Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Form 10-K
------------------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 0-24464
THE CRONOS GROUP
(Exact name of Registrant as specified in its charter)
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
------------------------------------
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 be
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 16, 2001 (Common Shares) was approximately
$41,212,701.
The number of Common Shares outstanding as of March 16, 2001:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common 9,158,378
Portions of the following documents have been incorporated by reference
into this report.
DOCUMENT
-------- PARTS IN WHICH INCORPORATED
Proxy Statement for Annual Meeting to be held in 2001 Part III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
THE CRONOS GROUP
TABLE OF CONTENTS
PAGE
----
Introductory Note........................................... ii
PART I
Item 1 -- Description of Business........................... 1
Item 2 -- Properties........................................ 9
Item 3 -- Legal Proceedings................................. 10
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................... 11
PART II
Item 5 -- Market for the Company's Common Equity and Related
Stockholder Matters....................................... 12
Item 6 -- Selected Financial Data........................... 12
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
Item 7A -- Quantitative and Qualitative Disclosures about
Market Risk............................................... 20
Item 8 -- Financial Statements and Supplementary Data....... 21
Item 9 -- Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............... 21
PART III
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 23
i
3
INTRODUCTORY NOTE
Unless the context indicates otherwise, the "Company" means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
"Cronos" or the "Group" 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:
Cronos is heavily dependent upon third parties to supply it with the
capital needed to acquire containers; such capital may not be available to
the Group to enable it to expand its fleet of containers.
The Group is in a dispute with a group of container owners who claim
that the Group owes it $2.6 million, plus interest and costs.
The Company settled a Securities and Exchange Commission ("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 common shares is not liquid.
The Company's four largest groups of shareholders control approximately 60%
of its outstanding common shares. For 2000, the average daily trading
volume in the Company's shares was 7,153 shares, or approximately 0.08% of
the Company's outstanding shares.
For a discussion of the container leasing industry and the Company's
business, see "Description of Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" herein. For a
discussion of the Company's legal proceedings, see "Legal Proceedings" herein;
and for a discussion of the market for the Company's common shares, see "Market
for the Company's Common Equity and Related Shareholder Matters" herein.
ii
4
PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme) organized in
Luxembourg with its registered office at 16, Allee Marconi, Boite Postale 260,
L-2120 Luxembourg (telephone (352) 453145). The Company is registered with the
Luxembourg Registrar of Companies under registration number R.C.S. Lux. B.
27489. Cronos Containers Limited, the Company's principal container leasing
subsidiary, is a UK corporation located at Orchard Lea, Winkfield Lane,
Winkfield, Windsor, Berkshire, SL4 4RU, England.
Cronos is the successor to Intermodal Equipment Associates ("IEA") and
Leasing Partners International ("LPI"). IEA began managing and leasing dry cargo
containers in 1978, primarily under master leases. LPI was established in 1983
to manage and lease refrigerated containers. In 1990, LPI acquired IEA and the
companies combined their operations under the new name Cronos. In December 1995
and January 1996, the Company and Barton Holding Ltd., a selling shareholder,
sold in a public offering (the "Public Offering") 3,643,000 common shares of the
Company.
Cronos is one of the world's leading lessors (by aggregate TEU capacity) of
intermodal marine containers. It owns and manages a fleet of dry cargo,
refrigerated, tank and other specialized containers. Through an extensive global
network of offices and agents, Cronos leases both its own and other owners'
containers to over 450 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 for the carriage of unitized or palletized
cargoes. Dry cargo containers currently constitute approximately 87% (in TEU) of
the worldwide container fleet. Refrigerated containers and tank containers
currently constitute approximately 5% (in TEU) of the worldwide container fleet,
with open-tops and other specialized containers constituting the remaining 8%.
See "Fleet Profile" below.
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
1960s, resulting in increased demand for containers. The world's container fleet
has grown from an estimated 270,000 TEU in 1969 to approximately 14 million TEU
by the end of 2000.
1
5
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 sixteen years.
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 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. Short-term lease agreements have a duration
of less than one year and include one-way, repositioning and round-trip leases.
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.
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. They differ from master leases in that they define the number of
containers to be leased and the lease term.
The terms and conditions of the Group'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 Group 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.
2
6
The percentage of equipment on term leases as compared to master leases
varies widely among leasing companies, depending upon each company's strategy on
margins, operating costs and cash flows.
Lease rates depend on several factors including the type of lease, length
of term, maintenance provided, type and age of the equipment and market
conditions.
COMPANY STRATEGY
Cronos targets operating leases, with an emphasis on master leases for its
dry cargo containers and term leases for refrigerated and tank containers.
LEASE PROFILE
Cronos offers flexible leasing arrangements primarily through master leases
on dry cargo containers. Cronos' specialized containers are generally leased on
longer-term leases because the higher cost, value and complexity of this
equipment make it more expensive to frequently redeliver and lease out.
PERCENTAGE OF ON-HIRE FLEET BY LEASE TYPE
------------------------------------------------
DRY FREIGHT
TYPE OF LEASE DRY CARGO REFRIGERATED TANK SPECIALS
------------- --------- ------------ ---- -----------
Master......................................... 70% 46% 45% 55%
Term........................................... 24% 51% 55% 44%
Finance........................................ 6% 3% -- 1%
---- ---- ---- ----
Total..................................... 100% 100% 100% 100%
==== ==== ==== ====
CUSTOMERS
Cronos is not dependent upon any particular customer or group of customers.
None of the Group's customers accounts for more than 10% of its revenue and the
ten largest customers accounted for approximately 47% 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 Group may be 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 ISO standards and designed to
minimize repair and operating costs. Cronos operates primarily dry cargo and
refrigerated containers but, since 1993, it has diversified into tanks and other
specialized containers. Cronos believes that this fleet diversification enables
it to increase business with its customers by supplying a wide range of their
equipment requirements.
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.
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
3
7
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' 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 tanks 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, Cellular Palletwide Containers ("CPCs"),
open-top and flatrack containers. Cronos diversified into dry freight specials
in 1996, when it acquired Intermodal Leasing AB, a Swedish company with a fleet
of approximately 800 rolltrailers, a type of heavy-duty chassis used for moving
cargo onto and off ships. Cronos markets this product on a worldwide basis
through its network of offices and agents, and has increased its rolltrailer
fleet to 2,468 TEU at the end of 2000. Cronos owns the patents of the CPC, a
specialized container designed specifically for the carriage of European coastal
cargo on "Euro" or "metric" pallets, which allow for side-by-side stowage of
pallets that is not possible in a standard ISO container, and therefore
increases the load capacity per container. Since 1996, Cronos has added 3,349
TEU of CPCs into its container fleet net of disposals.
During 2000, the size of the total fleet increased by 29,300 TEU
representing new container production of 44,900 TEU net of disposals of 15,600
TEU. Total new container production in 2000 represented an investment of $63.3
million. Approximately $55.6 million, or 88%, of the new container investment
related to dry cargo containers. Of the balance of new container purchases, $4.4
million was invested in rolltrailers, $1.9 million was invested in CPCs, and the
remaining $1.4 million was invested primarily in flatracks.
CRONOS CONTAINER FLEET (IN TEU THOUSANDS)
AT DECEMBER 31,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Dry Cargo.............................................. 375.9 346.6 337.8 345.9 322.0
Refrigerated........................................... 12.5 13.6 14.7 16.0 16.2
CPCs................................................... 3.3 3.1 2.4 2.4 --
Rolltrailer............................................ 2.5 1.9 2.2 2.0 1.7
Tank................................................... 2.0 2.0 2.0 2.0 1.7
Other Dry Freight Specials............................. 3.0 2.7 2.3 1.5 1.2
----- ----- ----- ----- -----
Total Fleet....................................... 399.2 369.9 361.4 369.8 342.8
===== ===== ===== ===== =====
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 Group 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 and CPC's from manufacturers in
China, Korea and India. Cronos' refrigerated containers were purchased mainly
from Korea and China. The related refrigeration units were purchased primarily
from Carrier Transicold and Thermo King, the primary suppliers of container
refrigeration units in the United States.
All of the Group's tank containers have been purchased from United Kingdom
and South African manufacturers.
4
8
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 review 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 Group
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 Group's area offices authorize all container
movements into and out of the depot and supervise all repairs and maintenance
performed by the depot. The Group'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 Group's operations, as the
redelivery of a container into a depot is the point at which the container is
off-hired from one customer and repaired in preparation for re-leasing to the
next.
Cronos' global network is integrated with its computer system and provides
24-hour communication between offices, 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 Group'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
5
9
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 Group 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 1.1 million TEU each in mid-2000,
control in excess of one third of the total leased fleet; a substantial middle
tier of companies possessing fleets in the 250,000 to 900,000 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 towards 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 China,
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.
In recent years, Cronos and other lessors have developed certain internet
based applications. For Cronos, these applications will allow customers access
to make on-line product inquiries. The Group is continuing to develop this side
of business and will introduce other internet options in the future, including
on-line bookings for all products.
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"),
2. Other Container Owners ("Other Container Owners"), and
3. Owned Containers.
6
10
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:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
US Limited Partnerships............................ 31% 33% 34% 35% 38%
Other Container Owners............................. 45% 45% 41% 40% 29%
Owned Containers................................... 24% 22% 25% 25% 33%
---- ---- ---- ---- ----
Total......................................... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
As of December 31, 2000, no single owner, other than the Group, 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 Group. The Group
evaluates the performance of its operating segments based on operating profit or
loss. Substantially all of the Group's lease revenue is earned on containers
used in global trade routes. This revenue is deemed to be earned based on the
physical location of the containers while on lease. Accordingly, the Group
believes that it does not possess discernible geographic reporting segments as
defined in Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information". See Note 2 to the 2000
Consolidated Financial Statements.
Segment revenues from external customers, operating profit or loss and
total assets are disclosed in the Group's Financial Statements and are
incorporated herein by reference.
US LIMITED PARTNERSHIPS
Cronos has raised capital through its investment syndication activities
since 1979 by the organization and sponsorship of public limited partnership
offerings. Cronos has sponsored 16 of these public limited partnerships and 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.
Cronos has neither sponsored nor syndicated any limited partnership public
offerings 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;
- 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.
7
11
Management and acquisition fees earned by the Group, were $8.3 million,
$8.6 million, and $11.3 million for the years ended December 31, 2000, 1999 and
1998, 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 has historically earned 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 Group from Other Container Owners were $7.4
million, $5.9 million and $7.4 million for the years ended December 31, 2000,
1999 and 1998, 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 Group 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 Group'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 Group
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 and later sell these
containers to third party owners after the initial lease profile is established
for a particular group of containers.
8
12
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
are still used in the container manufacturing process. The replacement
refrigerant used in the Group's new refrigerated containers may also become
subject to similar governmental regulations. Depending on market pressures and
future governmental regulations, certain of the Group's refrigerated containers
may require retrofitting with non-CFC refrigerants. Cronos' technical staff have
cooperated with refrigeration manufacturers in conducting investigations into
the most effective and economical retrofit plan. In the future, the Group may
bear the costs related to retrofitting certain of its Owned Containers, which
constitute approximately 33% 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, 2000, Cronos had 90 employees worldwide; 25 were located
in the United States, 48 in Europe and 17 in Asia and Australia combined. None
of Cronos' employees is covered by a collective bargaining agreement.
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
In June 2000, Cronos completed the sale of the real property known as
Orchard Lea, the head office of its container leasing operations. The property
is located west of London, England and was sold to an unaffiliated third party
for approximately $9.9 million generating a net gain on disposal of $0.3
million. After payment of expenses and retirement of $5.2 million of mortgage
debt, the Group realized proceeds of approximately $3.5 million. Under the terms
of a further loan agreement, the Group utilized such proceeds to repay debt. The
Group leases back 7,000 square feet in the office building from the buyer in the
form of a lease for a full term of 2 years at a market rental rate. Cronos also
leases approximately 12,160 square feet of office space (of which approximately
4,260 square feet is sub-let) 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, 2000, Cronos owned 60,428 TEU of dry
cargo containers 6,226 TEU of refrigerated containers, 3,349 TEU of CPCs, 1,758
TEU of rolltrailers, 729 TEU of tank containers, and 455 TEU of other
specialized equipment. As of December 31,
9
13
2000, Cronos managed a total of 375,925 TEU of dry cargo containers, 12,496 TEU
of refrigerated containers, 3,349 TEU of CPCs, 2,468 TEU of rolltrailers, 2,010
TEU of tank containers, and 2,957 TEU of other specialized equipment.
ITEM 3 -- LEGAL PROCEEDINGS
DISPUTE WITH THE CONTRIN GROUP
The Group manages containers for investment entities sponsored by or
affiliated with Contrin Holding S.A., a Luxembourg holding company (collectively
"Contrin"). Approximately 1% (measured by TEUs) of the Group's fleet of managed
containers is owned by Contrin. The Group 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 Group did not receive these funds and
believes that the funds were diverted to an account controlled by Stefan M.
Palatin, a former Chairman and Chief Executive Officer of the Group, and that
this was known or should have been known by Contrin. The Group also believes
that the bank that received the funds, Barclays Bank PLC ("Barclays"), may be at
fault.
On August 8, 2000, Contrin, through its affiliate, Contrin Worldwide
Container Leasing GmbH, filed an action in the Luxembourg District Court against
the Group, seeking recovery of $2.6 million, together with interest and costs.
On January 10, 2001, the Group responded to Contrin's complaint, requesting that
the District Court dismiss the proceeding for lack of jurisdiction over the
dispute. The Group intends to contest Contrin's claims, on the merits, if its
motion to dismiss is not granted, but is unable to predict the outcome of the
dispute.
To preserve its rights of indemnity in the face of Contrin's claims, the
Group, on June 1, 2000, filed a protective claim in the High Court of Justice,
London, England, against Mr. Palatin and his wife. By its claim, the Group seeks
to establish that the Palatins' are liable to the Group for any liability, which
the Group may have to Contrin arising out of the 1994 transfers. The Palatins',
through their counsel, are contesting the jurisdiction of the High Court of
Justice over them. The hearing on the Palatins' motion to dismiss the proceeding
for lack of jurisdiction is scheduled to be heard on April 6, 2001.
On July 13, 2000, Cronos also filed a protective claim against Barclays in
the High Court of Justice, London, England. By its claim, the Group seeks a
declaration that Barclays is liable to the Group for $2.6 million, plus interest
and costs, arising out of Contrin's 1994 transfer to an account with Barclays in
the name of Ms. Palatin. Now that Contrin has initiated its action against the
Group, the Group is pursuing an examination of documents from Barclays to
evaluate whether Cronos can prosecute its claim of indemnity against Barclays.
COLLECTION OF PALATIN NOTES
In October 1999, the Company brought an action against Mr. Palatin in the
Supreme Court of the State of New York, for payment of the remaining balances
due under two promissory notes, both dated July 14, 1997 (the "Palatin Notes"),
by and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin,
as payor. The original principal amount of the Palatin Notes was $9.6 million.
Mr. Palatin made no payments under the Palatin Notes, which were due on October
31 and December 31, 1997, respectively. The amounts due under the Palatin Notes
were reduced by $5.3 million as a result of the sale, on or about June 21, 1999,
of 1,463,636 common shares of the Company by certain of the Company's lenders
(the indebtedness of the Company to the lenders was reduced by a like amount).
The shares had been acquired by the banks by pledge from the Company to secure,
in part, indebtedness owed by the Company to the banks. As a result of the sale
of the shares, Mr. Palatin owed the Company, at the time the Company filed its
complaint in New York Supreme Court, $6.2 million in principal and $0.4 million
in interest under the Palatin Notes.
Mr. Palatin did not respond to the Company's lawsuit, and on February 8,
2000, the Supreme Court of the State of New York entered its default judgment
against Mr. Palatin in the amount of $6.6 million. The
10
14
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 common shares
of the Company owned of record by Klamath (the "Klamath Shares"). On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts, Norfolk County, against Mr. Palatin
and against the Company's transfer agent, Fleet National Bank c/o EquiServe,
L.P. as service agent, preliminarily enjoining them from selling, transferring,
assigning, or otherwise encumbering, disposing of, or diminishing the value of
the Klamath Shares. On or about June 28, 2000, the Payee filed a second amended
complaint with the court, seeking to add, as a party defendant, Klamath. The
Payee is seeking a preliminary injunction enjoining Klamath, as record owner of
the Klamath Shares, from selling, encumbering, or disposing of the Klamath
Shares, and enjoining Klamath from attending meetings of shareholders of the
Company or voting its common shares on matters put to the shareholders of the
Company. The Payee has also filed its motion for entry of default against Mr.
Palatin and Klamath, seeking a default judgment against the defendants and an
order directing the Company's transfer agent to transfer ownership of the
Klamath shares to Payee, in satisfaction of the New York State judgment obtained
by Payee against Mr. Palatin. A hearing on the Company's motion for default
judgment has yet to be set by the Court.
The Company has also obtained a preliminary attachment order in the Swiss
courts against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the common shares of the Company owned by Klamath. A foundation that
claims to be independent of Mr. Palatin has asserted in court that it is the
beneficial owner of the outstanding shares of Klamath. The Company has prevailed
in the trial court and in the court of appeal in its opposition to the
foundation's preliminary objection. The Company intends to proceed to trial in
the Swiss Courts in an attempt to obtain a judgment ordering transfer of the
common shares of the Company owned by Klamath to the Payee in satisfaction of
the indebtedness owed by Mr. Palatin to the Payee.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of the common shares beneficially owned
in the Company by Mr. Palatin to the Payee or by a liquidation of the shares in
an amount sufficient to fully discharge the judgment. The Company is unable to
predict whether it will succeed in achieving this objective.
PREVIOUS REPORTS
Investors are referred to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 for the Company's report on the SEC's
proceedings against Mr. Palatin and the cease-and-desist orders consented to by
Messrs. Weissenberger and Friedberg, former directors and (in the case of Mr.
Palatin and Mr. Weissenberger) former officers of the Company.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 annual meeting of shareholders on January 10,
2001, in Luxembourg. At the meeting, two directors were elected, and the
Company's Non-Employee Directors' Equity Plan and the appointment of Deloitte
Touche Tohmatsu (Deloitte & Touche SA) as the Company's independent auditors for
the 2000 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 10, 2001.
11
15
PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 16, 2001, there were outstanding 9,158,378 common shares. They
were held of record by approximately 415 holders.
Prior to December 1995, there was no trading market for the Company's
common shares. Subsequent to the Company's Public Offering, the common shares
were 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
----------------
HIGH LOW
------ ------
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
March 31, 2000.............................................. $6.875 $5.000
June 30, 2000............................................... $5.375 $4.375
September 30, 2000.......................................... $5.313 $4.500
December 31, 2000........................................... $5.125 $3.875
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.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth consolidated financial information for the
Group 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,
2000, 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
12
16
Condition and Results of Operations" and the 2000 Consolidated Financial
Statements and related notes thereto included elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gross lease revenue......................................... $137,605 $132,140 $157,546 $160,848 $154,011
Commissions, fees and other operating income................ 5,026 5,949 4,955 5,545 7,460
Interest income............................................. 877 1,011 1,154 861 1,333
Equity in earnings of affiliates............................ -- -- -- -- 1,397
Gain on sale of investment.................................. 3,631 1,278 -- 321 5,260
-------- -------- -------- -------- --------
TOTAL REVENUES.............................................. 147,139 140,378 163,655 167,575 169,461
-------- -------- -------- -------- --------
Direct operating expenses................................... 26,626 31,179 35,318 34,217 34,535
Payments to container owners................................ 71,659 63,943 75,527 73,945 72,894
Depreciation and amortization............................... 16,055 16,200 18,714 19,033 14,258
Selling, general and administrative expenses................ 17,580 16,569 21,164 22,683 23,834
Financing and recomposition expenses(1)..................... -- -- 5,375 7,384 2,149
Interest expense............................................ 9,367 10,809 15,718 17,758 11,368
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.............................................. 141,287 138,700 180,245 190,597 159,038
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 5,852 1,678 (16,590) (23,022) 10,423
Income taxes (benefit)...................................... (636) (236) (306) -- 2,441
-------- -------- -------- -------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON SHARES............... $ 5,216 $ 1,914 $(16,896) $(23,022) $ 7,982
-------- -------- -------- -------- --------
Net income (loss) per common share (basic and diluted)...... $ 0.57 $ 0.21 $ (1.91) $ (2.60) $ 0.90
-------- -------- -------- -------- --------
Shares used in:
-- basic net income (loss) per share calculations......... 9,158 8,983 8,858 8,858 8,853
-- diluted net income (loss) per share calculations....... 9,214 8,998 8,858 8,858 8,853
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 6,601 $ 8,701 $ 9,281 $ 14,455 $ 17,278
Total assets................................................ 230,893 231,867 279,979 327,145 399,301
Long-term debt and capital lease obligations................ 81,228 93,401 61,195 88,682 141,435
Total debt and capital lease obligations.................... 99,379 109,978 148,466 171,399 198,989
Shareholders' equity........................................ 64,753 60,370 56,087 73,713 95,576
- ---------------
(1) In 1998, 1997 and 1996, the Group 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.
(2) At December 31, 1997, the Group provided $3.9 million against loans to the
then Chairman due to concern over their collectability and the Group'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 Group 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 Group 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 Group's financial condition and results of
operations should be read in conjunction with the 2000 Consolidated Financial
Statements and the notes thereto and the other financial and statistical
information appearing elsewhere in this Annual Report. The 2000 Consolidated
Financial
13
17
Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP").
GENERAL
The Group generates revenues by leasing to ocean carriers, marine
containers that are owned either by managed container owners or by the Group
itself. These leases, which generate most of the Group's revenues, are generally
operating leases.
The segment information presented in Note 2 to the Group's 2000
Consolidated Financial Statements relates to the portions of the Group's fleet
owned by the Group itself ("Owned Containers"), or by the Group's managed
container programs ("Managed Container Owners"), which are comprised of US
Limited Partnerships and Other Container Owners. Owned Containers include
containers held for resale, the financing costs of which are borne by the Group
prior to the sale of such containers to Managed Container Owners, and are
accounted for in the Owned Container segment. The Group 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 Group 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, 2000, approximately 31%, 45% and 24% of the Group'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 Group has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Group'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 Group's financial statements as leases under which the
container owners are lessors and the Group is lessee. The agreements with
container owners 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 a management fee. The majority of
payments to container owners are therefore contingent upon the leasing of the
containers by the Group to ocean carriers and the collection of lease rentals.
Minimum lease payments on the agreements, which have fixed payment terms are
presented in Note 13 to the Group's 2000 Consolidated Financial Statements. In
2000, over 85% of payments to container owners represented agreements under
which the amounts payable to Managed Container Owners were contingent upon the
leasing of containers to ocean carriers and the collection of lease rentals.
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 Group 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.
The Group has expanded its fleet since December 31, 1996 from 342,800 TEU
to 399,205 TEU at December 31, 2000.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost):
2000 1999 1998
---- ---- ----
Utilization at December 31.................................. 75% 80% 75%
Average utilization during the year......................... 79% 76% 80%
During the first three quarters of 2000, increased demand in many
locations, but most significantly throughout Asia, resulted in growth in the
volume of containerized trade. In the fourth quarter of 2000, the economic
slowdown that materialized in the United States and other locations resulted in
reduced demand for containerized trade and utilization for the combined fleet
fell to 75%.
14
18
During 2000, inventories of idle equipment decreased in Europe but there
has been no appreciable reduction in the US where imports continue to exceed
exports. The Group will seek to strengthen utilization by repositioning off-hire
equipment to locations of greatest demand and by pursuing leasing opportunities
through its global network of marketing resources.
In recent years, the Group has increased its ownership of CPCs and
rolltrailers. Due to their specialized nature, the demand for these products is
less likely to be affected by global economic downturns. Utilization for both
CPCs and rolltrailers was over 90% at December 31, 2000.
The rate of decline in per diem rates in 2000 was not as steep as in
preceding years where rates were under strong downward pressure due to the
combined effects of rationalization in the global shipping industry and
competitive market conditions. Over the course of 2000, the Group's combined per
diem rate fell by approximately 2% from the combined rate at December 31, 1999.
Commissions, fees and other operating income includes acquisition fees
relating to the Group's managed container programs, income from direct financing
leases (principally containers leased under lease-purchase arrangements),
license fee income earned in connection with the manufacture and sale of CPCs
for which the Group owns the patent (see "Fleet Profile" above), fees from the
disposal of used containers, and miscellaneous other fees and income. This item
is affected by the size of new managed programs, the purchase price of
containers acquired for new managed programs, the quantity of CPCs 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 may be categorized as
activity-related, inventory-related, and, legal and other. Activity-related
expenses include agents costs and depot costs such as repairs, maintenance and
handling. Inventory-related expenses relate to off-hire containers and comprise
storage and repositioning costs. These costs are sensitive to the quantity of
off-hire containers as well as the frequency at which containers are
re-delivered. Legal and other expenses include legal costs and provisions for
doubtful accounts.
Payments to container owners reflect the amounts due to Managed Container
Owners, computed in accordance with the terms of the individual agreements.
Selling, general and administrative expenses include all employee and
office costs, professional fees and computer systems costs.
Operating profit or loss, for reported segments, includes items directly
attributable to specific containers in each of the Group's operating segments.
It also includes items not directly attributable to any specific container. Such
indirect items 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 container
depreciation expense. Indirect items allocated across segments include selling,
general and administrative expenses, interest, depreciation and impairment
charges on the Group's non-container assets.
15
19
RESULTS OF OPERATIONS
The following chart represents certain key performance measurements,
expressed as a percentage of total revenues:
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
% % %
Gross lease revenue......................................... 94 94 96
Payments to container owners................................ 49 46 46
Direct operating expenses................................... 18 22 22
Selling, general and administrative expenses................ 12 12 13
Depreciation and amortization............................... 11 12 11
Interest expense............................................ 6 8 10
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Approximately 57% of new container investment (by original equipment cost)
in 2000 was financed within the Managed Container Owners segments, compared to
91% in 1999. The remaining 43% in 2000 and 9% in 1999 was financed within the
Owned Container segment by operating cash flow and new debt. Dry cargo
containers accounted for 88% of the new container investment in 2000, with
rolltrailers and CPCs accounting for the majority of the balance.
Operating profit, (see Note 2 to the 2000 Consolidated Financial
Statements), from US Limited Partnerships increased by approximately $0.4
million, or 15%, from $2.3 million in 1999 to $2.7 million in 2000 as lower
indirect allocations of selling, general and administrative expenses, as well as
interest expense and depreciation expense, more than offset a reduction in
operating profit before indirect items. The reduction in operating profit before
indirect items reflected a smaller fleet size and lower per diem rates, only
partly offset by higher average utilization during 2000 and lower direct
operating expenses.
The Other Container Owners segment generated an operating profit of $1.8
million in 2000 compared to $0.2 million in 1999. Operating profit before
allocations of indirect items increased to $7.4 million in 2000 from $5.9
million in 1999 as the effect of a larger fleet size and higher average
utilization more than offset the reduction in per diem rates. Indirect
allocations of $5.6 million in 2000 were $0.1 million lower than in 1999.
Owned Containers generated an operating profit of $2.4 million in 2000, an
increase of $1.5 million over 1999. Operating profit before indirect items
increased by $1.2 million due to increased net lease revenue and lower interest
expense, which were partly offset by increased depreciation. Net lease revenue
increased as a result of additions to the owned fleet and the improvement in
average utilization during the year. The $0.3 million reduction in indirect
allocations was primarily due to reduced allocations of selling, general and
administrative expenses.
Gross lease revenue increased by approximately $5.5 million, or 4.1%, to
$137.6 million in 2000. The increase was due to a larger fleet size and improved
utilization, partly offset by lower per diem rates.
Commissions, fees and other operating income of $5 million were $0.9
million, or 15.5%, lower than in 1999. A $0.6 million increase in license fee
income earned in connection with the manufacture and sale of the patented CPCs
and a $0.3 million net gain on the disposal of a property were more than offset
by reductions of $0.8 million in product consultancy fees, $0.4 million in
acquisition fees, $0.4 million in finance lease income and $0.2 million in other
fee income.
Investment gains of $3.6 million represented a gain of $3.2 million
realized pursuant to the settlement and sale of shares in two escrow accounts
that had been held pending final determination of post-closing reports and
adjustments relating to the merger of Transamerica and Trans Ocean Limited in
1996, and an additional gain of $0.4 million realized on the settlement of an
additional escrow account.
16
20
Direct operating expenses were $26.6 million in 2000, a decrease of $4.6
million, or 14.6%, compared to 1999. A reduction of $3 million in
inventory-related costs, reflecting a larger on-hire fleet, together with lower
activity-related costs of $1.8 million, more than offset a $0.2 million increase
in legal and other expenses.
Payments to container owners increased to $71.7 million in 2000, an
increase of $7.7 million, or 12.1%, over the prior year. Payments to Other
Container Owners were $45 million in 2000, an increase of $5.3 million, or
13.4%, over 1999 due to a $7.3 million increase in net lease revenue for this
segment. The combined effects of an increase in fleet size, due to the addition
of new container programs, together with the increase in the number of on-hire
containers, was partly offset by lower per diem rates. Payments to US Limited
Partnerships increased by $2.4 million to $26.7 million, an increase of 9.9%
over the prior year.
Depreciation and amortization decreased by $0.1 million, or 0.9%, to $16.1
million during 2000 due to container sales from the Owned Containers segment to
the Other Container Owners segment during 1999. This was partly offset by
additions to fixed assets during 2000.
Selling, general and administrative expenses increased to $17.6 million in
2000, from $16.6 million in 1999, an increase of $1 million, or 6.1%. Reductions
of $0.6 million and $0.4 million, respectively, in manpower and information
technology costs were more than offset by an increase of $1.4 million in non-
operating legal and professional expenses together with a total increase of $0.6
million in legal fees, audit costs and other overhead expenses.
Interest expense of $9.4 million in 2000, was $1.4 million, or 13.3%, lower
than in 1999. This decrease was primarily due to a lower debt balance in 2000.
During 2000, in addition to scheduled debt repayments, the Group utilized
proceeds from the sale of a building, proceeds from the sale of investments, and
the release of cash deposits to prepay $11.8 million of debt.
Income taxes. The Group recorded a charge for income taxes of $636 for the
year, compared to a benefit of $236 in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In 1999, the Group implemented a strategy that was designed to reduce
overhead expenses and to refinance short-term debt.
First, the Group 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 Group 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
17
21
reduction in selling, general and administrative expenses and without the effect
of the $0.8 million impairment loss recorded in 1998 relating to the Group'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 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 represented 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 Group 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 Group recorded an income tax benefit of $0.2 million in
1999 reflecting losses that have arisen in the Group's US operations.
18
22
LIQUIDITY AND CAPITAL RESOURCES
The funding sources available to the Group and its consolidated
subsidiaries include operating cash flow and borrowings. The Group's operating
cash flow is derived from lease revenues generated by the Group's fleet and fee
revenues from its managed container programs. The Group's working capital
requirements generally relate to day-to-day fleet support and servicing the
current portion of long-term debt outstanding. The Group 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. No such dividends were
paid to the Company in either 2000 or 1999.
The Group purchases new containers for its own account and for resale to
its managed container programs. In recent years, the Group has targeted
container purchases to take advantage of strategic purchasing and leasing
opportunities.
Cash from Operating Activities. Net cash provided by operating activities
was $17.8 million, $15 million and $15.2 million in 2000, 1999 and 1998,
respectively. The net cash generated in 2000 included earnings from operations
and an $8.7 million increase in amounts due to container manufacturers. This was
partly offset by a $9.3 million increase in new container equipment for resale
and a $1.6 million increase in the net amounts due from lessees. 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 the 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. The net cash generated in 1998
reflected cash generated from operations and $7.9 million of proceeds from new
container equipment for sale.
Cash from Investing Activities. The Group uses cash from 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 $10.7 million and $18.9 million in 2000 and 1999,
respectively. Net cash used in investing activities was $1.4 million in 1998.
During 2000, the Group generated $10.9 million in proceeds from the sale of a
building and container equipment, and received $1.2 million of funds that had
been held in an escrow account. During 1999, $21.7 million was generated by
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.
Cash from Financing Activities. The Group 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 $30.7 million, $34.5 million and $19 million in 2000, 1999 and
1998, respectively. During 2000, in addition to scheduled debt repayments, the
Group utilized proceeds from the sale of a building, proceeds from the sale of
shares, and the release of cash deposits to prepay $11.8 million of debt. In
1999, the Group utilized the proceeds of a $50 million loan to refinance $47.8
million of indebtedness. In addition, debt and capital lease obligations in 1999
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
CAPITAL EXPENDITURES AND COMMITMENTS
The Group had outstanding orders to purchase container equipment at
December 31, 2000 of $0.5 million. These orders relate to containers to be
purchased for managed container owners or to be financed by the Company using
debt and capital lease funding.
In 2000, the Group utilized $18.6 million of capital lease financing to
fund new container additions.
Capital expenditures for containers in 2000, 1999 and 1998 were $2.1
million, $2.7 million and $1.8 million, respectively. Other capital expenditures
in 2000, 1999 and 1998 were $0.07 million, $0.2 million, and $1.1 million,
respectively.
19
23
During the second quarter of 2000, the Group completed the sale of the head
office of its container leasing operations known as Orchard Lea, located west of
London, England. The building was sold to an unaffiliated third party for
approximately $9.9 million. After payment of expenses and retirement of $5.2
million of mortgage debt, the Group realized net proceeds of $3.5 million. Under
the terms of a further loan agreement, these proceeds were utilized to repay
debt on the scheduled repayment date in the third quarter of 2000. The Group
leased back approximately 10,342 square feet in the office building from the
buyer in the form of two leases, one for 7,000 square feet and the other for
3,342 square feet each. The lease for 7,000 square feet will expire on June 26,
2002, and the lease for 3,342 square feet expired on September 30, 2000.
During 1996 the Group entered into agreements (the "Agreements") to acquire
the patent rights relating to the CPC, the Slimwall CPC and the intellectual
property of Cargo Unit Containers Limited from a third party (the "Seller").
Under the terms of the intellectual property agreement (the "Agreement"), it was
agreed that royalties received by the Group as defined in the Agreement would be
shared equally between the Group and the Seller. In April 2000, the Group
entered into another agreement with the Seller which provided that, in
consideration for the sum of $1 million, the Group would fully discharge any
liabilities for accrued royalties, acquire full right, title and interest that
the Seller may have had to receive royalties in the future and acquire all
residual rights as the Seller had or may have had under the Agreements. In
accordance with the agreed-upon installment payment plan, the Group paid $1
million to the Seller during 2000, thus fulfilling its obligations under the
agreement.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Group will adopt SFAS 133
effective January 1, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position, results of operations,
or cash flows of the Group.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements". The Group adopted SAB No. 101, as
amended, as of December 31, 2000. The adoption of SAB No. 101 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Group.
INFLATION
Management believes that inflation has not had a material adverse effect on
the Group's results of operations.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table sets forth principal cash flows and related weighted
average interest rates by expected maturity dates for debt and capital lease
obligations at December 31, 2000:
EXPECTED MATURITY DATE OF DEBT AND CAPITAL LEASE OBLIGATIONS
-----------------------------------------------------------------
2006 AND
2001 2002 2003 2004 2005 THEREAFTER
-------- -------- -------- -------- ------- -----------
(US DOLLAR EQUIVALENT, IN THOUSANDS)
Long-term debt and capital lease
obligations:
Fixed rate ($US)................... $ 4,547 $ 4,194 $ 4,682 $12,118 $ -- $ --
Average interest rate %............ 8.6 8.6 8.6 8.6 -- --
Variable rate ($US)................ $13,604 $13,841 $14,687 $19,501 $3,478 $8,727
Average interest rate %............ 8.1 8.1 8.1 8.0 8.2 8.2
20
24
Interest rate risk: Outstanding borrowings are subject to interest rate
risk. At December 31, 2000, 74% of total borrowings had floating interest rates.
The Group conducted 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 were 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 Group's revenues are billed
and paid in US dollars. Approximately 82% of costs in 2000 were incurred and
paid in US dollars. Of the remaining costs, approximately 76% are individually
small, unpredictable and were incurred in various denominations. Thus, such
amounts are not suitable for cost-effective hedging.
As exchange rates are outside of the control of the Group, there can be no
assurance that such fluctuations will not adversely affect its results of
operations and financial condition. By reference to 2000, it is estimated that
for every 10% incremental decline in value of the US dollar against various
foreign currencies, the effect would be to reduce cash flows by $1.4 million in
any given year.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
25
PART III
The Company hereby incorporates by reference the information required by
Part III (Items 10, 11, 12, and 13) from the Company's definitive proxy
statement to be filed no later than 120 days after the end of the Company's
fiscal year covered by this annual report. In the event that the Company does
not file its definitive proxy statement with the Commission on or before 120
days after the end of the fiscal year covered by this annual report, then the
Company shall provide the information required by Part III in an amendment to
this annual report, filed not later than the end of the 120-day period.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors and executive officers must file reports with the
SEC indicating the number of common shares of the Company they beneficially own
and any changes in their beneficial ownership. Copies of these reports must be
provided to the Company. Based on its review of the copies of beneficial
ownership reports received by it, or written representations from certain
persons that no Forms 5 were required for those persons, we believe that, during
the fiscal year ended December 31, 2000, all filing requirements applicable to
our officers, directors, and greater than ten-percent beneficial owners were
complied with except that John M. Foy, Nico Sciacovelli and John C. Kirby each
reported a stock option grant on Form 3, rather than on Form 4, because Messrs.
Foy, Sciacovelli and Kirby did not previously report their becoming executive
officers (each of whom owned no securities on the date each became an executive
officer) on a Form 3 report.
22
26
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Independent Auditors' Reports
Report of Independent Public Accountants
Consolidated Balance Sheets -- At December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
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
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION 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)).
23
27
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
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).
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).
24
28
NUMBER EXHIBIT DESCRIPTION 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).
10.21 Agreement for the Sale and Purchase of Orchard Lea,
Berkshire, England. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
Executive Compensation Plans and Arrangements
10.22 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).
10.23 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).
10.24 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 (incorporated
by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1999).
10.25 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).
10.26 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999 (incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1999).
10.27 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000 (incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1999).
10.28 Amended and Restated Employment Agreement between Cronos and
Peter J Younger dated March 24, 2000 (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1999).
10.29 Amended and Restated Employment Agreement between Cronos and
Dennis J Tietz dated March 24, 2000 (incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1999).
10.30 Employment Agreement by and between Cronos Containers S.r.l.
and Nico Sciacovelli dated April 7, 2000 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2000).
10.31 Amended and Restated Employment Agreement between Cronos and E 1
Dennis J Tietz dated December 4, 2000.
10.32 Amended and Restated Employment Agreement between Cronos and E 5
Peter J Younger dated December 4, 2000.
10.33 Amended and Restated Employment Agreement between Cronos and E 10
John Foy dated 1 December, 2000.
10.34 Amended and Restated Employment Agreement between Cronos and E 13
John Kirby dated 1 December, 2000.
10.35 Amended and Restated Employment Agreement between Cronos and E 16
Nico Sciacovelli dated 1 December, 2000.
25
29
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
Other Exhibits
21.1 List of principal wholly-owned subsidiaries at December 31, E 19
2000.
22.1 The Company's Form 8-K dated January 10, 2001, reporting on E 20
matters submitted to a vote of shareholders.
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the E 26
Company's Registration Statement on Form S-8 dated February
25, 2000.
99.2 Item 1 -- "Legal Proceedings" excerpted from the Company's E 31
Form 10-Q dated June 30, 2000, as referred to herein under
Item 3 -- "Legal Proceedings" of this Report.
(b) Reports on Form 8-K
On November 3, 2000 a Current report on Form 8-K was filed by the Company
announcing 3rd quarter 2000 results and that the Company had, over the past
year, explored various alternatives to enhance shareholder value, including
the possible merger or sale of the Company, but no agreement had been
achieved.
On October 2, 2000 a Current report on Form 8-K was filed by the Company
announcing the appointment of Peter J Younger as Chief Operating Officer of
the Company.
26
30
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
By: /s/ DENNIS J TIETZ
------------------------------------
Dennis J Tietz
Chairman of the Board and
Chief Executive Officer
Date: March 26, 2001
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 26, 2001
----------------------------------------- Chief Executive Officer
Dennis J Tietz (Principal Executive Officer)
By /s/ PETER J YOUNGER Director, Chief Operating March 26, 2001
----------------------------------------- Officer,
Peter J Younger Chief Financial Officer, and
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
By /s/ MAURICE TAYLOR Director March 26, 2001
-----------------------------------------
Maurice Taylor
By /s/ CHARLES THARP Director March 26, 2001
-----------------------------------------
Charles Tharp
By /s/ STEPHEN NICHOLAS WALKER Director March 26, 2001
-------------------------------------------
Stephen Nicholas Walker
By /s/ ROBERT M MELZER Director March 26, 2001
-----------------------------------------
Robert M Melzer
27
31
THE CRONOS GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999
AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
AND INDEPENDENT AUDITORS' REPORTS
F-1
32
INDEPENDENT AUDITORS' REPORTS
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheets of The Cronos
Group (a Luxembourg holding company) and its subsidiaries (collectively the
"Group") as of December 31, 2000, and 1999, and the related consolidated
statements of operations, cash flows and shareholders' equity for the years then
ended. These financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Cronos Group and its
subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, CA
February 16, 2001
F-2
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated statements of income, cash
flows and shareholders' equity of The Cronos Group (a Luxembourg holding
company) for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our 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 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 results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States of
America.
We draw attention 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. Paul's House
Warwick Lane
London EC4P 4BN
April 8, 1999
F-3
34
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTES 2000 1999 1998
----- -------- -------- --------
Gross lease revenue................................ $137,605 $132,140 $157,546
Commissions, fees and other operating income:
US Limited Partnerships.......................... 1,318 1,356 1,347
unrelated parties................................ 3,708 4,593 3,608
Interest income.................................... 877 1,011 1,154
Gain on sale of investment:
gain on conversion of investment................. 9 1,502 613 --
realized holding gain............................ 9 2,129 665 --
-------- -------- --------
TOTAL REVENUES..................................... 147,139 140,378 163,655
-------- -------- --------
Direct operating expenses.......................... 26,626 31,179 35,318
Payments to container owners:
US Limited Partnerships.......................... 26,696 24,288 31,922
Other container owners........................... 44,963 39,655 43,605
Amortization of intangible assets.................. 11 710 683 683
Depreciation....................................... 15,345 15,517 18,031
Selling, general and administrative expenses....... 17,580 16,569 21,164
Financing and recomposition expenses............... 4 -- -- 5,375
Interest expense................................... 9,367 10,809 15,718
Reversal of unrealized holding gain on available
for sale securities.............................. 3,9 -- -- 1,929
Impairment losses.................................. 1,3 -- -- 6,500
-------- -------- --------
TOTAL EXPENSES..................................... 141,287 138,700 180,245
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 5,852 1,678 (16,590)
Income taxes (benefit)............................. 5 636 (236) 306
-------- -------- --------
NET INCOME (LOSS).................................. 5,216 1,914 (16,896)
Other comprehensive income:
unrealized holding gain (loss) on available for
sale securities arising during the year....... (300) 848 (730)
reclassification adjustment...................... (533) -- --
-------- -------- --------
COMPREHENSIVE INCOME (LOSS)........................ $ 4,383 $ 2,762 $(17,626)
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND
DILUTED)......................................... 1 $ 0.57 $ 0.21 $ (1.91)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
35
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTES 2000 1999
----- -------- --------
ASSETS
Cash and cash equivalents................................... $ 6,601 $ 8,701
Amounts due from lessees (net).............................. 1 28,334 26,739
Amounts receivable from container owners, including amounts
due from related parties of $5,865 and $5,857 at December
31, 2000 and 1999, respectively........................... 9,851 9,147
New container equipment for resale.......................... 1,7 11,790 2,535
Net investment in direct financing leases, including amounts
due within twelve months of $99 and $1,004 at December 31,
2000 and 1999, respectively............................... 8 99 1,090
Investments, including investments in related parties of $1
and $34 at December 31, 2000 and 1999, respectively....... 3,9 628 1,707
Container equipment, net of accumulated depreciation of
$78,774 and $67,573 at December 31, 2000 and 1999,
respectively.............................................. 3,10 140,751 137,547
Building and other equipment, net of accumulated
depreciation of $11,195 and $11,615 at December 31, 2000
and 1999, respectively.................................... 846 11,807
Restricted cash............................................. 1,418 --
Intangible assets........................................... 11 12,695 13,405
Other assets................................................ 12 17,880 19,189
-------- --------
TOTAL ASSETS................................................ $230,893 $231,867
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
36
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTES 2000 1999
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners, including amounts
payable to related parties of $10,504 and $12,291 at
December 31, 2000 and 1999, respectively.................. $ 23,254 $ 26,620
Amounts payable to container manufacturers.................. 12,314 3,609
Other amounts payable and accrued expenses.................. 15,684 13,799
Debt and capital lease obligations, including amounts due
within twelve months of $18,151 and $16,577 at December
31, 2000 and 1999, respectively........................... 13 99,379 109,978
Income taxes................................................ 3,154 3,031
Deferred income taxes....................................... 5 3,963 4,027
Deferred income and deferred acquisition fees............... 14 8,392 10,433
-------- --------
TOTAL LIABILITIES........................................... 166,140 171,497
-------- --------
Commitments and contingencies............................... 15
SHAREHOLDERS' EQUITY
Common shares, par value $2 per share (25,000,000 shares
authorized; shares issued and outstanding, 9,158,378)..... 16,17,18 18,317 18,317
Additional paid-in capital.................................. 16,17,18 49,925 49,928
Share subscriptions receivable.............................. 17 (79) (82)
Accumulated other comprehensive income...................... 444 1,277
Restricted retained earnings................................ 18 1,832 1,832
Accumulated deficit......................................... (5,686) (10,902)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 64,753 60,370
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $230,893 $231,867
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
37
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTES 2000 1999 1998
----- ------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 5,216 $ 1,914 $(16,896)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
impairment losses....................................... 3 -- -- 6,500
reversal of unrealized holding gain on available for
sale securities...................................... 3 -- -- 1,929
depreciation and amortization........................... 16,055 16,200 18,714
decrease in unamortized acquisition fees................ (1,664) (1,607) (1,907)
provision for losses on accounts receivable............. 1,326 1,331 4,602
gain on disposal of fixed assets........................ (103) (79) (1)
gain on investment securities........................... (550) -- --
increase (decrease) in current and deferred income
taxes................................................ 59 (1,027) (234)
(increase) decrease in new container equipment for
resale............................................... (9,255) (2,220) 7,887
(increase) decrease in amounts receivable:
US Limited Partnerships.............................. (8) 1,881 (427)
unrelated parties.................................... (1,285) 9,636 (465)
increase (decrease) in amounts payable and accrued
expenses:
US Limited Partnerships.............................. (1,787) (996) (2,197)
unrelated parties.................................... 9,807 (10,045) (2,266)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 17,811 14,988 15,239
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of container equipment........................... (2,111) (2,650) (1,822)
Purchase of property and other equipment.................. (65) (176) (1,052)
Proceeds from sales of container equipment................ 2,165 20,724 1,155
Proceeds from sales of property and other equipment....... 8,747 -- 325
Proceeds from sale of investment securities............... 9 764 -- --
Proceeds from release of escrow........................... 1,245 -- --
Proceeds from sale of investment in finance lease
equipment............................................... -- 1,000 --
------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....... 10,745 18,898 (1,394)
------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
38
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTES 2000 1999 1998
----- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of term debt...................... 13 -- 51,116 3,109
Repayments of term debt and capital lease obligations.... (29,238) (85,582) (22,128)
Cash deposits (restricted)............................... (1,418) -- --
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES.................... (30,656) (34,466) (19,019)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................ (2,100) (580) (5,174)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........... 8,701 9,281 14,455
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 6,601 $ 8,701 $ 9,281
======== ======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
interest............................................... $ 8,407 $ 11,328 $ 16,402
income taxes........................................... 1,029 820 786
Cash received during the year for:
interest............................................... 657 494 1,092
income taxes........................................... 30 29 229
Non-cash investing and financing activities:
container equipment acquired under capital lease....... 17,476 1,257 --
reduction of debt/Other amounts receivable from related
parties............................................. -- 5,279 --
capital lease/amounts payable to container
manufacturers....................................... 1,163 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
39
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNRESTRICTED
ACCUMULATED RETAINED
ADDITIONAL SHARE OTHER RESTRICTED EARNINGS TOTAL
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE RETAINED (ACCUMULATED SHAREHOLDERS'
SHARES CAPITAL RECEIVABLE INCOME EARNINGS DEFICIT) EQUITY
------- ---------- ------------- ------------- ---------- ------------ -------------
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................... (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................... 848 848
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1999..... 18,317 49,928 (82) 1,277 1,832 (10,902) 60,370
Net income..................... 5,216 5,216
MEIP lapses.................... (3) 3 --
Change in unrealized holding
gain on available for sale
securities................... (833) (833)
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 2000..... $18,317 $49,925 $ (79) $ 444 $1,832 $ (5,686) $ 64,753
======= ======= ===== ====== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
40
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 that 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 publicly 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, has organized 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. The majority
of 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 lease
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.
F-10
41
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 of America ("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, income on direct financing leases, license
fees earned in connection with the manufacture and sale of dry freight special
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.
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. A valuation allowance is established to reduce the carrying
amounts of deferred tax assets unless it is more likely than not that such
assets will be realized.
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
42
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:
2000 1999 1998
---------- ---------- ----------
Net income (loss) available for common shareholders.... $ 5,216 $ 1,914 $ (16,896)
---------- ---------- ----------
Average outstanding shares of common shares............ 9,158,378 8,983,378 8,858,378
Dilutive effect of:
Executive officer common share options............... 31,358 9,197 --
Warrants............................................. 19,473 5,780 --
1999 stock option plan............................... 5,153 -- --
---------- ---------- ----------
Common shares and common share equivalents............. 9,214,362 8,998,355 8,858,378
========== ========== ==========
Net income (loss) per share (basic and diluted)........ $ 0.57 $ 0.21 $ (1.91)
========== ========== ==========
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 an additional allowance based on loss experience.
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.
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.
F-12
43
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 generally
contingent upon the lease rentals 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 Shareholders' 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 using the
equity method.
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:
Refrigerated container equipment is depreciated over a useful life of 12
years to a residual value of 15%. Dry cargo and other specialized container
equipment is depreciated over a useful life of 15 years to a residual value of
10%.
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.
F-13
44
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
The Group has adopted disclosure requirements under SFAS 123 "Accounting
for Stock-Based Compensation", 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 Management Equity Investment Plan (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 included in
Share subscriptions receivable within Shareholders' equity.
Q) 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 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.
R) RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current presentation adopted in the 2000 financial statements.
S) NEW PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Group will adopt SFAS 133
effective January 1, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position, results of operations,
or cash flows of the Group.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". The Group adopted SAB No. 101, as
F-14
45
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amended, as of December 31, 2000. The adoption of SAB No. 101 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Group.
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, 2000
Items directly attributable to operating
segments:
gross lease revenue.......................... $ 43,288 $ 61,787 $ 32,530 $137,605
direct operating expenses.................... (9,639) (11,091) (5,896) (26,626)
-------- -------- -------- --------
net lease revenue............................ 33,649 50,696 26,634 110,979
payments to container owners................. (26,696) (44,963) -- (71,659)
commissions, fees and other operating
income.................................... 1,317 1,702 2,007 5,026
container depreciation....................... -- -- (14,122) (14,122)
container interest expense................... -- -- (9,070) (9,070)
-------- -------- -------- --------
Operating profit before indirect items......... 8,270 7,435 5,449 21,154
======== ======== ======== ========
Indirect allocations:
interest income.............................. -- 575 302 877
depreciation................................. (385) (549) (289) (1,223)
interest expense............................. (96) (133) (68) (297)
selling, general and administrative
expenses.................................. (5,107) (5,513) (2,963) (13,583)
-------- -------- -------- --------
Operating profit............................... $ 2,682 $ 1,815 $ 2,431 $ 6,928
======== ======== ======== ========
Segment assets................................. $ 14,793 $ 17,112 $159,766 $191,671
======== ======== ======== ========
Expenditure for segment assets................. $ 20 $ 29 $ 19,603 $ 19,652
======== ======== ======== ========
Reconciliation of operating profit for reportable segments to income before
taxes:
Operating profit............................................ $ 6,928
Gain on sale of investment.................................. 3,631
Unallocated selling, general and administrative expenses.... (3,997)
Amortization of intangibles................................. (710)
-------
Income before taxes......................................... $ 5,852
=======
Reconciliation of assets for reportable segments to total assets:
Total assets for reportable segments........................ $191,671
General corporate assets.................................... 39,222
--------
Total assets................................................ $230,893
========
F-15
46
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, 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
container depreciation....................... -- -- (13,958) (13,958)
container 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
47
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
container depreciation....................... -- -- (16,403) (16,403)
container 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
========
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-17
48
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:
2000 1999 1998
-------- -------- --------
Dry cargo containers....................................... $ 99,853 $ 93,813 $114,373
Refrigerated containers.................................... 24,899 26,413 29,901
Tanks...................................................... 6,481 7,050 8,269
Dry freight specials....................................... 6,372 4,864 5,003
-------- -------- --------
Total...................................................... $137,605 $132,140 $157,546
======== ======== ========
No single customer accounted for 10% or more of total revenues in the years
ended December 31, 2000, 1999 and 1998, respectively.
Almost all of the Group's lease revenue is earned on containers used by its
customers in global trade routes. Accordingly, the Group believes that it does
not possess discernible geographic reporting segments as defined in SFAS No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information".
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS IN 1998
In the fourth quarter of 1998 the Group recorded asset impairment and other
charges, the aggregate of which increased the 1998 net loss by $11,929 ($1.35
per share). There were no such charges in the fourth quarters of 2000 and 1999,
respectively.
A) IMPAIRMENT LOSSES
In December 1998, the Group recorded charges relating to the impairment of
certain long-lived assets as required by SFAS 121.
Impairment losses comprised:
1998
------
Container equipment....................................... $4,500
Building.................................................. 2,000
------
Total..................................................... $6,500
======
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
F-18
49
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
disposed of 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 in the year ended December 31,
1998.
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.
ii. 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. At December 1998, management had concluded that the building should
continue to be held for use and any decision regarding disposal deferred until a
later date. During 2000, management re-evaluated the market for real estate
properties of this nature and the building was subsequently sold in June 2000 at
a net gain of $300.
B) OTHER ADJUSTMENTS
i. Restructuring program
During 1998, the Group announced a restructuring program, which was
designed to reorganize the Group's key activities into three divisions:
- Leasing
- Capital Markets and Investor Services
- Finance and Administration
This program, which commenced in December 1998 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.
F-19
50
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ii. 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 9). 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 IN 1998
Financing and recomposition expenses comprise:
NOTES 1998
----- ------
Restructuring plan.......................................... 3 $2,000
Loan penalty fees........................................... 1,803
Loan extension costs -- legal and professional fees......... 738
Other legal and professional fees........................... 640
Audit and compliance........................................ 194
------
$5,375
======
I. LOAN PENALTY FEES
During 1998 the Group incurred loan penalty fee charges relating to the
failure to repay certain loan facilities by the due date and to the subsequent
extension of the loan agreements. The Group made loan penalty fee payments
totalling $1,701 in 1998 and 1999 and the balance of $102 was credited to
operations in 1999.
II. LOAN EXTENSION COSTS -- LEGAL AND PROFESSIONAL FEES
In 1998, 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. In this regard, the Group made payments of
$192 and $546 in the years ended December 31, 1999 and 1998, respectively.
III. OTHER LEGAL AND PROFESSIONAL FEES
During the year ended December 31, 1998, 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. The costs were paid as they were incurred.
IV. AUDIT AND COMPLIANCE
During 1998, 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 15) and with SEC filings. A payment of
$194 was made during the year ended December 31, 1998.
F-20
51
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:
2000 1999 1998
----- ------- ----
Current taxes:
Federal................................................... $ (17) $ 75 $ --
Foreign................................................... 717 637 309
----- ------- ----
700 712 309
----- ------- ----
Deferred taxes:
Federal................................................... (729) (1,219) (3)
State..................................................... (135) (247) --
Withholding............................................... 11 -- --
Foreign................................................... 789 518 --
----- ------- ----
(64) (948) (3)
----- ------- ----
Total provision (benefit) for income taxes.................. $ 636 $ (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:
2000 1999 1998
------- ------- -------
Expected US federal provision (benefit)..................... $ 1,989 $ 579 $(5,495)
Foreign income not subject to US corporate taxes............ (2,568) (1,154) 5,341
Tax impact of net loss carried forward...................... -- -- 516
State taxes (net of Federal tax benefit).................... (102) (158) --
Foreign corporate taxes..................................... 1,507 1,155 309
Tax on unremitted retained earnings of subsidiaries......... 11 -- --
Release of valuation allowance.............................. (112) (345) --
Other....................................................... (89) (313) (365)
------- ------- -------
Actual tax provision (benefit).............................. $ 636 $ (236) $ 306
======= ======= =======
Income (loss) before income taxes comprises:
2000 1999 1998
------- ------- --------
United States............................................... (1,702) (2,753) (2,026)
Foreign..................................................... 7,554 4,431 (14,564)
------- ------- --------
$ 5,852 $ 1,678 $(16,590)
======= ======= ========
F-21
52
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:
2000 1999
------ -------
ASSETS
Acquisition fees............................................ $2,017 $ 2,588
Losses carried forward...................................... 1,092 1,945
Disallowed interest expense carried forward................. 1,491 1,489
Alternative minimum tax credit.............................. 57 75
Other....................................................... 85 208
------ -------
Total deferred income tax assets............................ 4,742 6,305
------ -------
LIABILITIES
Depreciation................................................ 6,102 7,257
Partnership income taxable in different periods for book and
tax purposes.............................................. 1,554 1,926
Unremitted retained earnings of subsidiaries................ 277 265
Valuation allowance......................................... 772 884
------ -------
Total deferred income tax liabilities....................... 8,705 10,332
------ -------
Net deferred income tax liabilities......................... $3,963 $ 4,027
====== =======
Tax losses have arisen in certain US entities. As of December 31, 2000 the
deferred tax asset associated with these losses carried forward will expire as
follows:
2001........................................................ $ 25
2002........................................................ 46
2003........................................................ 107
2004........................................................ 74
2005........................................................ 46
2006 and thereafter......................................... 474
----
Total....................................................... $772
====
At December 31, 2000, the Group had net operating loss carryforwards
available of approximately $1,301, $3,699 and $1,063 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 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, 2000 and 1999
was $786 and $1,040, respectively, based on unremitted earnings of $2,620 and
$3,466, respectively.
F-22
53
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6 AMOUNTS DUE FROM LESSEES
a) Lease rentals
As of December 31, 2000 the minimum lease rentals receivable in future
years under term operating leases were:
2001....................................................... $22,301
2002....................................................... 15,421
2003....................................................... 10,745
2004....................................................... 7,179
2005....................................................... 2,980
2006 and thereafter........................................ 3,468
-------
Total...................................................... $62,094
=======
Contingent rentals approximated 75%, 70% and 71% of gross lease revenue in
the years ended December 31, 2000, 1999 and 1998, respectively.
b) Allowance for doubtful accounts
The activity in the allowance for doubtful accounts was:
2000 1999 1998
------- ------- -------
Balance, January 1.......................................... $ 3,569 $ 4,446 $ 3,106
Provision for doubtful accounts............................. 1,326 1,331 4,602
Write-offs, net of recoveries............................... (2,130) (2,208) (3,262)
------- ------- -------
Balance, December 31........................................ $ 2,765 $ 3,569 $ 4,446
======= ======= =======
7 NEW CONTAINER EQUIPMENT FOR RESALE
Activity during the year in new container equipment for resale was:
2000 1999 1998
-------- -------- -------
Beginning of year........................................... $ 2,535 $ 315 $ 8,202
Container purchases......................................... 45,592 20,640 671
Container disposals
sold to container owners.................................. (33,258) (18,420) (8,558)
transferred to long term ownership of container
equipment.............................................. (3,079) -- --
-------- -------- -------
End of year................................................. $ 11,790 $ 2,535 $ 315
======== ======== =======
As part of organizing the US public limited partnerships the Group
purchases containers for resale to these partnerships. For the years ended
December 31, 2000, 1999 and 1998 containers purchased and resold to these
partnerships amount to $6,425, $964 and $0, respectively. These transactions
were entered into on normal commercial terms.
F-23
54
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8 NET INVESTMENT IN DIRECT FINANCING LEASES
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, 2000......................................... $ 99 $ 3 $ 102
====== ==== ======
December 31, 1999......................................... $1,090 $113 $1,203
====== ==== ======
9 INVESTMENTS, INCLUDING INVESTMENTS IN RELATED PARTIES
Investments comprise:
2000 1999
---- ------
Investment in US Limited Partnerships....................... $ 1 $ 34
Investment securities available for sale:
cost...................................................... 183 396
unrealized holding gain................................... 444 1,277
---- ------
$628 $1,707
==== ======
I. INVESTMENT IN US LIMITED PARTNERSHIPS
The Group has a general partnership investment and a further limited
partnership investment in eight sponsored funds. These general and limited
partner investments are accounted for using the equity method. For several of
the limited partnership investments, distributions have exceeded the sum of the
investment in the partnership and the profit recognized under the equity method
by a total of $493 and $327 at December 31, 2000 and 1999, respectively. For
these partnerships, the net balance is included in Amounts payable to container
owners.
II. INVESTMENT SECURITIES
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 a related unrealized holding gain recorded in 1996,
on the merger (the "Merger") of Transamerica and Trans Ocean Limited. 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 held.
F-24
55
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 previously recognized multiplied by the
approximate share value on the Merger date. The realized holding gain is
computed as the total number shares released from escrow multiplied by the share
appreciation between the Merger date and the date of sale.
At December 31, 1999, the Group had an interest in 68,531 shares in Aegon.
Of these shares, a total of 50,828 were 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.
During the year ended December 31, 2000, the Group recorded a gain of
$3,170 resulting from the settlement and sale of shares in the two escrow
accounts held pending final determination of post-closing reports and
adjustments. In addition, the Group recorded a gain of $461 in connection with
an interim settlement of the escrow subject to the terms of the tax
indemnification agreement.
During 2000, Aegon announced a 2-for-1 common share split, for each common
share held. At December 31, 2000, the Group had an interest in 16,281 shares in
Aegon.
10 CONTAINER EQUIPMENT
The activity in container equipment for the years ended December 31, 2000
and 1999 was:
COST
Balance, December 31, 1998.................................. $227,883
Additions................................................... 3,907
Disposals................................................... (26,670)
--------
Balance, December 31, 1999.................................. 205,120
Additions................................................... 19,587
Disposals................................................... (5,182)
--------
Balance, December 31, 2000.................................. $219,525
========
ACCUMULATED DEPRECIATION
Balance, December 31, 1998.................................. $ 59,640
Depreciation expense........................................ 13,958
Disposals................................................... (6,025)
--------
Balance, December 31, 1999.................................. 67,573
Depreciation expense........................................ 14,122
Disposals................................................... (2,921)
--------
Balance, December 31, 2000.................................. $ 78,774
========
BOOK VALUE
December 31, 2000........................................... $140,751
========
December 31, 1999........................................... $137,547
========
The depreciation expense in 1998 was $16,403
F-25
56
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, 1998.................................. $2,096 $16,231 $18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 1999.................................. 2,096 16,231 18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 2000.................................. $2,096 $16,231 $18,327
====== ======= =======
ACCUMULATED AMORTIZATION
Balance, December 31, 1998.................................. $ 438 $ 3,801 $ 4,239
Amortization expense........................................ 188 495 683
------ ------- -------
Balance, December 31, 1999.................................. 626 4,296 4,922
Amortization expense........................................ 186 524 710
------ ------- -------
Balance, December 31, 2000.................................. $ 812 $ 4,820 $ 5,632
====== ======= =======
BOOK VALUE
December 31, 2000........................................... $1,284 $11,411 $12,695
====== ======= =======
December 31, 1999........................................... $1,470 $11,935 $13,405
====== ======= =======
The amortization expense in 1998 was $683.
I. GOODWILL
Goodwill arose on the acquisition in 1990 of Intermodal Equipment
Associates and the acquisition in 1996 of Intermodal Management AB.
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 entered into agreements (the "Agreements") to acquire the patent
rights relating to the Cellular Palletwide Container ("CPC"), the Slimwall CPC
and the intellectual property of Cargo Unit Containers Limited ("CUC") in August
1996 for a total consideration of $2,096 from a third party ("the Seller"). In
April 2000, the Group entered into another agreement with the Seller which
provided that, in consideration for the sum of $1,000, the Group would fully
discharge any liabilities for accrued royalties, acquire full right, title and
interest that the Seller may have had to receive royalties in the future and
acquire all residual rights as the Seller had or may have had under the
Agreements. 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
F-26
57
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12 OTHER ASSETS
Other assets includes the following items:
2000 1999
------ ------
Residual interests in leased containers..................... 7,305 7,305
Retention deposits.......................................... 4,054 3,798
Deposits held in escrow for third party container owners.... 919 2,026
Other deposits held in escrow............................... 255 531
Unamortized loan origination fees........................... 2,477 3,351
Prepaid expenses............................................ 1,145 426
Other....................................................... 1,725 1,752
------ ------
17,880 19,189
====== ======
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 totalling $7,305. 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 one US dollar 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 exceed the
carrying value of the loan notes.
II. Amounts of $4,054 and $3,798 were held as retention deposits by financial
institutions in connection with long term funding transactions at December 31,
2000 and 1999, respectively. At December 31, 2000, the remaining release dates
for these amounts ranged from between 2000 and 2005 in accordance with the terms
of the funding transactions (see Note 13).
III. At December 31, 2000 and 1999, deposits of $919 and $2,026, respectively,
were held in escrow accounts relating to amounts due to third party container
owners (see Note 15).
IV. At December 31, 2000 and 1999 amounts of $255 and $531, respectively, were
held as a restricted cash deposit in an escrow account under the terms of a tax
indemnification agreement (see Note 9).
13 DEBT AND LEASE OBLIGATIONS
As of December 31, 2000, the Group had $99,379 of term facilities
(including capital lease financing) under which $99,379 was outstanding and
$6,500 of credit facilities under which $0 was outstanding. Interest rates under
these facilities ranged from 6.5% to 9.6%. The terms of these facilities extend
to various dates through 2010.
F-27
58
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Debt and capital lease obligations are comprised of:
INTEREST
2000 1999 RATES %
------- -------- ---------
Debt:
Floating rate debt, due 2004.............................. $34,055 $ 48,125 7.6 - 8.3
Fixed rate debt, due 2004................................. 19,099 21,399 8.7
Floating rate debt, due 2004.............................. 12,286 14,857 7.7 - 8.0
Other loans, due 2000 -- 2004............................. 4,871 13,622 8.1 - 9.6
------- --------
Total debt.................................................. 70,311 98,003
Obligations under capital leases, due 2000 -- 2010.......... 29,068 11,975 6.5 - 8.6
------- --------
Total....................................................... $99,379 $109,978
======= ========
A) DEBT
Debt is comprised of:
2000 1999
------- -------
Long-term debt:
Bank term loans
fixed rate................................................ $20,571 $29,698
variable rate............................................. 49,740 68,305
------- -------
70,311 98,003
Less: current maturities of long term debt.................. 14,445 14,390
------- -------
$55,866 $83,613
======= =======
Bank loans are secured by the Group's container equipment 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, 2000, 1999 and 1998 were 8.4%, 8.4%, and 9.0%, respectively.
As of December 31, 2000, the estimated fair value of fixed rate long-term
debt was $20,394 (1999 -- $29,504) for which the carrying value was $20,571
(1999 -- $29,698). The fair value of fixed rate long-term debt has been
calculated using the market rates prevailing at December 31, 2000 and 1999.
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 Fortis Bank 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.
In conjunction with the new facility, the Group agreed to new quarterly
financial covenants relating to minimum tangible net worth, maximum level of
total liabilities to tangible net worth, interest expense coverage and debt
service, and other covenants relating to the filing of financial statements and
management information with its current lenders. The Group was in compliance
with such covenants at December 31, 2000.
F-28
59
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 2000, the annual maturities of debt were:
2001....................................................... $14,445
2002....................................................... 14,008
2003....................................................... 14,848
2004....................................................... 27,010
-------
Total...................................................... $70,311
=======
B) CAPITAL LEASE OBLIGATIONS
The cost and net book value of assets acquired through capital leases was
$36,437 and $29,248, respectively, at December 31, 2000, ($20,696 and $13,672,
respectively, at December 31, 1999). Amortization in respect of these leases is
included in depreciation expense. The aggregate capital lease obligations are
secured by container equipment.
As of December 31, 2000, the minimum lease payments under capital leases
representing interest and principal were:
PRINCIPAL INTEREST TOTAL
--------- -------- -------
2001........................................................ $ 3,706 $2,250 $ 5,956
2002........................................................ 4,027 1,949 5,976
2003........................................................ 4,521 1,622 6,143
2004........................................................ 4,609 1,268 5,877
2005........................................................ 3,478 863 4,341
2006 and thereafter......................................... 8,727 1,729 10,456
------- ------ -------
Total....................................................... $29,068 $9,681 $38,749
======= ====== =======
At December 31, 1999 the current maturities under capital leases were
$2,187.
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 $10,291, $10,339 and $8,049
for the years ended December 31, 2000, 1999 and 1998, respectively.
Rental expense for containers, the majority of which is contingent as
described in Note 1, is shown in the Statement of Operations as Payments to
container owners. Rental expense for those leases which carry fixed payment
terms was $8,675, $8,783, and $6,456 for the years ended December 31, 2000, 1999
and 1998, respectively.
Rental expense for computer equipment and office space was $1,616, $1,556
and $1,593 for the years ended December 31, 2000, 1999 and 1998, respectively.
F-29
60
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 2000 future minimum lease payments under these
non-cancellable operating leases were:
2001....................................................... $10,880
2002....................................................... 10,198
2003....................................................... 6,405
2004....................................................... 5,445
2005....................................................... 3,839
2006 and thereafter........................................ 11,764
-------
Total...................................................... $48,531
=======
ii. Group as lessor
The Group sub-leases containers to ocean carriers under operating leases,
as described in Note 1. The Group also sub-leases office space and earned
revenue of $315, $250 and $211 for the years ended December 31, 2000, 1999 and
1998, respectively.
Rental income from sub-leasing containers owned by third party container
owners to ocean carriers was $105,075, $100,445 and $117,690 for the years ended
December 31, 2000, 1999 and 1998, respectively (see Note 2). These amounts are
included in Gross lease revenue in the statement of operations.
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 DEFERRED INCOME AND DEFERRED ACQUISITION FEES
Deferred income and deferred acquisition fees comprise:
2000 1999
------ -------
Advance billings............................................ $1,577 $ 1,954
Deferred acquisition fees................................... 6,815 8,479
------ -------
$8,392 $10,433
====== =======
The recognition of deferred 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 deferred fees are recognized immediately.
As of December 31, 2000 deferred acquisition fees are scheduled to be recognized
as follows:
2001........................................................ $1,572
2002........................................................ 1,312
2003........................................................ 1,138
2004........................................................ 900
2005........................................................ 675
2006 and thereafter......................................... 1,218
------
Total....................................................... $6,815
======
F-30
61
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15 COMMITMENTS AND CONTINGENCIES
I. COMMITMENTS
The Group had outstanding orders to purchase container equipment at
December 31, 2000 of $503. These orders relate to containers to be purchased for
container owners and for the Group.
II. GUARANTEE
During 2000, the Group provided a guarantee under a $5,000 third party loan
note (the "Note") to a US Limited Partnership. Under the terms of the guarantee,
the Group may be liable for any principal and interest outstanding under the
terms of the Note in the event of a default by the US Limited Partnership.
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, the Group 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 Group is in a dispute with Contrin over funds that Contrin claims to
have remitted to the Group for the purchase of containers. Contrin claims that
in 1994 it transmitted $2,600 to the Group for the purchase of containers. The
Group did not receive these funds and believes that the funds were diverted to
an account controlled by Stefan M. Palatin, a former Chairman and Chief
Executive Officer of the Group, and that this was known or should have been
known by Contrin. The Group also believes that the bank that received the funds,
Barclays Bank PLC ("Barclays"), may be at fault. 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.
F-31
62
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. On December 31, 2000, the balance of this accrual was $3,100.
In August 2000, Contrin filed an action in the Luxembourg District Court
against the Group seeking recovery of $2,600, together with interest and costs.
In January 2001, the Group responded to Contrin's complaint, requesting that the
District Court dismiss the proceeding for lack of jurisdiction over the dispute.
The Group intends to contest Contrin's claims, on the merits, if its motion to
dismiss is not granted, but is unable to predict the outcome of the dispute.
To preserve its rights of indemnity in the face of Contrin's claims, the
Group, on June 1, 2000, filed a protective claim in the High Court of Justice,
London, England, against Mr. Palatin and his wife. By its claim, the Group seeks
to establish that the Palatins' are liable to the Group for any liability, which
the Group may have to Contrin arising out of the 1994 transfers. The Palatins',
through their counsel, are contesting the jurisdiction of the High Court of
Justice over them. The hearing on the Palatins' motion to dismiss the proceeding
for lack of jurisdiction is scheduled to be heard on April 6, 2001.
On July 13, 2000, the Group also filed a protective claim against Barclays
in the High Court of Justice, London, England. By its claim, the Group seeks a
declaration that Barclays is liable to the Group for $2,600, plus interest and
costs, arising out of Contrin's 1994 transfer to an account with Barclays in the
name of Ms. Palatin. Now that Contrin has initiated its action against the
Group, the Group is pursuing an examination of documents from Barclays to
evaluate whether the Group can prosecute its claim of indemnity against
Barclays.
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 Group had no access to the records of the alleged transactions and insofar
as the Group has managed the containers, the Group 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 terminated management agreements
approximated:
1998
------
Gross lease revenue......................................... $2,127
------
Income before income taxes.................................. $ 334
------
Management considers that prudent provision has been made in the financial
statements for the matters noted above. There is a reasonable possibility that a
material change could occur with respect to these commitments and contingencies
within one year of the date of these financial statements. In such an event,
management estimates that possible losses could exceed the amount accrued by
$1,700.
F-32
63
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 2000 and 1999, the Group had $919 and $531,
respectively, in amounts payable to TOEMT on deposit in an escrow bank account
pending resolution of certain matters relating to the liquidation process. Over
the past year, the Group has become aware that more than one creditor of TOEMT
may claim an interest in the distributions made by the Group with respect to the
containers owned by TOEMT. At the present time, the Group has insufficient
information to evaluate the competing claims or to determine whether the Group
may have any liability to the competing creditors for the prior distributions
made with respect to the TOEMT containers.
16 COMMON SHARES
2000 1999 1998
--------- --------- ---------
Common shares outstanding:
At beginning of year...................................... 9,158,378 8,858,378 8,858,378
New common shares issued.................................. -- 300,000 --
--------- --------- ---------
At end of year............................................ 9,158,378 9,158,378 8,858,378
========= ========= =========
On December 11, 1998, an option to purchase 300,000 common shares was
granted to Mr. Tietz on his appointment as Chief Executive Officer (see Note
17).
On June 3, 1999, the 1999 Stock Option Plan ("the Plan") was approved by
the Board of Directors. The plan authorizes the issuance of 500,000 common
shares to key employees (see Note 17).
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). 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 October 29, 1999, a Shareholder Rights Plan (the "Rights Plan") was
adopted. Under the Plan one common share purchase right was distributed as a
dividend on each share of the Company's common shares as of the close of
business on October 25, 1999. The rights will be attached to and trade with all
certificates representing common shares. 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 shares. 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.
F-33
64
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 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, 2000, outstanding options to acquire 102,600 common
shares were held by 13 employees. The main terms of the plan are as follows:
i. The MEIP consists of "option units" and options to acquire common shares of
the Company ("share options"). Each option unit grants the key employee the
right to acquire four common shares of the Company at four different exercise
prices. The key employee must pay an option unit price to acquire such rights.
Upon payment of the option unit price, the related share options become
immediately exercisable. The exercise price for both the option units and the
share options was determined at the date of grant.
ii. During 1995 and 1996, 54,000 share options became exercisable. No option
units were purchased subsequent to 1996.
iii. Members of the MEIP may only exercise vested options within seven years of
November 25, 1994, the date of grant. Unexercised options will expire
thereafter. There were no new option units granted subsequent to November 25,
1994. As of December 31, 2000, unexercised options have a remaining contractual
life of 11 months.
The granting of the options did not result in additional compensation in
2000 for the key employees who have joined the MEIP. As of December 31, 2000,
the options are estimated to have a $0 fair 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
2000, 1999 and 1998. 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, 2000, outstanding unpaid options amount to $79, and are
reported as Share Subscriptions Receivable within Shareholders' Equity. The
exercise price for each option unit and related share option at December 31,
2000 was as follows:
NUMBER OPTION SHARE
OF SHARES UNIT PRICE OPTION PRICE
AT DECEMBER 31 PER SHARE PER SHARE
-------------- ---------- ------------
Option 1........................................ 25,650 $1.43 $14.30
Option 2........................................ 25,650 $1.56 $15.60
Option 3........................................ 25,650 $1.69 $16.90
Option 4........................................ 25,650 $1.82 $18.20
-------
Total................................. 102,600
=======
The options purchased by key employees represent a potential ownership
interest, on a fully diluted basis, of 1% of common shares. Options over 10,800
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 common
shares in the Company at an exercise price of $4.375 per
F-34
65
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
share, the closing price of the common shares 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
shares 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 2000. There were no significant modifications of outstanding
awards during 2000. 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:
2000 1999 1998
------ ------ --------
Net income (loss):
as reported.......................................... $5,216 $1,914 $(16,896)
pro forma............................................ 5,216 1,914 (17,346)
Net income (loss) per share (basic and diluted):
as reported.......................................... $ 0.57 $ 0.21 $ (1.91)
pro forma............................................ $ 0.57 $ 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 common share 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 shares 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-employee director,
with a grant price of $4.094. On October 13, 1999, the closing price of the
Company's common shares 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 shares 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 shares. 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
F-35
66
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
market value of a share of common shares 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 common shares of the Company, the declaration of a dividend payable
in common shares 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 shares 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.
Compensation expense of $62 and $13 was recognized for the years ended December
31, 2000 and 1999, respectively.
No units were redeemed during the year ended December 31, 2000.
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 common shares 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
shares of the Company, the declaration of a dividend payable in common shares 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 shares 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.
On February 4, 2000, the Compensation Committee of the Board authorized the
grant of options for 420,000 shares of common shares 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. The fair value of the option at the date of the grant was $639. In order
to determine fair value, the Company used the Black Scholes model using a
risk-free rate of 8%, an expected life of 3 years, an expected volatility of
2.94% and no expected dividends. If the stock options had been accounted for
under SFAS 123 the impact on the Company's net income and net income per share
would have been as follows:
2000
------
Net income:
as reported............................................... $5,216
pro forma................................................. 4,816
Basic net income per share:
as reported............................................... $ 0.57
pro forma................................................. $ 0.53
Diluted net income per share:
as reported............................................... $ 0.57
pro forma................................................. $ 0.52
F-36
67
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
E) THE CRONOS GROUP NON-EMPLOYEE DIRECTOR'S EQUITY PLAN
The Non-Employee Director's Equity Plan ("the Equity Plan"), was approved
by the shareholders at the 2000 Annual Meeting on January 10, 2001. The Plan is
designed to attract, motivate and retain non-employee directors of outstanding
ability and assisting the Company in promoting a greater identity of interest
between the Company's non-employee director's and its shareholders. A
non-employee Director will participate in the Equity Plan in two ways: by
electing to receive, in lieu of the cash compensation otherwise payable to the
non-employee Director, an award of "director's stock units", and through the
receipt of non qualified stock options ("director's options") to acquire common
shares of the Company. The number of shares available for issuance under the
Plan may be adjusted in the event of any subdivision of the outstanding common
shares of the Company, the declaration of a dividend payable in common shares of
the Company, or like events. Each non-employee Director will be granted the
option to purchase 15,000 shares of common shares. On each anniversary of the
first date of grant, the non-employee Director's shall automatically be granted
a director's option to purchase an additional 15,000 common shares. The exercise
price of each director's option will be the average of the fair market value of
the common shares for the twenty trading days immediately preceding the date of
grant of the director's options. The Equity Plan terminates on 31 December,
2003, after which no awards will be made.
A total of 275,000 common shares will be available for issuance under the
Plan, both to supply shares for the settlement of director's stock units into
common shares of the Company and for issuance upon the exercise of director's
options.
Additionally, the current non-employee Directors were granted the option to
convert the SARs granted on October 13, 1999 into director's options under the
Equity Plan. This right of conversion was exercised by the non-employee
Directors within thirty days of the date that the Equity Plan was approved by
the shareholders.
18 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. At December 31, 2000 the legal reserve represented 10% of the stated
capital and no appropriation to the reserve was required.
19 RELATED PARTY TRANSACTIONS
The Group had the following transactions with related parties during the
three years ended December 31, 2000, 1999 and 1998, respectively:
I. During 1998, an ocean carrier in which a then director of the Company was a
non-employee director ceased doing business. The ocean carrier leased containers
from the Group. 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. During the year ended December 31, 1998, payments totalling $150 were made
to a former non-employee director of the Company, Dr. Axel Friedberg, for legal
fees. In addition Mr. Friedberg has submitted a statement to the Company for the
balance due for legal services rendered to the Company in the amount of
F-37
68
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
$100. In the report of the Special Litigation Committee of the Company's Board
of Directors (the "Committee"), dated March 31, 2000, the Committee recommended
that the Company reject Dr. Friedberg's statement, and the Company has done so.
III. In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York, for payment of the remaining balances
due under two promissory notes, both dated July 14, 1997 (the "Palatin Notes"),
by and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin,
as payor. The original principal amount of the Palatin Notes was $9,600. Mr.
Palatin made no payments under the Palatin Notes, which were due on October 31
and December 31, 1997, respectively. The amounts due under the Palatin Notes
were reduced by $5,279 as a result of the sale, on or about June 21, 1999, of
1,463,636 common shares of the Company by certain of the Company's lenders (the
indebtedness of the Company to the lenders was reduced by a like amount). The
shares had been acquired by the banks by pledge from the Company to secure, in
part, indebtedness owed by the Company to the banks. As a result of the sale of
the shares, Mr. Palatin owed the Company, at the time the Company filed its
complaint in New York Supreme Court, $6,227 in principal under the Palatin
Notes.
Mr. Palatin did not respond to the Company's lawsuit, and on February 8,
2000, the Supreme Court of the State of New York entered its default judgment
against Mr. Palatin in the amount of $6,583.
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
common shares of the Company owned of record by Klamath (the "Klamath Shares").
On February 28, 2000, the Payee obtained a preliminary injunction order from the
Superior Court of the Commonwealth of Massachusetts, Norfolk County, against Mr.
Palatin and against the Company's transfer agent preliminarily enjoining them
from selling, transferring, assigning, or otherwise encumbering, disposing of,
or diminishing the value of the Klamath Shares. On or about June 28, 2000, the
Payee filed a second amended complaint with the court, seeking to add, as a
party defendant, Klamath. The Payee is seeking a preliminary injunction
enjoining Klamath, as record owner of the Klamath Shares, from selling,
encumbering, or disposing of such shares, and enjoining Klamath from attending
meetings of shareholders of the Company or voting its common shares on matters
put to the shareholders of the Company.
The Company has also obtained a preliminary attachment order in the Swiss
courts against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the common shares of the Company owned by Klamath. The record owner
of the shares of Klamath has resisted responding to the preliminary attachment
order, and a foundation that claims to be independent of Mr. Palatin has
asserted in court that it is the exclusive owner of the outstanding shares of
Klamath. The Company has prevailed in the trial court and in the court of appeal
in its opposition to the foundation's preliminary objection. The Company intends
to proceed to trial in the Swiss Courts in an attempt to obtain a judgment
ordering transfer of the common shares of the Company owned by Klamath to the
Payee in satisfaction of the indebtedness owed by Mr. Palatin to the Payee.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of the common shares beneficially owned
in the Company by Mr. Palatin to the Payee or by a liquidation of the shares in
an amount sufficient to fully discharge the judgment. The Company is unable to
predict whether it will succeed in achieving this objective.
IV. Amounts of $34 and $436 were paid for services, for the years ended
December 31, 1999 and 1998, 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.
F-38
69
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
V. As indicated in Note 15, 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-39
70
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION 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)).
71
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
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).
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).
10.21 Agreement for the Sale and Purchase of Orchard Lea,
Berkshire, England. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
Executive Compensation Plans and Arrangements
10.22 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).
72
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
10.23 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).
10.24 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 (incorporated
by reference to Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1999).
10.25 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).
10.26 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999 (incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1999).
10.27 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000 (incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1999).
10.28 Amended and Restated Employment Agreement between Cronos and
Peter J Younger dated March 24, 2000 (incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1999).
10.29 Amended and Restated Employment Agreement between Cronos and
Dennis J Tietz dated March 24, 2000 (incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1999).
10.30 Employment Agreement by and between Cronos Containers S.r.l.
and Nico Sciacovelli dated April 7, 2000 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2000).
10.31 Amended and Restated Employment Agreement between Cronos and E 1
Dennis J Tietz dated December 4, 2000.
10.32 Amended and Restated Employment Agreement between Cronos and E 5
Peter J Younger dated December 4, 2000.
10.33 Amended and Restated Employment Agreement between Cronos and E 10
John Foy dated 1 December, 2000.
10.34 Amended and Restated Employment Agreement between Cronos and E 13
John Kirby dated 1 December, 2000.
10.35 Amended and Restated Employment Agreement between Cronos and E 16
Nico Sciacovelli dated 1 December, 2000.
Other Exhibits
21.1 List of principal wholly-owned subsidiaries at December 31, E 19
2000.
22.1 The Company's Form 8-K dated January 10, 2001, reporting on E 20
matters submitted to a vote of shareholders.
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the E 26
Company's Registration Statement on Form S-8 dated February
25, 2000.
99.2 Item 1 -- "Legal Proceedings" excerpted from the Company's E 31
Form 10-Q dated June 30, 2000, as referred to herein under
Item 3 -- "Legal Proceedings" of this Report.