's loans was $5,500.
In June 1999, $5,279 of proceeds from the sale of the Company's stock held as
collateral on the Palatin loans were utilized in reducing Mr. Palatin's
indebtedness to the Company. The remaining balance of $221 was charged to
operations.
In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York for payment of the remaining balances due
under two promissory notes, both dated July 14, 1997, by and between a
subsidiary of the Company, as payee ("Payee"), and Mr. Palatin, as payor.
F-40
84
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On February 8, 2000, the Supreme Court of the State of New York entered its
default judgment against Mr. Palatin. Pursuant to the judgment, the Payee is to
recover from Mr. Palatin $6,227, plus interest at 9% per annum from June 21,
1999 to February 8, 2000 in the amount of $356, for a total recovery of $6,583.
The Payee currently is pursuing execution of the judgment against Mr.
Palatin's beneficial ownership of the Common Shares of the Company. According to
filings made with the SEC by the shareholder of Klamath Enterprises S.A.
("Klamath"), Mr. Palatin is the beneficial owner of the 1,793,798 outstanding
shares of Common Stock of the Company owned of record by Klamath. On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts against Mr. Palatin and against the
Company's transfer agent, EquiServe Limited Partnership, preliminarily enjoining
them from selling, transferring, assigning, or otherwise encumbering, disposing
of, or diminishing the value of the Common Shares of the Company held of record
by Klamath.
The Company is also pursuing an attachment order in the Swiss courts
against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the Common Shares of the Company owned by Klamath.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of Common Shares beneficially owned in
the Company by Mr. Palatin to the Payee or by a liquidation of the shares in an
amount sufficient to fully discharge the judgment. The Company is unable to
predict at the present time whether it will succeed in achieving its objectives.
v. Included in Financing and recomposition expenses in 1998 and 1997 were
amounts totalling $232 which were attributed to Mr. Palatin.
On the resignation of Mr. Palatin in 1998, the Group retained $238 of
outstanding payroll to be held as possible settlement against any claims.
In December 1999, the $238 payable to Mr. Palatin was offset against the
$232 payable to the Group.
vi. Amounts of $34, $436 and $618 were paid for services, for the years ended
December 31, 1999, 1998 and 1997, respectively, under the terms of an
information technology agreement with a company, to which Mr. Palatin indicated
that he was related. In November 1999, the Group was advised by a third party
that they had purchased all of the equity of the information technology company
that was previously owned by Mr. Palatin.
vii. As indicated in Note 16iv, it has been asserted by a representative of
Contrin that Mr. Palatin has financial and other interests in companies that
were involved in the trading of containers with participants in certain Austrian
investment entities. The relationship or otherwise between these companies and
the Group cannot be substantiated by management at present. The public records
regarding these companies do not disclose their beneficial ownership. One of the
companies in question, TOEMT, has been regarded by management as a subsidiary of
Contrin and is so characterised in certain commercial correspondence. Contrin,
through three management companies, administered the Austrian investment
entities. The Group has responded to a request for information from the
liquidator relating to the trading transactions with that company.
F-41
85
EXHIBIT INDEX
NUMBER EXHIBIT PAGE
- ------ ------- ----
3.1 Coordinated Articles of Incorporation (incorporated by
reference to Exhibit 1.1 to the Company's Annual Report on
Form 20-F for the year ended December 31, 1997 (File No.
0-24464)).
3.2 Policies and procedures with respect to the indemnification
of directors and officers of the Company, as adopted by the
Board of Directors on August 4, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, dated November 24, 1999).
4.1 Rights Agreement, dated as of October 28, 1999, between the
Company and BankBoston, N.A., as Rights Agent (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A dated October 29, 1999).
10.1 Amended and Restated Credit Agreement, dated as of June 24,
1997, by and among Cronos Containers N.V., Cronos Containers
Ltd., Cronos Equipment Ltd., Cronos Containers Inc., Cronos
Capital Corp., and Cronos Equipment (Bermuda) Limited, as
joint and several borrowers, each of the banks that is or
may become a party thereto, Fleet Bank, N.A., as agent for
the banks, and The Cronos Group, as guarantor (the "Credit
Agreement") (incorporated by reference to Exhibit 1.2 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.2 First Amendment to the Credit Agreement, dated as of July
14, 1997 (incorporated by reference to Exhibit 1.3 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.3 Second Amendment to the Credit Agreement, dated as of
December 3, 1997 (incorporated by reference to Exhibit 1.4
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.4 Third Amendment to the Credit Agreement, dated as of June
30, 1998 (incorporated by reference to Exhibit 1.5 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.5 Confirmation of Guaranties, Agreement and Power of Attorney
by the Cronos Group, dated June 30, 1998, pertaining to the
Credit Agreement (incorporated by reference to Exhibit 1.6
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.6 Deed in lieu of foreclosure relating to shares given as
collateral to the Palatin loans (incorporated by reference
to Exhibit 10.6 in the Company's Annual Report on Form 10-K
for the period ended December 31, 1998).
10.7 Forbearance Agreement and Fourth Amendment to Amended and
Restated Credit Agreement dated March 31, 1999 (incorporated
by reference to Exhibit 10.7 in the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.8 Note Purchase Agreement among Cronos Equipment (Bermuda)
Limited, The Cronos Group and Sun Life Insurance Company of
America, dated as of December 29, 1994 (the "Sun Agreement")
(incorporated by reference to Exhibit 1.7 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No. 0-24464)).
10.9 Amendment to the Sun Agreement, dated as of November 1, 1997
(incorporated by reference to Exhibit 1.8 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No 0-24464)).
10.10 Second Amendment to the Sun Agreement dated as of January
26, 1999 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1998).
86
NUMBER EXHIBIT PAGE
- ------ ------- ----
10.11 Lambert Confirmation, Acknowledgement and Consent of
Collateral Assignment (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1998).
10.12 Amendment to the Revolving Credit Facility between Cronos
Containers Limited and China International Marine Containers
(Group) Company Limited, dated March 24, 1999 (incorporated
by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.13 Guarantee, dated as of July 30, 1999, by and between the
Company and MeesPierson, as agent on behalf of itself and
First Union (incorporated by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.14 Loan Agreement, dated as of July 30, 1999, by and between
Cronos Finance (Bermuda) Limited ("CFBL") as issuer, and
MeesPierson, as agent, on behalf of itself and First Union,
as initial noteholders (incorporated by reference to Exhibit
10.21 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999).
10.15 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of
MeesPierson (incorporated by reference to Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.16 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of First
Union (incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.17 Issuer Stock Pledge Agreement [CFBL], dated as of July 30,
1999, by and between the Company and MeesPierson, as agent
on behalf of itself and First Union (incorporated by
reference to Exhibit 10.24 to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1999).
10.18 Stock Pledge Agreement [Cronos Holdings/Investments (U.S.),
Inc.], dated as of July 30, 1999, by and between the Company
and MeesPierson, as agent on behalf of itself and First
Union (incorporated by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.19 Warrant Agreement dated as of July 30, 1999 ("Warrant
Agreement") by and between the Company and MeesPierson N.V
("MeesPierson") and First Union National Bank ("FUNB")
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.20 Amendment No.1 to Warrant Agreement, dated as of August 11,
1999, by and among the Company, MeesPierson, and FUNB
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30,1999).
Executive Compensation Plans and Arrangements
10.21 Stock Appreciation Rights Agreement by and between the
Company and Peter J Younger, dated as of October 13, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3, dated November 24,
1999).
10.22 The Cronos Group Management Equity Investment Plan, dated as
of July 25, 1994 (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the period
ended December 31, 1998).
10.23 Stock Appreciation Rights Agreement by and between the
Company and S Nicholas Walker and each other party listed on
the schedule thereto, dated October 13, 1999. E1
10.24 1999 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8,
dated February 25, 2000).
10.25 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999. E13
10.26 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000. E23
87
NUMBER EXHIBIT PAGE
- ------ ------- ----
10.27 Employment Agreement by and between Cronos and Peter J
Younger dated July 1, 1998, as amended March 24, 2000. E37
10.28 Employment Agreement by and between Cronos and Dennis J
Tietz dated December 11, 1998, as amended March 24, 2000. E60
21.1 List of principal wholly-owned subsidiaries at December 31,
1999. E82
22.1 The Company's Form 8-K dated January 21, 2000, reporting on
matters submitted to a vote of shareholders.
27.1 Financial Data Schedule. E84
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the
Company's Registration Statement on Form S-8 dated February
25, 2000. E85