Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2002
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)

16, ALLÉE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices)(zip code)

Registrant’s telephone number, including area codes:
(352) 453145

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [   ]

     The number of Common Shares outstanding as of Aug 9, 2002:

Table of Contents

The Cronos Group

TABLE OF CONTENTS

Table of Contents

The Cronos Group

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

     Management Representation

     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.

     The unaudited condensed consolidated interim financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

     These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

     This financial information reflects, in the opinion of management, all adjustments necessary to present fairly, the results for the interim periods. Such adjustments consist of only normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

 1

Table of Contents

The Cronos Group

Condensed Consolidated Statements of Income
(US dollar amounts in thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 2

Table of Contents

The Cronos Group

Condensed Consolidated Balance Sheets
(US dollar amounts in thousands, except per share amounts)
(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 3

Table of Contents

The Cronos Group

Condensed Consolidated Statements of Cash Flows
(US dollar amounts in thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 4

Table of Contents

The Cronos Group

Condensed Consolidated Statements of Shareholders’ Equity
(US dollar amounts in thousands, except per share amounts)
(Unaudited)

Six Months Ended June 30, 2002

The accompanying notes are an integral part of these condensed consolidated financial statements.

 5

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements
(US dollar amounts in thousands, except per share amounts)
(Unaudited)

1.		The condensed consolidated financial statements include the accounts of The Cronos Group and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
2.		Operating segment data

     Condensed segment information is provided in the tables below:

Reconciliation of operating profit (loss) for reportable segments to income before income taxes:

6

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements

3.

Earnings per common share (US dollar amounts in thousands, except per share amounts)

The components of basic and diluted net income per share were as follows:

4.

Income taxes

     During the second quarter of 2002, the Group agreed to a settlement with a foreign taxation authority. This followed a review that focused primarily on the transfer prices under the terms of the principal trading agreements between Cronos Group companies prior to 31 December, 1998. The Group had previously recorded a charge of $2.9 million in this regard. As a result of the settlement, the Group reversed $2.5 million of the tax liability in the second quarter.

5.

Amounts receivable from container owners

     Amounts receivable from container owners include amounts due from related parties of $3.9 million and $4.3 million at June 30, 2002 and December 31, 2001, respectively.

6.

Investments in related parties

     Investments in related parties comprise general partnership and limited partnership investments in eight sponsored funds. These general and limited partnership investments are accounted for using the equity method. The subsidiary of the Company that acts as a general partner maintains insurance for bodily injury, death and property damage for which a partnership may be liable, and may be contingently liable for uninsured obligations of the partnerships.

     The investment in US Limited Partnerships was $nil at both June 30, 2002 and December 31, 2001.

     Distributions for the limited partnership investments have exceeded the sum of the investment in the partnerships and the profit recognized under the equity method by a total of $1.3 million and $0.9 million at June 30, 2002 and December 31, 2001, respectively. For these partnerships, the net balance is included in amounts payable to container owners.

7.

Container equipment

     Container equipment is net of accumulated depreciation of $86.5 million and $81.2 million at June 30, 2002 and December 31, 2001, respectively.

7

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements

8.

Amounts payable to container owners

     Amounts payable to container owners include amounts payable to related parties of $8.7 million and $8.0 million at June 30, 2002 and December 31, 2001, respectively.

9.

Debt and capital lease obligations

     Debt and capital lease obligations include amounts due within twelve months of $15.5 million and $12.8 million at June 30, 2002 and December 31, 2001, respectively.

10.		Commitments and contingencies (to be read in conjunction with Note 13 to the Company’s 2001 Consolidated Financial Statements on Form 10-K)
i.		Commitments

     At June 30, 2002, the Group had outstanding orders to purchase container equipment of $1.9 million.

ii.

Guarantee to US Limited Partnership

     During 2000, the Group provided a guarantee under a $5 million third-party loan note (the “Note”), with a 2006 maturity date, 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. At June 30, 2002, the balance outstanding under the Note was $3.4 million.

iii.

Guarantee of third-party loan & rent support agreement

     During 1996 and 1997, the Group sold equipment, which was under a direct finance lease with a major shipping line, to a third-party for $26.3 million. The third-party financed the acquisition of this equipment with a loan of $26.3 million, with a 2004 maturity date, to which the Group provided a first loss guarantee for 20% of the debt. The Group can collateralize up to 50% of the guarantee with a first security interest in additional equipment. At June 30, 2002, the balance outstanding under the loan was $7 million.

     In addition, under the terms of a rent support agreement, the Group is required to deposit an amount equal to the aggregate of all rental charges scheduled to be paid under the direct finance lease for the next twelve months or until the end of the lease, if sooner, upon the occurrence of a continuing event of default by the shipping line. Annual rental charges under the lease, with a 2004 scheduled maturity date, approximate $5.1 million.

iv.

Guarantee under a purchase, assignment and agency agreement

     During 1996, the Group entered into a term lease with a lessee in the ordinary course of business. During 1997, the containers held under the lease were sold, and the lease was assigned, to a financial institution. As part of this contract, the Group continues to manage the containers held under the term lease, and invoices the lessee and collects monies on behalf of the financial institution. Rental under the lease is approximately $0.5 million per annum of which the Group remits $0.4 million to the financial institution as rent and just under $0.1 million to a retention account held as security by the institution. The remaining amount is retained by the Group as compensation for this service.

     Under the terms of the contract with the financial institution, if the lessee fails to make payments, other than in the event of being declared bankrupt, the Group has guaranteed that it will continue to make these payments to the financial institution. The guarantee and agreement with the financial institution will expire in October 2005.

v.

Agreements with Other Managed Container Owners — early termination options

     Approximately 48% (based on original equipment cost) of the agreements with Other Managed Container Owners (“Agreements”) contain early termination options, whereby the container owner may terminate the Agreements if certain performance thresholds are not achieved. At June 30, 2002, approximately 36% of the Agreements were eligible for early termination. Cronos believes that early termination of these Agreements by the Other Managed Container Owners is unlikely.

8

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements

10.		Commitments and contingencies (continued)
vi.		Agreements with Other Managed Container Owners — change of control provisions

     Approximately 52% (based on original equipment cost) of Agreements with Other Managed Container Owners provide that a change in ownership of the Group, without the prior consent of the container owner, may constitute an event of default under the Agreements. In substantially all of these Agreements, the consent of the container owners may not be unreasonably withheld. In the event that consent is not obtained, 30% of Agreements may require the Group to transfer possession of the equipment to another equipment manager. Such transfer of possession may result in the Group incurring certain costs. The remaining 22% of Agreements may require the Group to purchase the equipment from the container owners pursuant to the terms of their respective Agreements, generally a stipulated percentage (determined by age of the equipment) of the original cost of the equipment.

vii.

Contingencies — Dispute with Contrin Holding S.A.

     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, and for Contrin itself (collectively, “Contrin”).

     As described further below, the Group is in litigation 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 $2.6 million 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.

     In December 1997, the Group recorded a charge of $3.4 million relating to the alleged transfer of $2.6 million, the related interest, plus the estimated settlement costs of this and other claims by Contrin. On June 30, 2002, the balance of this accrual was $3.0 million.

     On August 8, 2000, Contrin, through an affiliate, Contrin Worldwide Container Leasing GmbH (“CWC”), filed an action in the Luxembourg District Court against the Company, seeking recovery of $2.6 million, together with interest and costs. On January 10, 2001, the Company responded to Contrin’s complaint, requesting that the District Court dismiss the proceeding for lack of jurisdiction over the dispute, and denying Contrin’s claims on the merits. Since January 10, 2001, each party has supplemented its pleadings to respond to assertions made by the other party. The Company anticipates that a final hearing will be held by the Court in 2003.

     To preserve its rights of indemnity in the face of Contrin’s claims, the Group, on June 1, 2000, filed a protective claim 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.

     On July 13, 2000, Cronos also filed a protective claim against Barclays Bank PLC (“Barclays”) in the High Court of Justice, London, England. Barclays was the bank that received the $2.6 million from Contrin. 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 Mrs. Palatin. In February 2001, the Group obtained an order from the Court requiring the production of documents by Barclays. The Group and Barclays have agreed to a stay of the action while the Group evaluates the documentation produced by Barclays.

     On August 2, 2001, CWC filed a separate claim against Cronos Containers N.V. (“CNV”), a wholly-owned Netherlands Antilles subsidiary of the Company, in the High Court of Justice, London, England. By its claim, Contrin asserts that CNV, wrongfully and in violation of the container management agreement between Contrin and CNV, failed to distribute to Contrin $0.5 million in distributions for the second through fourth calendar quarters of 1996. Contrin seeks recovery of this sum, plus interest.

9

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements

10.

Commitments and contingencies (continued)

     On December 31, 2001, CNV filed its defense to CWC’s claim, denying CWC’s claims and denying that CNV is liable to CWC in any amount. Concurrently with the filing of its defense to CWC’s claims, CNV filed a separate claim against the Palatins and Klamath Enterprises, S.A. (“Klamath”), seeking recovery of $0.5 million from the Palatins that CNV alleges was misappropriated from CNV by Mr. Palatin. On April 8, 2002, Klamath filed its application with the court seeking an order declaring that the court has no jurisdiction over Klamath or, in the alternative, that it should exercise its discretion not to assert jurisdiction over the Group’s claims against Klamath. CNV has opposed Klamath’s application; no hearing on the application has yet been set. The Palatins were recently served with CNV’s separate claim against them, and have yet to respond to CNV’s claims.

     Since September 2001, the Group and Contrin have had discussions with a view to resolving all disputes between them. These discussions have yet to achieve any success. During the course of the discussions, Contrin has asserted, in addition to its claims advanced in the Luxembourg District Court and in the High Court of Justice in England, described above, a claim to $2.6 million, including interest, as its share of the proceeds from containers disposed of by CNV under the container management agreements between Contrin and CNV. CNV has rejected the claim as a misinterpretation of the container management agreements.

     Contrin has also asserted an interest in the containers managed by the Group for Transocean Equipment Manufacturing and Trading Limited (“TOEMT”) and in the distributions payable with respect to such containers, as discussed below.

     Management considers that prudent provision has been made in the financial statements for the Contrin 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 $3.0 million.

viii.

TOEMT

     TOEMT, which is currently in liquidation in the United Kingdom, has been separately registered by the same name in both the United Kingdom and in the Isle of Man. At June 30, 2002, the Group had $1.2 million in amounts payable to TOEMT on deposit in a bank account pending clarification of the proper claimants to the distributions payable with respect to the containers owned by TOEMT. The information currently available to the Group is insufficient to enable it to determine the nature or amount of the claims by the respective companies and their creditors to the distributions available with respect to the TOEMT containers.

     As stated above, Contrin, in its discussions with the Group over a global resolution of all disputes between the parties, has asserted a right to the distributions being held by the Group for TOEMT. Contrin has provided the Group with copies of default judgements Contrin secured in January and June 2001 from the Commercial Court of Vienna, Austria, against TOEMT (UK) and TOEMT (Isle of Man), for $0.1 million and $0.4 million, respectively. Contrin has also demanded an accounting of the Group's management of the TOEMT containers since November 1991. Until clarification is secured by court proceedings and/or through agreement with the creditors of TOEMT, the Group intends to continue to set aside the distributions due and payable by the Group on the containers it manages for TOEMT.

11.

Issued and Authorised Share Capital

     In June 2002, the Company retired and canceled 1,793,798 shares held in the Company by Cronos Equipment (Bermuda) Limited (“CEB”), a subsidiary of the Company. In May 2001, Cronos was awarded the outstanding common shares in the Company that were beneficially owned by a former Chairman and Chief Executive Officer of the Company in partial consideration for amounts owed under two promissory notes (see Item I of PART II — Legal Proceedings). Such shares had been recorded as common shares held in treasury.

10

Table of Contents

The Cronos Group

Notes to the Condensed Consolidated Financial Statements

12.

New accounting pronouncements (US dollar amounts in thousands, except per share amounts)

     On January 1, 2002, the Group adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

     SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The impact of the adoption of SFAS No. 142 on the results of operations of the Group may be presented as follows:

     SFAS No. 144 supersedes SFAS No. 121, but retains its fundamental provisions relating to the recognition and measurement of the impairment of long-lived assets to be held and used, and the measure of long-lived assets to be disposed of by sale.

     In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which is effective for all fiscal years beginning after June 15, 2002. This standard requires a company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and a corresponding increase in the carrying value of the related long-lived asset. The Group is currently evaluating the impact that SFAS No. 143 will have on its financial statements.

     In June 2002, the Financial Accounting Standards Board issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Group will adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

11

Table of Contents

The Cronos Group

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     General

     The Group generates revenues by leasing to ocean carriers marine containers that are owned either by the Group itself or by the Group’s managed container programs (“Managed Container Owners”), which are comprised of US Limited Partnerships and Other Managed Container Owners.

     The following table summarizes the composition of the Cronos fleet (based on original equipment cost) at June 30 for each of the periods indicated:

     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 SFAS 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. For the six months ended June 30, 2002, 79% of payments to Managed Container Owners represented agreements which generally provided that the amounts payable to container owners were based upon the rentals to ocean carriers after deducting direct operating expenses and a management fee. The remaining 21% of payments to Managed Container Owners represented agreements under which the container owner is entitled to a fixed payment for a specified term. Minimum lease payments on the agreements, which have fixed payment terms are presented in Note 11 to the Group’s 2001 Consolidated Financial Statements.

     The following table summarizes the composition of the Cronos fleet (in thousands, based on twenty-foot equivalent units (“TEU”)), by equipment type, at June 30 for each of the periods indicated:

     During 2001, the slowdown in the global economy caused a significant downturn in demand for dry cargo containers. Corporate failures and a cautious business climate resulted in lower levels of capital available for equipment purchases. Prices for new containers reached historic lows as demand declined for new production resulting in further downward pressure on per diem rates and container residual values. Since June 30, 2001, the combined per diem rate for the Cronos fleet of dry cargo containers declined by approximately 16%.

12

Table of Contents

The Cronos Group

     In the first half of 2002, the relatively low levels of new container production together with an improving business climate have resulted in increased demand for existing dry cargo and specialized container equipment. The Group has sought to exploit the improving demand by repositioning off-hire equipment to locations of greatest demand and by pursuing leasing opportunities through its global network of marketing resources. As a result, utilisation for the Cronos fleet of dry cargo containers increased to 80% by the end of June compared to 73% at the beginning of the year. Per diem rates for dry cargo containers, although lower than in the first quarter of 2002, remained level during the second quarter.

     Container manufacturers have begun to report increased demand and equipment prices have increased in response to this demand. Industry sources forecast that 2002 new container production will exceed the relatively low level of 2001 production by approximately 14%.

     Cronos operates a diversified fleet of containers, including refrigerated containers, tanks, CPCs and rolltrailers. Specialized containers account for over 50% of the Cronos owned fleet (based on original equipment cost). Due to their specialized nature, demand for these containers is less likely to be affected by global economic downturns. During the second quarter of 2002, Cronos has experienced strong demand for all specialized containers.

     The following table summarizes the combined utilization of the Cronos fleet (based on approximate original equipment cost):

     The Group reviews its owned container equipment when changes in circumstances require consideration as to whether the carrying value of the equipment has become impaired, pursuant to guidance established in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. 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. The Group periodically evaluates future cash flows and potential impairment of its fleet by container type rather than for each individual container. Therefore, future losses could result for individual container dispositions due to various factors including age, condition, suitability for continued leasing, as well as geographic location of the containers where disposed. In addition, subjective management judgement is required in estimating future cash flows from container operations. Accordingly, the estimates may not be indicative of the amounts that may be realized in future periods.

     Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

     Gross lease revenue of $27.9 million for the three months ended June 30, 2002, was $2.2 million, or 7%, lower than in the corresponding period of 2001. Dry cargo containers accounted for $1.8 million of the total decline as the increase in utilization reported during 2002 was more than offset by the reduction in per diem rates. However, some of the underlying trends are positive when compared to 2001. For example, leasing incentives, which are offered to lessees as an inducement to lease equipment and are a strong indicator of demand in the marketplace, were $0.6 million lower than in the second quarter of 2001. In addition, drop-off charges, which are earned when a container is returned by a lessee, were $0.4 million lower when compared to the same period in 2001.

     Equipment trading revenue of $0.2 million for the three months ended June 30, 2002, represented transactions undertaken in which the Group used its relationships with equipment manufacturers to assist third-parties to design and acquire their own equipment and arrange for delivery to designated locations. Equipment trading expenses represent equipment and related costs for this activity.

13

Table of Contents

The Cronos Group

     Commissions, fees and other income for the three months ended June 30, 2002, of $1.3 million were $0.4 million, or 25%, lower than in the second quarter of 2001. An increase of $0.2 million in direct finance lease income was more than offset by a $0.3 million decline in CPC license fee income, and a total reduction of $0.3 million in acquisition and other fee income.

     Direct operating expenses of $7.2 million for the three months ended June 30, 2002 were $0.7 million, or 9%, lower than in the second quarter of 2001. Storage costs declined by $0.9 million reflecting the increased demand for dry cargo containers when compared to the corresponding period in 2001. A $0.6 million increase in repositioning expense was primarily due to the cost of moving off-hire dry cargo containers from the East Coast of the United States to Korea. A $0.4 million reduction in legal expenses and provisions for doubtful accounts was primarily due to a slight improvement in the credit profile of a number of lessees.

     Payments to managed container owners of $12.9 million during the three months ended June 30, 2002, were $1.4 million, or 10%, lower when compared to the corresponding period in 2001. This decline was due to a reduction in net lease revenue for each of these segments resulting mainly from lower per diem rates for dry cargo containers and, in the case of the US Limited Partnership segment, a smaller fleet size, reflecting the sale of older equipment.

     Depreciation and amortization of $3.9 million during the three months ended June 30, 2002, was $0.1 million lower when compared to the second quarter of 2001. A $0.2 million increase in container depreciation was more than offset by a $0.2 million reduction in depreciation for leasehold and computer assets together with a $0.1 million reduction in the amortization of intangible assets due to the adoption of SFAS No. 142.

     Selling, general and administrative expenses of $3.4 million in the second quarter of 2002 were almost unchanged when compared to the corresponding period of 2001. A $0.1 million increase in professional service expenses was offset by a $0.1 million decrease in information technology costs.

     Interest expense of $1.7 million for the three months ended June 30, 2002, declined by $0.5 million, or 25%, when compared to the corresponding period in 2001. The decline in interest expense attributable to the reduction in interest rates over the course of 2001 more than offset the increase in interest expense resulting from higher debt balances used to finance new equipment purchases.

     Income taxes: During the second quarter of 2002, the Group agreed to a settlement with a foreign taxation authority. This followed a review that focused primarily on the transfer prices under the terms of the principal trading agreements between Cronos Group companies prior to 31 December, 1998. The Group had previously recorded a charge of $2.9 million in this regard. As a result of the settlement, the Group reversed $2.5 million of the tax liability in the second quarter of 2002 and recorded a tax benefit of the same amount. This benefit was partly offset by $0.1 million of income tax charges.

     Income from recovery of related party loans for the three months ended June 30, 2001, represented the partial recovery of interest and principal receivable under two promissory notes between the Group and Mr. Palatin. The Group had previously made a provision against some of the amounts owed under the promissory notes in December 1997. In May 2001, Cronos was awarded 1.8 million outstanding common shares in the Company that were beneficially owned by Mr. Palatin in partial consideration for amounts owed under the promissory notes. These shares were recorded as common shares in treasury. The valuation of $6 million was based on the estimated fair value of the shares received.

     Impairment charges of $4 million for the second quarter of 2001, were recorded against certain refrigerated containers and against loan notes receivable from a third-party container owner.

     The Group undertook a review of its refrigerated container equipment and identified a number of issues that have had an impact on the carrying value of certain equipment, which use the R12 refrigerant gas. As a result of the review, management concluded that inventories of R12 equipment would be targeted for immediate sale and that 531 containers with a carrying value of $2.4 million exceeded fair value. Additionally, a review was conducted of 776 containers with a carrying value of $3.7 million that were on lease at June 30, 2001. It was concluded that the carrying value of these assets exceeded the future cash flows expected to result from the use of the assets and their eventual disposition. As a result of these reviews, an impairment charge of $2 million was recorded.

14

Table of Contents

The Cronos Group

     The Group also reviewed the carrying value of loan notes receivable from a third-party container owner in the second quarter of 2001. The carrying value of the loan notes are measured in terms of the discounted value of projected future net cash flows to be generated based on historical and projected trends on per diem revenues, utilization, container disposal proceeds and funding costs over the expected useful life of the containers. Due to the global economic downturn, management revised the projections for per diem revenues and utilization downwards. Based on the revised projected trends, the Group considered that the carrying value of the loan notes due from the third-party container owner exceeded the discounted value of the future cash flows by $2 million. Accordingly, an impairment of $2 million was recorded.

     Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

     Gross lease revenue of $56.3 million for the six months ended June 30, 2002, was $5.3 million, or 9%, lower than in the corresponding period of 2001. Gross lease revenue for dry cargo containers was $5.1 million lower than in 2001 as the reduction in per diem rates more than offset the increase in utilization reported during 2002.

     Equipment trading revenue of $0.6 million for the six months ended June 30, 2002, represented transactions undertaken in which the Group used its relationships with equipment manufacturers to assist third-parties to design and acquire their own equipment and arrange for delivery to designated locations. Equipment trading expenses represent equipment and related costs for this activity.

     Commissions, fees and other income for the six months ended June 30, 2002, of $2.6 million were $0.4 million, or 13%, lower when compared to the first six months of 2001. Reductions of $0.4 million in CPC license fee income, $0.3 million in the profit recorded on the sale of fixed assets and $0.2 million in acquisition fees were partly offset by a $0.5 million increase in direct finance lease income.

     Gain on sale of investment of $0.3 million in the first six months of 2001 represented the sale of shares that had been held in escrow as security for a 1994 tax indemnification agreement. This agreement expired on December 31, 2000, and the shares were released in the first quarter of 2001.

     Direct operating expenses of $15 million in the first six months of 2002 were $0.4 million, or 3%, higher than in the corresponding period of 2001. Reduced storage costs of $0.8 million and increased handling and other activity-related costs of $0.5 million reflected the increased quantity of on-hire containers in 2002 when compared to the same period in 2001. A $1.1 million increase in repositioning expense was primarily due to the cost of moving off-hire dry cargo containers from the East Coast of the United States to Korea in the second quarter of 2002. The containers were placed on lease shortly after arrival in Korea. A $0.4 million reduction in legal expenses and provisions for doubtful accounts was primarily due to an improvement in the credit profile of a number of lessees.

     Payments to managed container owners of $25.6 million in the first half of 2002, were $4.6 million, or 15%, lower when compared to the corresponding period in 2001, due primarily to the decline in dry cargo container net lease revenue for each of these segments. Payments to US Limited Partnerships of $8.0 million in the first half of 2002 were $2.5 million lower than in the same period of 2001. Payments to Other Managed Container Owners were $17.6 million during the six months ended June 30, 2002, a decrease of $2.1 million, or 11%, when compared to the same period of 2001.

     Depreciation and amortization of $7.7 million for the six months ended June 30, 2002, was $0.3 million, or 4%, lower when compared to the corresponding period in 2001. In 2002, depreciation expense for leasehold and computer assets was $0.3 million lower than for the same period in 2001. This is due to certain computer assets reaching the end of their useful life and the relocation of the UK office to new leasehold premises in the second quarter of 2002. This was partly offset by a $0.2 million increase in container depreciation expense reflecting the addition of new equipment. The amortization of intangible assets declined by $0.2 million in 2002 due to the adoption of SFAS No. 142.

     Selling, general and administrative expenses of $6.8 million in the first half of 2002, were almost unchanged when compared to the corresponding period of 2001. A $0.2 million reduction in information technology costs was offset by increased professional service costs.

15

Table of Contents

The Cronos Group

     Interest expense of $3.3 million for the six months ended June 30, 2002, decreased by $1.1 million, or 25%, when compared to the corresponding period in 2001. The decline in interest expense attributable to the reduction in interest rates over the course of 2001 more than offset the increase in interest expense resulting from higher debt balances used to finance new equipment purchases.

     Income taxes: During the second quarter of 2002, the Group agreed to a settlement with a foreign taxation authority. This followed a review that focused primarily on the transfer prices under the terms of the principal trading agreements between Cronos Group companies prior to 31 December, 1998. The Group had previously recorded a charge of $2.9 million in this regard. As a result of the settlement, the Group reversed $2.5 million of the tax liability in the second quarter of 2002 and recorded a tax benefit of the same amount. This benefit was partly offset by $0.2 million of income tax charges.

     Income from recovery of related party loans for the six months ended June 30, 2001, represented the partial recovery of interest and principal receivable under two promissory notes between the Group and Mr. Palatin. The Group had previously made a provision against some of the amounts owed under the promissory notes in December 1997. In May 2001, Cronos was awarded 1.8 million outstanding common shares in the Company that were beneficially owned by Mr. Palatin in partial consideration for amounts owed under the promissory notes. These shares were recorded as common shares in treasury. The valuation of $6 million was based on the estimated fair value of the shares received.

     Impairment charges of $4 million for the six months ended June 30, 2001, were recorded against certain refrigerated containers and against loan notes receivable from a third-party container owner.

     The Group undertook a review of its refrigerated container equipment and identified a number of issues that have had an impact on the carrying value of certain equipment, which use the R12 refrigerant gas. As a result of the review, management concluded that inventories of R12 equipment would be targeted for immediate sale and that 531 containers with a carrying value of $2.4 million exceeded fair value. Additionally, a review was conducted of 776 containers with a carrying value of $3.7 million that were on lease at June 30, 2001. It was concluded that the carrying value of these assets exceeded the future cash flows expected to result from the use of the assets and their eventual disposition. As a result of these reviews, an impairment charge of $2 million was recorded.

     The Group also reviewed the carrying value of loan notes receivable from a third-party container owner in the second quarter of 2001. The carrying value of the loan notes are measured in terms of the discounted value of projected future net cash flows to be generated based on historical and projected trends on per diem revenues, utilization, container disposal proceeds and funding costs over the expected useful life of the containers. Due to the global economic downturn, management revised the projections for per diem revenues and utilization downwards. Based on the revised projected trends, the Group considered that the carrying value of the loan notes due from the third-party container owner exceeded the discounted value of the future cash flows by $2 million. Accordingly, an impairment of $2 million was recorded.

16

Table of Contents

The Cronos Group

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 container fleet and fee revenues from its managed container programs and other parties. Operating cash flow is utilized to meet costs relating to day-to-day fleet support, payments to Managed Container Owners, selling, general and administrative expenses, interest expense, servicing the current portion of long-term borrowings and financing a portion of certain debt funded equipment acquisitions.

     Operating cash flow is largely dependent upon the timely collections of lease revenues from shipping lines. Based on loss experience for the last nine years, bad debts have approximated 1% of lease revenues. The Group monitors the aging of lease receivables, collections and the credit status of existing and potential customers. In the current economic climate there is a risk that some shipping lines may experience financial difficulty. Any resultant material increase in the level of bad debts could potentially impair the ability of the Group to meet its operating commitments.

     At June 30, 2002, the Group had $128.6 million of available container borrowing facilities under which $116 million was outstanding. In addition, the Group had $1.7 million of credit facilities under which $0.6 million was outstanding. The credit facilities are available, if required, for operating cash flow purposes.

     Cash Flow Statements for the Six Months ended June 30, 2002 and 2001

     Cash from Operating Activities: Net cash provided by operating activities was $1.3 million and $13.2 million during the first six months of 2002 and 2001, respectively. In 2002, the cash provided by operating activities represented earnings from operations, which were partly offset by a $5.6 million increase in new container equipment for resale. The net cash generated in 2001 reflected a decrease in container equipment for resale, resulting from the sale of $8 million of container equipment to a new managed container owner program, and a decrease in amounts due from lessees. This was offset by a $3.6 million decrease in amounts payable to container manufacturers.

     Cash from Investing Activities: Net cash used in investing activities was $5.8 million in the first six months of 2002, reflecting the acquisition of $6.1 million of container and other equipment and an investment of $1 million in direct finance lease equipment. This was partly offset by $1.3 million of proceeds from the sale of container equipment. Net cash used in investing activities was $13 million in the first half of 2001. The acquisition of $16.8 million of container equipment was partly offset by proceeds of $3.3 million from the sale of container equipment and proceeds from the sale of investments of $0.5 million.

     Cash from Financing Activities: Net cash provided by financing activities was $4.6 million during the first six months of 2002. Proceeds from the issuance of new term debt of $15.4 million was partly offset by the repayment of $10.7 million of debt and capital lease obligations. In the first six months of 2001, the Group borrowed $9 million of new term debt and repaid $11.5 million of debt and capital lease obligations.

17

Table of Contents

The Cronos Group

     Capital Resources

     The Group purchases new containers for its own account and for resale to Managed Container Owners and other parties. At June 30, 2002, the Group owed container manufacturers $11.3 million for equipment, of which $3.5 million is scheduled to be funded in the third quarter of 2002, utilizing available container funding facilities. Of the remaining $7.8 million of equipment, the Group has designated $7.1 million for sale to Managed Container Owners in the third quarter.

     In addition, the Group had outstanding orders to purchase container equipment at June 30, 2002 of $1.9 million. These orders relate to containers to be financed by the Group using available container funding facilities.

     The Group believes that it has sufficient capital resources to support its operating and investing activities.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

     Interest rate risk: Outstanding borrowings are subject to interest rate risk. Approximately 84% of total borrowings had floating interest rates at June 30, 2002. 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 variable interest rates, the expected effect would be to reduce annual cash flows by $0.4 million.

     Exchange rate risk: Substantially all of the Group’s revenues are billed and paid in US dollars and a significant portion of costs are billed and paid in US dollars. Of the remaining costs, the majority are individually small, unpredictable and incurred in various denominations and thus are not suitable for cost effective hedging. By reference to the first six months of 2002, it is estimated that for every 10% incremental decline in the value of the US dollar against various foreign currencies, the effect would be to reduce annual cash flows by $0.9 million in any given year.

     As exchange rates are outside of the control of the Group, there can be no assurance that such fluctuations will not adversely effect its results of operations and financial condition.

18

Table of Contents

The Cronos Group

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

     Dispute with the Contrin Group

     The Group manages containers for investment entities sponsored by or affiliated with Contrin. Approximately 1% (measured by TEUs) of the Group’s fleet of containers is owned by Contrin. The Group is in litigation with Contrin over funds that Contrin claims to have remitted to Cronos for the purchase of additional 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 Mr. Palatin, and that this was known or should have been known by Contrin.

     On August 8, 2000, Contrin, through its affiliate, CWC, filed an action in the Luxembourg District Court against the Company, seeking recovery of $2.6 million, together with interest and costs. On January 10, 2001, the Company responded to CWC’s complaint, (i) requesting that the District Court dismiss the proceeding for lack of jurisdiction over the dispute, and (ii) denying Contrin’s claims on the merits. Since January 10, 2001, each party has supplemented its pleadings to respond to assertions made by the other party. The Company anticipates that a final hearing will be held by the Court in 2003.

     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. On March 29, 2001, the Group secured a “freezing injunction” from the High Court of Justice in aid of its claim against the Palatins. By the injunction, the Palatins are prohibited from selling, charging, or otherwise disposing of their interest in an estate the Group believes is beneficially owned by the Palatins in Amersham, England. The injunction also extends to Klamath, a Panamanian company and the record owner of the estate. The Palatins have contested the jurisdiction of the High Court of Justice over them, and have filed an affidavit with the Court asserting that the estate is owned by Pontino S.A., a Panamanian company, in which they disclaim any interest. The Group believes that the High Court of Justice has jurisdiction to hear its claim against the Palatins and that their disclaimer of any beneficial interest in the Amersham estate is not credible. The Palatins have filed their application with the Court contesting the jurisdiction of the Court over them or, in the alternative, have requested a stay of any further prosecution of the action pending resolution of a criminal proceeding pending in Vienna, Austria, against Mr. Palatin. The Group anticipates that a hearing on the Palatins’ motion will be heard in the fall of 2002.

     On April 8, 2002, Klamath filed its application with the court seeking an order declaring that the Court has no jurisdiction over Klamath or, in the alternative, that it should exercise its discretion not to assert jurisdiction over the Group’s claims against Klamath. The Group has opposed Klamath’s application. The hearing on Klamath’s application will be heard at the same time as the hearing on the Palatins’ motion, described above.

     On July 13, 2000, the Group also filed a protective claim against Barclays in the High Court of Justice, London, England. Barclays was the bank that received the $2.6 million from Contrin. 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 Mrs. Palatin. In February 2001, the Group obtained an order from the Court requiring the production of documents by Barclays. The Group and Barclays have agreed to a stay of the action while the Group evaluates the documentation produced by Barclays.

     On August 2, 2001, CWC filed a separate claim against CNV in the High Court of Justice, London, England. By its claim, CWC asserts that CNV, wrongfully and in violation of the container management agreement between CWC and CNV, failed to distribute to CWC $0.5 million in distributions for the second through fourth calendar quarters of 1996. CWC seeks recovery of this sum, plus interest.

19

Table of Contents

The Cronos Group

     On December 31, 2001, CNV filed its defense to CWC’s claim, denying CWC’s claims and denying that CNV is liable to CWC in any amount. Concurrently with the filing of its defense to CWC’s claims, CNV filed a separate claim against the Palatins and Klamath, seeking recovery of $0.5 million from the Palatins that CNV alleges was misappropriated from CNV by Mr. Palatin. Mr. Palatin has yet to respond to CNV’s claim. On April 8, 2002, Klamath filed its application with the court seeking an order declaring that the court has no jurisdiction over Klamath or, in the alternative, that it should exercise its discretion not to assert jurisdiction over the Group’s claims against Klamath. CNV has opposed Klamath’s application; no hearing on the application has yet been set. The Palatins were recently served with CNV’s separate claim against them, and have yet to respond to CNV’s claims; their counsel has indicated that the Palatins will challenge the jurisdiction of the Court over them.

     Collection of Palatin Notes

     On May 8, 2001, the Massachusetts Superior Court entered its judgement against Mr. Palatin and Klamath, affirming the default judgement secured on February 8, 2000 in the New York State Supreme Court by CEB against Mr. Palatin in the amount of $6.6 million. The Court further ordered the Group’s transfer agent to cancel 1,793,798 outstanding common shares of the Company owned of record by Klamath (the “Klamath Shares”), beneficially owned by Mr. Palatin, in partial satisfaction of the New York State Supreme Court judgement, and to transfer the Klamath Shares on the books and records of the transfer agent to CEB. The Group’s transfer agent promptly canceled the Klamath Shares and issued a new stock certificate for 1,793,798 common shares of the Company to CEB. The Court also ordered Mr. Palatin and Klamath to pay CEB’s fees and expenses, including attorneys’ fees, incurred in securing the final judgement.

     As of May 8, 2001, the amount owed by Mr. Palatin to CEB under the New York judgement totaled $7.3 million, representing the amount of the judgement ($6.6 million) plus interest thereon at 9% per annum. The Group reduced the amount owed by Mr. Palatin to CEB under the judgement by $6 million as a result of the cancelation of the Klamath Shares, leaving a balance due under the judgement of $1.3 million as of May 8, 2001.

     On November 23, 2001, CEB filed its claim against Mr. Palatin in the High Court of Justice, London, England, for the purpose of collecting the remaining balance due to CEB under the New York judgement. CEB will seek to enforce the claim against the estate that the Group believes is beneficially owned by Mr. Palatin in Amersham, England. Service of the claim upon Mr. Palatin, through his U.K. counsel, was effected on June 25, 2002. Mr. Palatin has yet to respond to the claim, but his counsel has indicated that he will challenge the jurisdiction of the Court over him.

Item 2 — Changes in Securities and Use of Proceeds

     Not applicable

Item 3 — Defaults Upon Senior Securities

     Not applicable

Item 4 — Submission of Matters to a Vote of Security Holders

     The Company’s 2002 annual meeting of shareholders was held on Wednesday, June 12, 2002, in Luxembourg. The record date of the meeting was fixed by the Board of Directors of the Company at April 15, 2002. As of the record date, the Company had outstanding 7,364,580 common shares.

     The holders of 7,016,212 common shares of the Company were represented at the 2002 annual meeting of the shareholders in person or by proxy, thus constituting a quorum of the shareholders for the meeting. The following sets forth the results of the shareholder voting on the matters submitted to the shareholders at the annual meeting.

20

Table of Contents

The Cronos Group

21

Table of Contents

The Cronos Group