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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11862
INTERPOOL, INC.
(Exact name of registrant as specified in the charter)
DELAWARE 13-3467669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 COLLEGE ROAD EAST, PRINCETON, NEW JERSEY 08540
(Address of principal executive office) (Zip Code)
(609) 452-8900
(Registrant's telephone number including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
COMMON STOCK, PAR VALUE $.001 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $58,056,399 as of March 20, 2000.
At March 20, 2000, there were 27,421,452 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2000 are incorporated by reference into Part
III of the Form 10-K.
INTERPOOL, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1. Business........................................................................................... 3
2. Properties......................................................................................... 9
3. Legal Proceedings.................................................................................. 9
4. Submission of Matters to a Vote of Security Holders................................................ 9
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters.......................... 10
6. Selected Financial Data............................................................................ 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12
7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 19
8. Financial Statements and Supplementary Data........................................................ 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 40
PART III
10. Directors and Executive Officers of the Registrant................................................. 41
11. Executive Compensation............................................................................. 41
12. Security Ownership of Certain Beneficial Owners and Management..................................... 41
13. Certain Relationships and Related Transactions..................................................... 41
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 42
Signatures......................................................................................... 47
2
PART I
ITEM 1. BUSINESS
Interpool, Inc. (the "Company" or "Interpool") is one of the world's leading
lessors of intermodal dry freight standard containers and believes that it is
the largest lessor of intermodal container chassis in the United States. At
December 31, 1999, the Company's container fleet totaled approximately 575,000
twenty foot equivalent units ("TEUs"), the industry standard measure of
dimension for containers used in international trade, and its chassis fleet
totaled approximately 90,000 chassis. The Company leases its containers and
chassis to over 200 customers, including nearly all of the world's 20 largest
international container shipping lines.
The efficiencies and cost savings inherent in intermodal transportation of
containerized cargo have facilitated the dramatic growth of international trade.
Intermodal transportation permits movement of cargo in a standard steel
container by means of a combination of ship, rail and truck without unpacking
and repacking of the contents during transit. The Company believes the world's
dry freight standard container fleet has grown from fewer than .4 million TEUs
in 1970 to approximately 11.0 million TEUs by mid-1999. During the twelve-month
period ending in mid-1999 the Company estimates that approximately 1.3 million
TEUs were produced, of which .4 million have been estimated to be replacements
of older containers. Concurrently with this growth of the world's container
fleet, the domestic chassis fleet has grown to accommodate the increased
container traffic. Leasing companies have played a significant role in the
growth of intermodal transportation, supplying approximately half of the world's
container and chassis requirements.
The Company focuses on leasing dry freight standard containers and container
chassis on a long-term basis in order to achieve high utilization of its
equipment and stable and predictable earnings. From 1991 through 1994, the
combined utilization rate of the Company's container and chassis fleets averaged
at least 90%. At the end of 1995 and 1996 the combined utilization rate of the
Company's container and chassis fleets was approximately 97% and at December 31,
1997, 1998 and 1999 such rate was approximately 98%. A substantial portion of
the Company's newly acquired equipment is leased on a long-term basis and, at
December 31, 1999, approximately 88% of its total equipment fleet was leased on
this basis. The remainder of the Company's equipment is leased under short-term
agreements to satisfy customers' peak or seasonal requirements, generally at
higher rates than under long-term leases. The Company concentrates on standard
dry cargo containers and chassis because such equipment may be more readily
remarketed upon expiration of a lease than specialized equipment. In financing
its equipment acquisitions, Interpool generally seeks to meet debt service
requirements from the leasing revenue generated by its equipment.
The Company conducts its container and chassis leasing business through its two
subsidiaries, Interpool Limited and Trac Lease, Inc. ("Trac Lease"),
respectively. Certain other United States equipment leasing activities are
conducted through Interpool itself.
The Company and its predecessors have been involved in the leasing of containers
and chassis since 1968. The Company leases containers throughout the world, with
particular emphasis on the Pacific Rim. The Company leases chassis to customers
for use in the United States. The Company maintains contact with its customers
through a worldwide network of offices, agents and sales representatives. The
Company believes one of the key factors in its ability to compete effectively
has been the long-standing relationships management has established with most of
the world's large shipping lines. In addition, Interpool relies on its strong
credit rating and low financing costs to maintain its competitive position.
From time to time the Company considers possible acquisitions of complementary
businesses and asset portfolios. In May 1999, the Company's Microtech subsidiary
acquired a 51% interest in Personal Computer Rentals, Inc. (PCR), a nationwide
lessor of computers and related equipment. The Company also provided financing
to PCR. In April 1998, the Company established a strategic alliance with another
container leasing company whose business complements that of the Company through
the acquisition of a 50% interest in Container Applications International, Inc.
(CAI), whose business is primarily in the short term master lease market. The
Company also provided CAI with financing to repay debt.
3
Company History
The Company is a Delaware corporation formed in February 1988. The Company is
the successor to a line of container and chassis leasing businesses that traces
its beginning to the 1960's.
Interpool Limited, a container and chassis leasing business, was formed in 1968
by Warren L. Serenbetz, a director of the Company and executive consultant until
January 1995, Martin Tuchman, currently Chairman of the Board, Chief Executive
Officer and director of the Company, and two other individuals. In 1978,
Interpool Limited was sold to Thyssen-Bornemisza, N.V. ("Thyssen"). As part of
Thyssen, Interpool Limited continued to be managed by Messrs. Serenbetz and
Tuchman. In 1986, Messrs. Serenbetz and Tuchman, along with Mr. Raoul J.
Witteveen and two other senior executives formed and became the stockholders of
Trac Lease. In 1988, the Company was formed by Messrs. Serenbetz, Tuchman and
Witteveen and acquired Interpool Limited from Thyssen (the "Interpool Limited
Acquisition"). In 1993, the Company acquired 87.5% of Trac Lease (the "Trac
Lease Acquisition"). In the first quarter of 1996 pursuant to an Agreement of
Merger between Trac Lease and Trac Lease Merger Corp., a newly formed subsidiary
(the "Trac Merger"), the Company acquired the minority interests in Trac Lease
and as a result Trac Lease became a wholly owned subsidiary.
Intermodal Transportation
The fundamental component of intermodal transportation is the container.
Containers provide a secure and cost-effective method of transporting finished
goods and component parts because they are generally freely inter-changeable
between different modes of transport, making it possible to move cargo from a
point of origin to a final destination without the repeated unpacking and
repacking of the goods required by traditional shipping methods. The same
container may be carried successively on a ship, rail car and truck and across
international borders with minimal customs formalities. Containerization is more
efficient, more economical and safer in the transportation of cargo than "break
bulk transport" in which the goods are unpacked and repacked at various
intermediate points enroute to their final destination. By eliminating manual
repacking operations when differing modes of transportation are used,
containerization reduces freight and labor costs. In addition, automated
handling of containers permits faster loading and unloading and more efficient
utilization of transportation equipment, thereby reducing transit time. The
protection provided by sealed containers also reduces damage to goods and loss
and theft of goods during shipment. Containers may also be picked up, dropped
off, stored and repaired at independent common user depots located throughout
the world.
The adoption of uniform standards for containers in 1968 by the International
Standards Organization (the "ISO") precipitated a rapid growth of the container
industry, as shipping companies recognized the advantages of containerization
over traditional break bulk transportation of cargo. This growth resulted in
substantial investments in containers, container ships, port facilities,
chassis, specialized rail cars and handling equipment.
Most containers are constructed of steel in accordance with recommendations of
the ISO. The basic container type is the general purpose dry freight standard
container (accounting for approximately 87% of the world's container fleet),
which measures 20 or 40 feet long, 8 feet wide and 8 1/2 or 9 1/2 feet high. In
general, 20-foot containers are used to carry heavy, dense cargo loads (such as
industrial parts and certain food products) and in areas where transport
facilities are less developed, while 40-foot containers are used for lighter
weight finished goods (such as apparel, electronic appliances and other consumer
goods) in areas with better developed transport facilities. Standards adopted by
the International Convention for Safe Containers and the Institute of
International Container Lessors govern the operation and maintenance of
containers.
The demand for containers is influenced primarily by the volume of international
and domestic trade. In recent years, however, the rate of growth in the
container industry has exceeded that of world trade as a whole due to several
factors, including the existence of geographical trade imbalances, the expansion
of shipping lines, and changes in manufacturing practices, such as growing
reliance on "just-in-time" delivery methods and increased exports by certain
technologically advanced countries of component parts for assembly in other
countries and the subsequent re-importation of finished products.
When a container vessel arrives in port, each container is loaded onto a chassis
or rail car. A chassis is a rectangular, wheeled steel frame, generally 20 or 40
feet in length, built specifically for the purpose of transporting a container.
Once mounted, the container and chassis are the functional equivalent of a
trailer. When mounted on a chassis, the container may be trucked either to its
final destination or to a railroad terminal for loading onto a rail car.
Similarly, a container shipped by rail may be transferred to a chassis to travel
over the road to its final destination. As the use of containers has become a
predominant factor in the intermodal movement of cargo, the chassis has become a
prerequisite for the domestic segment of the journey. A chassis seldom travels
permanently with a single container, but instead serves as a transport vehicle
for containers that are loaded or unloaded at ports or railroad terminals.
4
Because of differing international road regulations and the lack of
international standards for chassis, chassis used in the United States are
seldom used in other countries.
The Company's management believes that in recent years domestic railroads and
trucking lines have begun actively marketing intermodal use of services for the
domestic transportation of freight. In 1992, container loadings represented, for
the first time, a majority of total domestic rail loadings of intermodal
transportation equipment. Management further believes that this trend should
serve to accelerate the growth of intermodal transportation, and hence result in
increased container and chassis demand.
As a result of the advantages of intermodal containerization and the increased
globalization of the world economy, the use of containers for domestic
intermodal transportation has also grown over the last few years. Greater use of
containers on cargo ships led railroad and trucking companies to develop the
capacity to transport containers domestically by chassis and rail car. In
addition, shipping companies began soliciting domestic freight in order to
mitigate the cost of moving empty containers back to the port areas for use
again in international trade. The introduction in the mid-1980's of the double
stack railroad car, specially designed to carry containers stacked one on top of
another, accelerated the growth of domestic intermodal transportation by
reducing shipping costs still further. Due to these trends, an increasing
portion of domestic cargo is now being shipped by container instead of by a
conventional highway trailer. The Company has acquired over 11,500 units of
equipment, including domestic trailers, domestic chassis and domestic containers
in order to increase its participation in the growing domestic intermodal
market.
The Leasing Market and the Company's Strategy
Benefits of Leasing
Leasing companies own approximately half of the world's container fleet and half
of the domestic chassis fleet, with the balance owned predominantly by shipping
lines. Leasing companies have maintained this market position because container
shipping lines receive both financial and operational benefits by leasing a
portion of their equipment. The principal benefits to shipping lines of leasing
are:
o to provide shipping lines with an alternative source of financing in a
traditionally capital-intensive industry;
o to enable shipping lines to expand their routes and market shares at a
relatively inexpensive cost without making a permanent commitment to
support their new structure;
o to enable shipping lines to benefit from leasing companies' anticipatory
buying and volume purchases, thereby offering them attractive pricing and
prompt delivery schedules;
o to enable shipping lines to accommodate seasonal and/or directional trade
route demand, thereby limiting their capital investment and storage
costs; and
o to enable shipping lines at all times to maintain the optimal mix of
equipment types in their fleets.
Because of these benefits, container shipping lines generally obtain a
significant portion of their container fleets from leasing companies, either on
short-term or long-term leases. Short-term leases provide a considerable degree
of operational flexibility in allowing a customer to pick up and drop off
containers at various locations worldwide at any time. However, customers pay
for this flexibility in the form of substantially higher lease rates for
short-term leases and drop-off charges for the privilege of returning equipment
to certain locations. Most short-term leases are "master leases," under which a
customer reserves the right to lease a certain number of containers as needed
under a general agreement between the lessor and the lessee. Long-term leases
provide the lessee with advantageous pricing structures, but usually contain an
early termination provision allowing the lessee to return equipment prior to
expiration of the lease only upon payment of an early termination fee. Since
1991, the Company has experienced minimal early returns under its long-term
leases, primarily because of the penalties involved and because customers must
return all containers covered by the particular long-term lease being
terminated, generally totaling several hundred units, and bear substantial costs
related to their repositioning and repair. Frequently, a lessee will retain
long-term leased equipment well beyond the initial lease term. In these cases,
long-term leases will be renewed at the then prevailing market rate, either for
additional one-year periods or as part of a short-term agreement. In some cases,
the customer has the right to purchase the equipment at the end of a long-term
lease. The Company's long-term leases generally have five to eight year terms.
5
The Company often enters into long-term "direct finance" leases. Under a direct
finance lease, the customer owns the container at the expiration of the lease
term. Although customers pay a higher per diem rate under a direct finance lease
than under a long-term operating lease, a direct finance lease enables the
Company to provide customers with access to financing on terms generally
comparable to those available from financial institutions which provide this
type of financing.
Shipping lines generally spread their business over a number of leasing
companies in order to avoid dependence on a single supplier.
Unlike the business of container leasing, which is global in scale, the
Company's chassis leasing business is almost exclusively a domestic business.
Many of the customers for the Company's chassis, however, are United States
subsidiaries or branches of international shipping lines.
Company Strategy
The Company emphasizes long-term leases in order to minimize the impact of
economic cycles on the Company's revenues and to achieve high utilization and
stable and predictable earnings. The lower rate of turnover provided by
long-term leases enables the Company to concentrate on the expansion of its
asset base through the purchase and lease of new equipment, rather than on the
repeated re-marketing of its existing fleet.
The result of this strategy has been to establish the Company as one of the
world's leading lessors of dry freight standard containers. The Company intends
to continue its emphasis on acquiring and leasing dry freight standard
containers, rather than investing significantly in special purpose equipment
such as refrigerated or tank containers. Management believes that the Company
currently has one of the youngest container fleets of the world's ten largest
container lessors.
Trac Lease, with a fleet of approximately 90,000 chassis, believes it is now the
largest chassis lessor in the United States. The Company's chassis leasing
strategy includes an emphasis on long-term leasing of new or re-manufactured
chassis which allows the Company to offer equipment packages to its customers at
the most attractive cost to the Company.
In order to re-deploy chassis that are coming off long-term leases, the Company
operates "chassis pools" for most of the major port authorities and terminal
operators on the Eastern seaboard and the Gulf coast. A chassis pool is an
inventory of chassis available for short-term leasing to customers of the port
or terminal. The principal ports in the United States where the Company supplies
chassis pools are Boston, Baltimore, Norfolk, Charleston, Savannah, New Orleans
and Houston.
Like most leasing companies, the Company depends on high utilization of its
equipment in order to run its operations profitably. Because the Company has
most of its container and chassis fleets under long-term leases, the Company
believes that it has generally experienced better utilization in periods of weak
demand than other leasing companies having a smaller proportion of their fleets
under long-term leases. From 1991 through 1994, the annual utilization of the
Company's container fleet and Trac Lease's chassis fleet has averaged at least
90%. At the end of 1995 and 1996, the combined utilization rate of the Company's
container and chassis fleets was approximately 97%, and at December 31, 1997,
1998 and 1999, such rate was approximately 98%.
Operations
Lease Terms
Lease rentals are typically calculated on a per diem basis, regardless of the
term of the lease. The Company's leases generally provide for monthly or
quarterly billing and require payment by the lessee within 30 to 60 days after
presentation of an invoice. Generally, the lessee is responsible for payment of
all taxes and other charges arising out of use of the equipment and must carry
specified amounts of insurance to cover physical damage to and loss of
equipment, as well as bodily injury and property damage to third parties. In
addition, the Company's leases usually require lessees to repair any damage to
the containers and chassis. Lessees are also required to indemnify the Company
against losses to the Company arising from accidents or similar occurrences
involving the leased equipment. The Company's leases generally provide for
pick-up, drop-off and other charges and set forth a list of locations where
lessees may pick up or return equipment. The Company's long-term leases
generally have five to eight year terms.
6
Equipment Tracking and Billing
The Company uses a computer system with proprietary software for equipment
tracking and billing to provide a central operating data base showing the
Company's container and chassis leasing activities. The system processes
information received electronically from the Company's regional offices. The
system records the movement and status of each container and chassis and links
that information with the complex data comprising the specific lease terms in
order to generate billings to lessees. More than 15,000 movement transactions
per month are routinely processed through the system, which is capable of
tracking revenue on the basis of individual containers and chassis. The system
also generates a wide range of management reports containing information on all
aspects of the Company's leasing activities.
Sources of Supply
Because of the rising demand for containers and the availability of relatively
inexpensive labor in the Pacific Rim, approximately 80% of world container
production now occurs in China. Containers are also produced in other countries,
such as South Korea, India, Indonesia, Malaysia, Taiwan, Turkey, South Africa,
and, to a lesser extent, in other parts of the world. Most chassis used in the
United States are manufactured domestically due to the high cost of
transportation to the United States of chassis manufactured abroad.
Manufacturers of chassis frequently produce over-the-road trailers as well, and
can convert some production capability to chassis as needed.
Upon completion of manufacture, new containers and chassis are inspected to
insure that they conform to applicable standards of the ISO and other
international self-regulatory bodies.
Maintenance, Repairs and Refurbishment
Maintenance for new containers and chassis has generally been minor in nature.
However, as containers and chassis age, the need for maintenance increases, and
they may eventually require extensive maintenance.
The Company's customers are generally responsible for maintenance and repairs of
equipment other than normal wear and tear. When normal wear and tear to
equipment is extensive, the equipment may have to be refurbished or
remanufactured. Refurbishing and remanufacturing involve substantial cost,
although chassis can be remanufactured for substantially less than the cost of
purchasing a new chassis. Because facilities for this purpose are not available
at all depots or branches, equipment requiring refurbishment or remanufacture
may have to be repositioned, at additional expense, to the nearest suitable
facility. Alternatively, the Company may elect to sell equipment requiring
refurbishment.
Depots
The Company, through its affiliate CAI, operates in all the major depots
throughout the world. Depots are facilities owned by third parties at which
containers and other items of transportation equipment are stored, maintained
and repaired. The Company retains independent agents at these depots to handle
and inspect equipment delivered to or returned by lessees, to store equipment
that is not leased and to handle maintenance and repairs of containers and
chassis. Some agents are paid a fixed monthly retainer to defray recurring
operating expenses and some are guaranteed a minimum level of commission income.
In addition, the Company generally reimburses its agents for incidental
expenses.
Repositioning and Related Expenses
If lessees in large numbers return equipment to a location which has a larger
supply than demand, the Company may incur expenses in repositioning the
equipment to a better location. Such repositioning expenses generally range
between $50 and $500 per item of equipment, depending on geographic location,
distance and other factors, and may not be fully covered by the drop-off charge
collected from the lessee. In connection with necessary repositioning, the
Company may also incur storage costs, which generally range between $.20 and
$2.50 per TEU per day. In addition, the Company bears certain operating expenses
associated with its containers and chassis, such as the costs of maintenance and
repairs not performed by lessees, agent fees, depot expenses for handling,
inspection and storage and any insurance coverage in excess of that maintained
by lessee. The Company's insurance coverage provides protection against various
risks but generally excludes war-related and other political risks.
7
Disposition of Containers and Chassis and Residual Values
From time to time, the Company sells equipment that was previously leased. The
decision whether to sell depends on the equipment's condition, remaining useful
life and suitability for continued leasing or for other uses, as well as
prevailing local market resale prices and an assessment of the economic benefits
of repairing and continuing to lease the equipment compared to the benefits of
selling. Containers are usually sold to shipping or transportation companies for
continued use in the intermodal transportation industry or to secondary market
buyers, such as wholesalers, depot operators, mini storage operators,
construction companies and others, for use as storage sheds and similar
structures. Because old chassis are more easily remanufactured than old
containers, chassis are less likely to be sold than containers.
At the time of sale, the residual value of a container or chassis will depend,
among other factors, upon mechanical or economic obsolescence, as well as its
physical condition. While there have been no major technological advances in the
short history of containerization that have made active equipment obsolete,
several changes in standards have decreased the demand for older equipment, such
as the increase in the standard height of containers from 8 feet to 8 1/2 feet
in the early 1970's.
Marketing and Customers
The Company leases its containers and chassis to over 200 shipping and
transportation companies throughout the world, including nearly all of the
world's 20 largest international container shipping lines. With a network of
offices and agents covering major ports in the United States, Europe and the Far
East, the Company has been able to supply containers in nearly all locations
requested by its customers. In 1999, the Company's top 25 customers represented
approximately 67% of its consolidated revenues, with no single customer
accounting for more than 7%.
The customers for the Company's chassis are a large number of domestic
companies, many of which are domestic subsidiaries or branches of international
shipping lines to which the Company also leases containers.
The Company maintains close relationships with a large customer base on which
detailed credit records are kept. The Company's credit policy sets different
maximum exposure limits for its customers. Credit criteria may include, but are
not limited to, customer trade route, country, social and political climate,
assessments of net worth, asset ownership, bank and trade credit references,
credit bureau reports, and operational history.
The Company seeks to reduce credit risk by maintaining insurance coverage
against defaults and equipment losses. Although there can be no assurance that
such coverage will be available in the future, the Company currently maintains
contingent physical damage, recovery/repatriation and loss of revenue insurance
which provides coverage in the event of a customer's default. The policy covers
the cost of recovering the Company's equipment from the customer, including
repositioning costs, the cost of repairing the equipment and the value of
equipment which cannot be located or is uneconomical to recover. It also covers
a portion of the lease revenues the Company may lose as a result of the
customer's default (i.e., 180 days of lease payments following default). The
Company has the option to renew the current policy for periods through December
2001, subject to premium adjustments.
Competition
There are many companies leasing intermodal transportation equipment with which
the Company competes. Some of the Company's competitors have greater financial
resources than the Company or are subsidiaries or divisions of much larger
companies. Over the last several years, there has been consolidation in the
container leasing business resulting from several acquisitions. The result of
the consolidation has been fewer lessors, a more rationalized industry and a
stabilizing pricing environment. Management believes that the Company is
currently one of the world's largest dry freight standard container leasing
companies and the second largest container chassis leasing company in the United
States.
In addition, the containerized shipping industry which the Company services,
competes with providers of alternative methods of transporting goods, such as by
air, truck and rail. The Company believes that in most instances such
alternative methods are not as cost-effective as shipping of containerized
cargo.
8
Because rental rates for containers and chassis are not subject to regulation by
any government authority but are determined principally by the demand for and
supply of equipment in each geographical area, price is one of the principal
methods by which the Company competes. In times of low demand and excess supply,
leasing companies tend to grant price concessions, such as free days or pick-up
credits, in order to keep their equipment on lease and to avoid storage charges.
The Company attempts to design lease packages tailored to the requirements of
individual customers and considers its long-term relationships with customers to
be important to its ability to compete effectively. The Company also competes on
the basis of its ability to deliver equipment in a timely manner in accordance
with customer requirements.
Other Business Operations
In addition to its container and chassis leasing operations through Interpool
Limited and Trac Lease, the Company also receives revenues from other
activities. The Company leases approximately 500 freight rail cars to railroad
companies through its Chicago based Railpool division. Microtech Leasing
Corporation, a 75.5% owned subsidiary of the Company, leases microcomputers and
related equipment as does PCR, a 51% owned subsidiary. The Company also leases
intermodal trailers which are designed to be carried on rail flatcars and pulled
by tractor over the highway. The Company received, in the aggregate,
approximately 17% of its consolidated revenues for the year ended December 31,
1999 from these other business operations. These operations have been
consistently profitable since the Company's formation.
PoolStat Chassis Pool Management
Trac Lease has developed a new business service, which allows for cooperative
management of chassis among competing shipping lines. Under this program,
shipping lines can "pool" their chassis at common locations such as marine
terminals and railroad depots. The PoolStat software compiles data from each
location and reports on levels of chassis contribution as compared to levels of
chassis usage by each shipping line in the cooperative pool. The benefit of this
program to the shipping lines is a lower overall inventory requirement at each
location. In addition, centralized maintenance and repair improves service
levels to customers and the trucking community. The benefits to Trac Lease are
the management fee, and the closer relationship forged with the same shipping
lines, which lease chassis from Trac Lease on both a long and short-term basis.
A number of leasing and other companies have been vying to provide cooperative
pool services to the shipping community, and Trac Lease has been successful at
winning a number of the contracts awarded to date. PoolStat now has
approximately 80,000 chassis under contract and is actively looking to increase
its level of business.
Employees
As of December 31, 1999 the Company had approximately 360 employees,
approximately 340 of whom are based in the United States. Included in the total
employee count are approximately 220 employees of PCR. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its relations with its employees are good.
ITEM 2. PROPERTIES
On July 22, 1998, the Company purchased approximately 18,000 square feet of
condominium office space located on the 27th floor at 633 Third Avenue, New
York, NY 10017 and relocated the Company's New York office to this new location
during the fourth quarter of 1998. All the Company's' other commercial office
space, aggregating approximately 35,000 square feet, is leased. The Company's
executive offices are located at 211 College Road East, Princeton, New Jersey.
The Company also leases office facilities in Chicago, Portland, Barbados,
Aberdeen, Antwerp, Basel, Hong Kong and Singapore.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings from time to time incidental
to the conduct of its business. In the opinion of management, the Company is
adequately insured against the claims relating to such proceedings, and any
ultimate liability arising out of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through
solicitation of proxies during the fourth quarter of fiscal 1999.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Common Stock of the Company is traded on the New York Stock Exchange under
the symbol "IPX". The following table sets forth for the periods indicated
commencing on January 1, 1997, the high and low last reported sale prices for
the Common Stock on the New York Stock Exchange. All share and per share data
have been adjusted to reflect the 3-for-2 stock split effected on March 27, 1997
and have been rounded to the nearest eighth.
HIGH LOW
---- ---
Calendar Year 1997
First Quarter.............................. $16.75 $10.25
Second Quarter............................. 15.50 12.25
Third Quarter.............................. 17.75 13.50
Fourth Quarter............................. 17.625 13.50
Calendar Year 1998
First Quarter.............................. $15.50 $13.25
Second Quarter............................. 16.1875 14.3750
Third Quarter.............................. 18.9375 9.875
Fourth Quarter............................. 17.125 10.00
Calendar Year 1999
First Quarter.............................. $16.75 $12.4375
Second Quarter............................. 15.25 10.50
Third Quarter.............................. 13.50 7.50
Fourth Quarter............................. 9.125 6.875
As of March 20, 2000 there were approximately 1,500 record holders of Common
Stock. On March 20, 2000 the last reported sale price of the Common Stock on the
New York Stock Exchange was $6.625 per share.
The Company paid a quarterly dividend in the amount of 3.75 cents per share on
its Common Stock in January, April, July and October 1999.
Equity Financing
On January 27, 1997, Interpool Capital Trust, a Delaware statutory business
trust (the "Trust"), sold an aggregate of $75 million in aggregate liquidation
amount of 9-7/8% Capital Securities (the "Capital Securities") for a total sales
price of $75 million in cash. Interpool owns all the common securities of the
Trust. The proceeds received by the Trust from the sale of the Capital
Securities were used by the Trust to acquire $75 million of 9-7/8% Junior
Subordinated Debentures due February 15, 2027 of Interpool.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma consolidated
financial data for the Company, for the periods and at the dates indicated. The
historical financial data for each of the five years in the period ended
December 31, 1999, and at December 31, 1999, 1998, 1997, 1996, and 1995, are
derived from and qualified by reference to the historical consolidated financial
statements that have been audited and reported upon by Arthur Andersen LLP,
independent public accountants. This information should be read in conjunction
with the historical consolidated financial statements of the Company and the
notes thereto.
10
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
1999(1) 1998 1997(2) 1996(3) 1995(4)
------- ---- ------- ------- -------
INCOME STATEMENT DATA:
Revenues $ 217,840 $ 182,316 $ 161,425 $147,148 $127,925
Earnings before interest and taxes 79,628 96,624 86,474 81,481 70,752
Income before extraordinary gain/loss $21,871 $37,614 $33,091 $ 34,196 $ 29,545
========== ========== ========== ======== ========
Income per share before extraordinary gain/loss (5)
Basic $ 0.79 $ 1.36 $ 1.17 $ 1.24 $ 1.09
========== ========== ========== ======== ========
Diluted $ 0.77 $ 1.31 $ 1.13 $ 1.16 $ 1.02
========== ========== ========== ======== ========
Weighted average shares outstanding (5):
Basic 27,571 27,561 27,552 25,953 25,953
Diluted 28,234 28,615 29,370 31,438 30,533
Cash dividends declared per common share (5): $ 0.15 $0.15 $0.15 $0.13 $0.12
AS OF DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash, short-term investments and marketable
Securities $ 207,626 $ 112,298 $ 42,976 $ 70,005 $ 70,661
Total assets 1,443,259 1,362,234 1,114,456 939,418 851,600
Debt and capital lease obligations 998,228 932,157 744,227 602,704 571,102
Stockholders' equity 301,367 283,215 250,446 280,546 246,690
(1) The 1999 income statement data excludes an extraordinary gain of $740, net
of tax expense, resulting from the retirement of debt.
(2) The 1997 income statement data excludes an extraordinary loss of $5,428, net
of the tax benefit, resulting from the retirement of debt.
(3) The 1996 income statement data includes non-recurring expense items totaling
$3,892. The Company recorded a $1,500 charge for the initial public offering
expenses of Interpool Limited which was withdrawn in the fourth quarter;
this charge had a $.06 net income per share effect on basic basis and a $.05
net income per share effect on a diluted basis. Also, a $2,392 charge was
recorded for the accumulated dividends of the Company's subsidiary, Trac
Lease, Inc. which resulted from the acquisition of the outstanding preferred
stock of Trac Lease through the issuance of Interpool, Inc. preferred stock.
Such charge had no impact on net income per share because unpaid dividends
were included in the computation of net income per share in prior periods.
(4) The 1995 income statement data excludes the extraordinary gain of $2,422 net
of taxes resulting from the exchange of $67,436 of 5 1/4% Convertible
Exchangeable Subordinated Notes due 2018 for new 5 3/4% Cumulative
Convertible Preferred Stock.
(5) Restated to give effect of the three-for-two stock split effective March 27,
1997. In 1997, the Company adopted Statement of Financial Accounting
Standards Statement No. 128. See Note 1 to the consolidated financial
statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's historical financial condition and
results of operations should be read in conjunction with the historical
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this report.
Certain of the matters discussed herein and elsewhere in this Form 10-K may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and as such may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of Interpool to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
General
The Company generates revenues through leasing transportation equipment,
primarily dry freight standard containers and container chassis. Most of the
Company's revenues are derived from payments under operating leases and income
earned under finance leases, under which the lessee has the right to purchase
the equipment at the end of the lease term. In May 1999, the Company's Microtech
subsidiary acquired a 51% interest in Personal Computer Rentals Inc. (PCR), a
nationwide lessor of computers and related equipment.
Revenue derived from an operating lease generally consists of the total lease
payment from the customer. In 1999, 1998 and 1997, revenues derived from
operating leases were $189.2 million (90% of revenues), $148.0 million (81% of
revenues), and $127.6 million (79% of revenues), respectively.
Revenue derived from a direct finance lease consists only of income recognized
over the term of the lease using the effective interest method. The principal
component of the direct finance lease payment is reflected as a reduction to the
net investment in the direct finance lease. In 1999, 1998 and 1997, total
payments from direct finance leases were $86.7 million, $128.1 million and $94.4
million, respectively. The revenue component of total lease payments totaled
$20.7 million (10% of revenues), $34.3 million (19% of revenues) and $33.8
million (21% of revenues) in 1999, 1998 and 1997, respectively. The decrease in
the revenue component of total lease payments is a result of the reduction in
finance lease revenues of $14.2 million as a result of the securitized lease
receivables.
The Company's mix of operating and direct finance leases is a function of
customer preference and demand and the Company's success in meeting those
customer requirements. During the initial two years of either an operating lease
or a direct finance lease, the contribution to the Company's earnings before
interest and taxes is very similar. In subsequent periods, however, the
operating lease will generally be more profitable than a direct finance lease,
primarily due to the return of principal inherent in a direct finance lease.
However, after the long-term portion (and any renewal) of an operating lease
expires, the operating lease will have redeployment costs and related risks
which are avoided under a direct finance lease.
The Company conducts business with shipping line customers throughout the world
and is thus subject to the risks of operating in disparate political and
economic conditions. Offsetting this risk is the worldwide nature of the
shipping business and the ability of the Company's shipping line customers to
shift their operations from areas of unfavorable political and/or economic
conditions to more promising areas. Substantially all of the Company's revenues
are billed and paid in U.S. dollars. In addition, the Company's container
purchases are paid for in U.S. dollars. The Company believes these factors
substantially mitigate foreign currency rate risks.
Certain of the shipping lines to which the Company leases containers are
entities domiciled in several Asian countries. In addition, many of the
Company's customers are substantially dependent upon shipments of goods exported
from Asia. Economic disruption, political instability or military disturbances
in these areas of the world could adversely affect the Company. Although the
Company has not experienced any material adverse impact on its business as a
result of the recent financial conditions in certain Asian markets, there can be
no assurance that financial turmoil in one or more of the Asian markets would
not adversely affect the Company's business.
The Company's container leasing operations are conducted through Interpool
Limited, a Barbados corporation. The Company's effective tax rate benefits
substantially from the application of an income tax convention, pursuant to
which the profits of Interpool Limited from container leasing operations are
exempt from federal taxation in the United States. Such profits are subject to
Barbados tax at rates which are significantly lower than the applicable rates in
the United States. See "--United States Federal Income Tax." The Company's
chassis leasing operations are conducted primarily through Trac Lease. Certain
other United States equipment leasing activities are conducted through Interpool
itself.
12
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gain and losses to offset related
results on the hedge item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election before January
1, 1998). The Company has not yet quantified the impacts of adopting Statement
133 on its financial statements and has not determined the timing or method of
our adoption of Statement 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. The Company's revenues increased to $217.8 million for the year ended
December 31, 1999, from $182.3 million in the year ended December 31, 1998, an
increase of $35.5 million or 19%. The increase was due to increased operating
lease revenues of $23.5 million primarily generated by an expanded container and
chassis fleet, $18.3 million in leasing revenues generated by the assets
acquired in the PCR acquisition, as well as a gain of $7.9 million recognized
from a securitization completed during the three months ended March 31, 1999,
partially offset by a decrease in finance lease revenues of $14.2 million.
Subsequent to the securitization, the Company recognizes revenue only on its
retained interest in the securitized lease receivables.
Lease Operating and Administrative Expenses. The Company's lease operating and
administrative expenses increased to $73.8 million for the year ended December
31, 1999 from $45.0 million in the year ended December 31, 1998, an increase of
$28.8 million. The increase was primarily due to additional bad debt reserves
for specific losses, $15.3 million of lease operating and administrative
expenses as a result of the acquisition of PCR, as well as higher operating and
administrative costs resulting from expanded operations generating increased
commission, insurance and salary expense.
Depreciation and Amortization of Leasing Equipment. The Company's depreciation
and amortization expenses increased to $61.7 million in the year ended December
31, 1999 from $42.6 million in the year December 31, 1998, an increase of $19.1
million. The increase was due to a $6.8 million write-down of certain container
equipment for which the residual value was impaired, an increased fleet size, as
well as $2.2 million of depreciation and amortization as a result of the
acquisition of PCR. A specific manufacturer of containers provided the Company
with defective containers subject to a warranty claim, for which the expenses
are not recoverable due to the bankruptcy of the manufacturer. The Company
isolated the unit numbers of the defective containers and analyzed the proceeds
received upon the sale of these defective containers. The Company then reduced
the book value of these defective containers to scrap value in order to
approximate their net realizable value.
Other (Income)/Expense, Net. The change in other (income)/expense, net of $4.6
million was due to a decrease in the Company's income from unconsolidated
subsidiaries of $2.1 million. Additionally the Company's net loss on sale of
leasing equipment was $1.2 million in the year ended December 31, 1999 versus a
gain of $1.3 million in 1998.
Interest Expense, Net. The Company's net interest expense increased to $54.3
million in the year ended December 31, 1999 from $53.2 million in the year ended
December 31, 1998, an increase of $1.1 million. The increase in net interest
expense was due to increased interest expense of $2.1 million, as well as
increased investment income of $1.0 million. The increase in interest expense
was primarily due to increased borrowings to fund capital expenditures resulting
in incremental interest expense of $3.9 million, partially offset by reduced
borrowing costs resulting in interest expense savings of $1.8 million.
13
Provision for Income Taxes. The Company's provision for income taxes decreased
to $3.4 million from $5.8 million primarily due to lower taxable income.
Income Before Extraordinary Gain. As a result of the factors described above,
the Company's income before extraordinary gain decreased to $21.9 million in the
year ended December 31, 1999 from $37.6 million in the year ended December 31,
1998.
Extraordinary Gain. The Company recorded an extraordinary gain on the retirement
of debt of $.7 million in the year ended December 31, 1999.
Net Income. As a result of the factors described above, the Company's net income
decreased to $22.6 million in the year ended December 31, 1999 from $37.6
million in the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. The Company's consolidated revenues increased to $182.3 million for
the year ended December 31, 1998 from $161.4 million in the year ended December
31, 1997, an increase of $20.9 million or 13%. Of this increase, $8.3 million
was attributable to increased container revenue resulting from an increased
container fleet size, which by year-end had grown by approximately 74,000 TEUs
from the previous year. Chassis revenue also increased by $10.8 million with the
fleet increasing to 76,000 units from the previous level of 63,000. Revenue from
other business operations increased by $1.8 million in 1998 primarily due to
increased micro computer leasing revenue of $2.0 million. Partially offsetting
the increase in other business operations revenue was a reduction in intermodal
trailer leasing revenue of $.2 million.
Lease operating and administrative expenses. The Company's lease operating and
administrative expenses increased to $45.0 million for the year ended December
31, 1998 from $39.8 million in the year ended December 31, 1997, an increase of
$5.2 million. The increase was due to higher administrative costs of $3.2
million resulting from both increased operations and inflation, as well as
higher operating expenses of $2.0 million resulting from expanded operations
generating increased commission, insurance and other operating expenses.
Depreciation and amortization. The Company's depreciation and amortization
expenses increased to $42.6 million in the year ended December 31, 1998 from
$35.6 million in the year ended December 31, 1997, an increase of $7.0 million.
The increase is due to an increased fleet size.
Other income, net. The Company's income from unconsolidated subsidiaries net of
goodwill amortization was $.7 million in the year ended December 31, 1998. The
Company's gain on sale of leasing equipment increased to $1.3 million in the
year ended December 31, 1998 from $.5 million in the year ended December 31,
1997.
Interest expense, net. The Company's net interest expense increased to $53.2
million in the year ended December 31, 1998 from $48.9 million in the year ended
December 31, 1997, an increase of $4.3 million. The issuance of additional debt
and lease financing necessary for capital expenditures resulted in additional
interest expense.
Provision for income taxes. The Company's provision for income taxes increased
to $5.8 million in the year ended December 31, 1998 from $4.5 million in the
year ended December 31, 1997, an increase of $1.3 million. This increase was
primarily due to a higher effective tax rate resulting from greater income
contribution from the domestic intermodal division, as well as an increase in
Subpart F taxable income.
Net income. As a result of the factors described above, the Company's net income
was $37.6 million in the year ended December 31, 1998 versus income before
extraordinary loss of $33.1 million in the year ended December 31, 1997. For the
year ended December 31, 1998, the Interpool Limited international container
division contributed $34.6 million to net income while the domestic intermodal
division contributed $3.0 million. An extraordinary loss of $5.4 million, net of
tax benefit, was recorded in the year ended December 31, 1997. This loss
resulted from the retirement of debt replaced with the proceeds of other
financings.
Liquidity and Capital Resources.
The Company uses funds from various sources to finance the acquisition of
equipment for lease to customers. The primary funding source are cash provided
by operations, borrowings, generally from banks, securitization of lease
receivables, the issuance of capital lease obligations and the sale of the
Company's debt securities. In addition, the Company generates cash from the sale
of equipment being retired from the Company's fleet. In general, the Company
seeks to meet debt service requirements from the leasing revenue generated by
its equipment. Since 1990, the Company has been steadily increasing its fleet of
containers and adding to its portfolio of finance leases. The Company generated
cash flow from operations of $151.3 million, $162.6 million, and $134.7 million
in 1999, 1998 and 1997, respectively. In 1999 net cash provided by financing
activities was $250.3 million resulting from the issuance of debt and proceeds
14
from securitized lease receivables in excess of debt payments and dividends
paid. In 1998 and 1997, net cash provided by financing activities was $183.1
million and $150.5 million, the result of the proceeds from the issuance of debt
in excess of debt repayment and dividends paid. The Company has purchased
equipment costing $324.3 million in 1999, $263.0 million in 1998, and $263.8
million in 1997.
On March 30, 1999, the Company established a securitization facility of $250.0
million. This program provides the Company with a lower cost of capital for its
finance lease business and access to an additional source of funding. On March
31, 1999, the Company securitized approximately $235.5 million of lease
receivables through utilization of $190.0 million of this facility and recorded
a pre-tax gain of $7.9 million which is included in revenues; other costs and
associated tax effect brought the net gain to $5.5 million. A portion of the
gain has been deferred to record an estimate of the losses under recourse
provisions for the lease receivables securitized. Included in other investment
securities at December 31, 1999, is approximately $33.4 million of retained
interests in the securitized lease receivables. At December 31, 1999, $164.0
million of the securitization facility was utilized.
The Company has a $215.0 million revolving credit facility with a group of
commercial banks; on December 31, 1999, $140.0 million was outstanding, with an
interest rate of 6.7%. The terms of this facility extends until May 31, 2000
(unless the lenders elect to renew the facility) at which time a maximum of 10%
of the amount then outstanding becomes due, with the remainder becoming payable
in equal monthly installments over a five year period. In addition, as of
December 31, 1999, the Company had available lines of credit of $71.0 million
under various facilities, under which $52.6 million was outstanding. Interest
rates under these facilities ranged from 6.7% to 7.4%. Subsequent to December
31, 1999 the Company has continued to incur and repay debt obligations in
connection with financing its equipment leasing activities.
On February 24, 1998, the Company issued $100 million principal amount of 6-5/8%
Notes due 2003 (the "6-5/8% Private Notes"). The net proceeds were used to repay
$83 million in borrowings under the revolving credit agreement and for other
general corporate purposes. On September 18, 1998, the Company consummated an
exchange offer whereby the entire $100 million principal amount of 6-5/8%
Private Notes were exchanged for the same principal amount of Interpool 6-5/8%
Notes due 2003 (the "6-5/8% Exchange Notes"), which have been registered under
the Securities Act. The 6-5/8% Private Notes were originally issued and sold in
a transaction exempt from registration under the Securities Act. The 6-5/8%
Exchange Notes issued in the exchange offer have substantially the same terms
and conditions as the unregistered 6-5/8% Private Notes, except that the 6-5/8%
Exchange Notes are not subject to the restrictions on resale or transfer, which
applied to the unregistered 6-5/8% Private Notes. During the fourth quarter of
1999, the Company retired $17.0 million of the 6-5/8% Private Notes and
recognized an extraordinary gain of $.7 million. As of December 31, 1999, $83.0
million principal amount of 6-5/8% Private Notes remain outstanding.
On April 30, 1998, the Company acquired a 50% interest in CAI, a container
leasing company whose business is primarily in the short term master lease
market. CAI would not be deemed a "significant subsidiary" of the Company for
purposes of the Securities and Exchange Commission accounting requirements. The
Company also advanced CAI subordinated debt. The Company's investment in and
advances to CAI totaled approximately $49.4 million.
In May 1999, the Company's Microtech subsidiary acquired a 51% interest in
Personal Computer Rentals, Inc. (PCR), a nationwide lessor of computers and
related equipment. The Company also provided financing to PCR.
As of December 31, 1999, commitments for capital expenditures totaled
approximately $81.2 million. The Company expects to fund such capital
expenditures through some combination of cash flow from the Company's
operations, borrowings under its available credit facilities and additional
funds raised through the sale of its debt securities in the private and/or
public markets.
The Company believes that cash generated by continuing operations, together with
existing short-term credit facilities, the issuance of debt securities in the
appropriate markets and the portion of the proceeds remaining from recent debt
security sales will be sufficient to finance the Company's working capital needs
for its existing business, planned capital expenditures and expected debt
repayments over the next twelve months. The Company anticipates that long-term
financing will continue to be available for the purchase of equipment to expand
its business in the future. In addition, from time to time Interpool explores
new sources of capital both at the parent and subsidiary levels.
In September 1999, the Company made a proposal to negotiate acquiring The Cronos
Group ("Cronos"), a container lessor, through the Company's affiliate Container
Applications International, Inc. pursuant to which each shareholder of Cronos
15
would receive $5.00 per share in cash. The Cronos Board of Directors rejected
the proposal to negotiate and subsequently instituted a Shareholder Rights Plan.
Under the plan, the Rights will be exercisable only if triggered by a person's
or group's acquisition of 20% or more of Cronos Common Stock. If triggered, each
Right, other than Rights held by the acquiring person or group, would entitle
its holder to purchase a specified number of Cronos common shares for 50% of
their market value at that time. In December 1999, the Company entered into a
confidentiality and standstill agreement with Cronos and has agreed to withdraw
its nominees for election to the Cronos Board or Directors.
As previously announced, the Company has authorized the repurchase up to
1,000,000 shares of its common stock. The shares will be purchased from time to
time through open market purchases or privately negotiated transactions. A total
of 158,500 shares were purchased by the Company during the fourth quarter of
1999, for an aggregate purchase price of $1.17 million.
The following table sets forth certain historical cash flow information for the
three years ended December 31, 1999.
Year Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
Net cash provided by operating activities $151.3 $162.6 $134.7
Proceeds from disposition of leasing equipment 21.8 8.3 5.1
Acquisition of leasing equipment (201.0) (182.3) (105.9)
Investment in direct financing leases (123.3) (80.7) (157.8)
Net proceeds of issuance of long-term debt and capital leases obligations in
excess of payment of long-term debt and capital lease obligations 74.1 153.1 139.0
From time to time, the Company enters into discussions with third parties
regarding potential acquisitions or business combinations. If additional capital
were to be required for any such acquisition, there can be no assurance that
such additional capital would be available on terms acceptable to the Company.
On January 27, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission under which the Company may offer from time
to time up to $400 million aggregate principal amount of its debt and/or equity
securities. As of March 30, 2000, this registration statement has not yet become
effective.
In 1998, the Company entered into interest rate swap contacts with notional
amounts totaling $79.7 million. The terms of the interest rate swap contracts
are for three, five and seven years. The interest rate swap contacts convert
available rate debt into fixed rate debt. The maturity of these contracts
coincides with the principal and maturity of the underlying debt instruments
hedged. At December 31, 1999, the notional amount was approximately $57.8
million.
In 1996, the Company entered into a five year interest rate swap contract, with
a notional amount of $80 million to convert variable rate debt into fixed rate
debt. The maturity of this contract coincides with the principal and maturity of
the underlying debt instruments hedged. The notional amount was reduced for 1997
when a portion of the debt was retired. At December 31, 1999, the notional
amount was approximately $26.2 million.
Interest rate swap contracts are intended to be an integral part of borrowing
transactions and, therefore are not recognized at fair market value. Interest
differentials paid or received under these contract are recognized as yield
adjustments to the effective yield of the underlying debt instruments hedged.
Interest rate swap contracts would only be recognized at fair value if the
hedged relationship is terminated. Gains or losses accumulated prior to
termination of the relationship would be amortized as a yield adjustment over
the shorter of the remaining life of the contract, or the remaining period to
maturity of the underlying debt instrument hedged. If the contract remained
outstanding after termination of the hedged relationship, subsequent changes in
market value of the contract would be recognized in earnings. The Company does
not use leverage swaps and does not use leverage in any of its investment
activities that would put principal capital at risk.
United States Federal Income Tax
The Company is subject to federal and state income taxes as a Subchapter "C"
corporation under the Internal Revenue Code (the "Code"). The Company, Trac
Lease, Inc. and other United States subsidiaries file a consolidated United
States federal income tax return. This consolidated group is liable for federal
income taxes on its worldwide income.
16
Personal holding company issues. If the Company or any of its subsidiaries were
classified as a personal holding company, such corporation's undistributed
personal holding company income would be subject to a federal income tax of
39.6% in addition to its regular federal income tax liability. The federal
income tax laws have two requirements for classifying a company as a personal
holding company. The Company and its subsidiaries currently satisfy the first
requirement, the ownership of more than 50% of the value of the Company's stock
by five or fewer individuals. Whether or not the Company or any of its
subsidiaries satisfies the second requirement, that at least 60% of such
corporation's adjusted ordinary gross income constitutes personal holding
company income, will depend upon such corporation's income mix.
Based upon current management projections, Interpool will be considered a
personal holding company for federal income tax purposes for 1999 (and possibly
in subsequent years). If Interpool or any of its subsidiaries is classified as a
personal holding company for federal income tax purposes, in addition to its
regular federal income tax liability, Interpool's or such subsidiary's
undistributed personal holding company income (generally taxable income with
certain adjustments, including a deduction for federal income taxes and
dividends paid) would be subject to a personal holding company tax of 39.6%.
Management anticipates that for 1999 Interpool's current level of dividends will
be sufficient to avoid having any undistributed personal holding company income,
and thus does not anticipate that there will be any personal holding company tax
imposed for 1999. There can be no assurance, however, that the Company will not
at some point in the future become liable for such personal holding company tax.
Furthermore, the Company may at some point in the future elect to increase the
dividend rate on its common stock in order to avoid such tax.
The Company has incurred certain losses from leasing activities that are
characterized for tax purposes as "Suspended Passive Losses." These losses can
be carried forward indefinitely to offset income from future leasing activities.
As of December 31, 1999 such suspended passive losses totaled approximately
$91.8 million.
Trac Lease. Trac Lease has approximately $15.6 million of net operating loss
carry-forwards for federal income tax purposes, which may be used only to offset
the income of Trac Lease and, if not utilized, will expire between 2005 and
2006. The use of substantially all these loss carry-forwards is subject to a
number of limitations under federal tax laws.
Interpool Limited. Under certain circumstances, the Company may be liable for
United States federal income taxes on earnings of Interpool Limited and any
other foreign subsidiaries of the Company, whether or not such earnings are
distributed to the Company. This would occur if Interpool Limited realized
"Subpart F income" as defined in the Code, if it were deemed to be a foreign
personal holding company or a passive foreign investment company, or if it were
to have an increase in earnings invested in United States property.
Subpart F income includes foreign personal holding company income, such as
dividends, interest and rents. Although a substantial portion of Interpool
Limited's income consists of rents from container leasing activities, the
Company believes that such rents are not Subpart F income because they are
derived from the active conduct of a trade or business and received from
unrelated persons. However, Interpool Limited has received some dividend and
interest income in past years, which was taxed as Subpart F income.
If Interpool Limited were treated as a foreign personal holding company for any
year, the Company would be taxed on the amount the Company would have received
if Interpool Limited had distributed all its income to the Company as a
dividend. One of the conditions for treating a foreign subsidiary as a foreign
personal holding company is that a minimum of 60% of the foreign subsidiary's
gross income must be foreign personal holding company income. Foreign personal
holding company income does not include rental income that constitutes at least
50% of the subsidiary's gross income. Because the Company expects that rental
income will constitute at least 50% of Interpool Limited's gross income, the
Company does not anticipate that Interpool Limited will be deemed a foreign
personal holding company.
A foreign corporation such as Interpool Limited is a passive foreign investment
company if 75% or more of its gross income is foreign personal holding company
income or the average percentage of assets by value held by such corporation
during the taxable year which produce foreign personal holding company income is
at least 50%. The Company does not believe that Interpool Limited is a passive
foreign investment company. If Interpool Limited were to become a passive
foreign investment company, the Company would make the election to treat
Interpool Limited as a qualified electing fund with the result that the Company
would be taxed each year on Interpool Limited's entire earnings. The Taxpayer
Relief Act of 1997 eliminated application of the passive foreign investment
company rules to the Company for years after 1997.
A parent company is also subject to taxation when a foreign subsidiary increases
the amount of its earnings invested in United States property during any
calendar year. The Company does not expect that Interpool Limited will invest
any earnings in United States property.
17
United States/Barbados income tax convention. Interpool Limited's business is
managed and controlled in Barbados; it also has a permanent establishment in the
United States. Under the Tax Convention, any profits of Interpool Limited from
leasing of containers used in international trade generally are taxable only in
Barbados and not in the United States. For its taxable years commencing prior to
January 1, 1994, Interpool Limited is entitled to the benefits of the Tax
Convention for each year that more than 50% of the shares of Interpool Limited
are owned, directly or indirectly, by United States citizens or residents (the
"stock ownership test") and its income is not used in substantial part, directly
or indirectly, to meet liabilities to persons who are not residents or citizens
of the United States (the "base erosion test"). The Company believes that
Interpool Limited passes both of these tests and should continue to be eligible
for the benefits of the Tax Convention, but there can be no assurance as to such
continued eligibility. If Interpool Limited ceased to be eligible for the
benefits of the Tax Convention, a substantial portion of its income would become
subject to the 35% United States federal income tax and the 30% branch profits
tax.
A protocol to the Tax Convention has been ratified by the United States and
Barbados which amends the eligibility provision of the Tax Convention, making
the stock ownership test easier to satisfy and the base erosion test more
difficult to satisfy. The protocol became effective on January 1, 1994 and
applies to taxable years of Interpool Limited commencing on or after that date.
The Company believes that Interpool Limited will continue to satisfy the base
erosion test and remain eligible for the benefits of the Tax Convention after
1993.
Neither the Tax Convention nor the protocol affords Interpool Limited any relief
from the personal holding company tax or the accumulated earnings tax. To the
extent that Interpool Limited has United States source income that is personal
holding company income or is not needed in its business, Interpool Limited could
be taxed on such income unless such income is distributed to the Company as a
dividend. The Company expects that Interpool Limited would distribute any such
income to the Company.
State and Local Taxes
Income taxes. The Company and Trac Lease are liable for state and local income
taxes on their income, and Interpool Limited is liable for state and local
income taxes on its earnings attributable to operations in the United States.
Sales tax. To date, Interpool Limited and Trac Lease generally have not paid
sales taxes on their leasing revenues to the states in which they conduct
business because management has believed such revenues to be exempt from state
sales taxes on several grounds, including a long-standing interpretation of the
Commerce Clause of the United States Constitution that would prohibit the
imposition of a tax on cargo containers and chassis used primarily for
transportation of goods in interstate commerce or international trade. Recently,
Itel Containers International Corp. ("Itel"), a container leasing company,
challenged an attempt by the State of Tennessee to collect sales tax on Itel's
proceeds from the leasing of containers delivered in Tennessee. In a ruling by
the United States Supreme Court in February 1993, Itel's position was rejected
and the Court upheld the right of Tennessee to impose sales tax on leasing
revenues from containers delivered in Tennessee. The Company cannot predict the
extent to which states other than Tennessee will now attempt to collect sales
tax on the Company's equipment leasing revenues based on this Supreme Court
decision. Under the terms of the Company's equipment leases, the Company would
be entitled to pass any such sales tax on to its lessees.
Inflation
Management believes that inflation has not had a material adverse effect on the
Company's results of operations. In the past, the effects of inflation on
administrative and operating expenses have been largely offset through economies
of scale achieved through expansion of the business.
Year 2000
During 1998, a working group comprised of senior management and members from
potentially affected departments formed to determine the potential scope and
costs associated with the onset of the calendar year 2000 ("Y2K") and to insure
that the Company's systems continued to meet its internal needs and those of its
customers. The Y2K Working Group met periodically during 1998 and 1999, and
reported its findings and proposed plans to the Company's Board of Directors.
As a result of the analysis, three of the Company's four software systems: the
fleet management system, the accounting system for accounts payable and general
ledger, and the overseas data input program were upgraded or replaced as
necessary. In addition, the telephone PBX systems were replaced as were a number
of personal computers of a specific age and model. Recognizing that there may
18
have been additional Y2K factors related to its dependence on other business
partners, including customers, suppliers, and service providers, the Company
developed a questionnaire requesting Y2K project information from over 400
business partners, including approximately 95% of all customers and all key
suppliers and service providers. As a result of the Company's actions to assure
readiness, the much awaited arrival of Y2K passed without incident.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The nature of our business exposes us to market risk arising from changes in
interest rates.
The Company manages interest rate risk to protect its margins on existing
transactions. Interest rate risk is the risk of earnings volatility attributable
to changes in interest rates. Additionally, the Company considers interest rate
swap contracts as an integral part of borrowing transactions. The Company seeks
to minimize its exposure by entering into amortizing interest rate swap
contracts, which coincide with the principal and maturity of the underlying debt
instruments hedged. The Company does not use leveraged swaps and does not use
leverage in any of its investment activities that would put principal capital at
risk.
For 1999, a 10% change in interest rates would result in a $.7 million change in
pretax earnings of the Company.
For further information regarding the Company's floating and fixed rate debt,
reference is made to Note 4 to the 1999 Consolidated Financial Statements.
Credit Risk
The Company leases its containers and chassis to over 200 shipping and
transportation companies throughout the world.
For further information regarding the Company's credit risk procedures,
reference is made to Item 1 - Marketing and Customers.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page No.
INTERPOOL, INC.
Report of Independent Public Accountants............................................................ 21
Consolidated Balance Sheets--At December 31, 1999 and 1998.......................................... 22
Consolidated Statements of Income For the Years Ended December 31, 1999, 1998 and 1997.............. 23
Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1999,
1998 and 1997....................................................................................... 24
Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997.......... 25
Notes to Consolidated Financial Statements ......................................................... 26
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Interpool, Inc.:
We have audited the accompanying consolidated balance sheets of Interpool, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interpool, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles in
the United States.
Arthur Andersen LLP
New York, New York
March 1, 2000
21
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(dollars in thousands, except per share amounts)
ASSETS 1999 1998
---- ----
CASH AND SHORT-TERM INVESTMENTS $ 207,388 $ 107,226
MARKETABLE SECURITIES, at fair value 238 5,072
ACCOUNTS AND NOTES RECEIVABLE, less allowance of $10,275 and
$4,632, respectively 31,837 32,746
NET INVESTMENT IN DIRECT FINANCING LEASES 164,394 356,369
OTHER RECEIVABLES, net, including amounts from related parties of
$13,433 and $13,433, respectively 52,437 56,758
LEASING EQUIPMENT, net of accumulated depreciation and amortization of
$230,460 and $169,079, respectively 876,067 736,094
OTHER INVESTMENT SECURITIES, at fair value 33,359 ---
OTHER ASSETS 77,539 67,969
---------- ----------
TOTAL ASSETS $1,443,259 $1,362,234
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 47,907 $ 50,098
INCOME TAXES:
Current 346 858
Deferred 18,649 18,751
---------- ----------
18,995 19,609
---------- ----------
DEFERRED INCOME 618 1,531
DEBT AND CAPITAL LEASE OBLIGATIONS, including $2,296 and $2,447
due to a related party, respectively:
Due within one year 115,286 77,776
Due after one year 882,942 854,381
---------- ----------
998,228 932,157
---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES IN SUBSIDIARY GRANTOR TRUSTS (holding solely junior
Subordinated Deferrable interest debentures of the Company) (75,000 shares
9-7/8% Capital securities outstanding, liquidation preference $75,000) 75,000 75,000
MINORITY INTEREST IN EQUITY OF SUBSIDIARIES 1,144 624
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001 per share; 1,000,000 authorized, none issued --- ---
Common stock, par value $.001 per share; 100,000,000 shares authorized,
27,579,952 issued at December 31, 1999 and 27,566,452 at December 31, 1998 28 28
Additional paid-in capital 124,184 124,046
Treasury stock, at cost, 158,500 shares in 1999 (1,170) ---
Retained earnings 177,612 159,138
Accumulated other comprehensive income 713 3
---------- ----------
Total stockholders' equity 301,367 283,215
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,443,259 $1,362,234
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
22
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
REVENUES $217,840 $182,316 $161,425
-------- -------- --------
COST AND EXPENSES:
Lease operating expenses 37,112 25,071 23,287
Administrative expenses 29,050 17,826 14,573
Provision for doubtful accounts 7,686 2,142 1,972
Depreciation and amortization of leasing equipment 61,736 42,651 35,611
Other (income)/expense, net 2,628 (1,998) (492)
Interest expense 66,406 64,271 54,131
Interest income (12,049) (11,061) (5,248)
-------- -------- --------
192,569 138,902 123,834
-------- -------- --------
Income before provision for income taxes and extraordinary items 25,271 43,414 37,591
PROVISION FOR INCOME TAXES 3,400 5,800 4,500
-------- -------- --------
Income before extraordinary items 21,871 37,614 33,091
Extraordinary gain/(loss) on debt retirement, net of applicable taxes of
($494) and $1,825 740 --- (5,428)
-------- -------- --------
NET INCOME $ 22,611 $ 37,614 $ 27,663
======== ======== ========
INCOME PER SHARE BEFORE EXTRAORDINARY ITEMS AND PREMIUM PAID ON REDEMPTION OF
PREFERRED STOCK:
Basic $ 0.79 $ 1.36 $ 1.17
======== ======== ========
Diluted $ 0.77 $ 1.31 $ 1.13
======== ======== ========
EXTRAORDINARY GAIN/(LOSS) PER SHARE:
Basic $ 0.03 NA $ (0.20)
======== ======== ========
Diluted $ 0.03 NA $ (0.18)
======== ======== ========
PREMIUM PAID ON REDEMPTION OF PREFERRED STOCK:
Basic NA NA $ (0.24)
======== ======== ========
Diluted NA NA $ (0.23)
======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.82 $ 1.36 $ 0.73
======== ======== ========
Diluted $ 0.80 $ 1.31 $ 0.71
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING (in
thousands):
Basic 27,571 27,561 27,552
======== ======== ========
Diluted 28,234 28,615 29,370
======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
23
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(dollars and shares in thousands)
Preferred Stock Common Stock Accum.
--------------- ------------ Additional Other
Par Par Paid-in Treasury Retained Comp. Comp.
Shares Value Shares Value Capital Stock Earnings Income Income
------ ----- ------ ----- ------- ----- -------- ------ ------
BALANCE, December 31, 1996 759 $ 1 25,953 $26 $170,172 --- 109,837 $ 510
Net income --- --- --- --- --- --- 27,663 --- $27,663
Other comprehensive income --- --- --- --- --- --- --- 205 205
-------
Comprehensive income --- --- --- --- --- --- --- $27,868
=======
Redemption of preferred stock (510) (1) --- --- (46,154) --- (6,716) ---
Conversion of preferred stock (249) --- 1,597 2 (2) --- --- ---
Conversion of subordinated
notes --- --- 2 --- 30 --- --- ---
Cash dividends declared:
Preferred stock, $1.31 per
share --- --- --- --- --- --- (994) ---
Common stock, $0.15 per
share --- --- --- --- --- --- (4,133) ---
---- ---- ------ --- -------- ------- -------- -----
BALANCE, December 31, 1997 --- --- 27,552 28 124,046 --- 125,657 715
Net income --- --- --- --- --- --- 37,614 --- $37,614
Other comprehensive loss --- --- --- --- --- --- --- (712) (712)
-------
Comprehensive income --- --- --- --- --- --- --- --- $36,902
=======
Shares issued on exercise of
stock option --- --- 37 --- 363 --- --- ---
Shares surrendered in
satisfaction of stock option
purchase price --- --- (23) --- (363) --- --- ---
Cash dividends declared:
Common Stock, $0.15 per
share --- --- --- --- --- --- (4,133) ---
---- ---- ------ --- -------- --- -------- -----
BALANCE, December 31, 1998 --- --- 27,566 28 124,046 --- 159,138 3
Net income --- --- --- --- --- --- 22,611 --- $22,611
Other comprehensive income --- --- --- --- --- --- --- 710 710
-------
Comprehensive income --- --- --- --- --- --- --- --- $23,321
=======
Shares issued on exercise of
stock option --- --- 14 --- 138 --- ---
Purchase of 158,500 shares of
treasury stock --- --- --- --- --- (1,170) --- ---
Cash dividends declared:
Common stock, $0.15 per
share --- --- --- --- --- --- (4,137) ---
---- ---- ------ --- -------- ------- -------- -----
BALANCE, December 31, 1999 --- $--- 27,580 $28 $124,184 $(1,170) $177,612 $ 713
==== ==== ====== === ======== ======= ======== =====
The accompanying notes to consolidated financial statements are
an integral part of these statements.
24
INTERPOOL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,611 $37,614 $ 27,663
Adjustments to reconcile net income to net cash provided by
operating activities --
Extraordinary (gain) loss on retirement of debt (740) --- 5,428
Gain on securitized lease receivables (7,942) --- ---
Loss (gain) on sale of marketable securities 43 (1,734) (195)
Depreciation and amortization 57,000 44,590 37,439
Loss (gain) on sale of leasing equipment 1,196 (1,313) (492)
Collections on net investment in direct financing leases 86,657 128,064 94,384
Income recognized on direct financing leases (20,725) (34,288) (33,820)
Provision for uncollectible accounts 7,686 2,142 1,972
Changes in assets and liabilities -
Accounts and notes receivable 2,779 (6,978) (137)
Other assets 8,759 (20,321) (9,159)
Accounts payable and accrued expenses (9,209) 7,112 9,054
Income taxes payable (1,290) 945 582
Provision for deferred income taxes 552 2,935 1,989
Other receivables 4,321 4,186 (49)
Deferred income (914) (499) 60
Minority interest in equity of subsidiaries 520 115 (20)
--------- --------- ---------
Net cash provided by operating activities 151,304 162,570 134,699
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of leasing equipment (200,950) (182,350) (105,905)
Proceeds from dispositions of leasing equipment 21,789 8,253 5,115
Proceeds from disposition of loan receivable --- 14,148 ---
Investment in loan receivable --- (5,698) (21,514)
Investment in direct financing leases (123,337) (80,694) (157,845)
Investment in and advances to subsidiary (3,500) (47,469) ---
Changes in marketable securities and other investing activities 4,775 8,139 (20,009)
Accrued equipment purchases 2,661 16,856 ---
Acquisitions, net of cash acquired (2,887) --- ---
--------- --- ---
Net cash used for investing activities (301,449) (268,815) (300,158)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 145,181 230,708 391,533
Payment of long-term debt and capital lease obligations (71,044) (77,616) (291,554)
Proceeds from issuance of capital securities --- --- 73,300
Redemption of preferred stock --- --- (52,871)
Borrowings of revolving credit lines 263,170 297,428 197,169
Repayment of revolving credit lines (270,918) (263,318) (162,091)
Proceeds from issuance of common stock 138 --- ---
Purchase of treasury stock (1,170) --- ---
Proceeds from securitized lease receivables 189,087 --- ---
Dividends paid (4,137) (4,133) (4,958)
--------- --------- ---------
Net cash provided by financing activities 250,307 183,069 150,528
--------- --------- ---------
Net increase (decrease) in cash and short-term investments 100,162 76,824 (14,931)
CASH AND SHORT-TERM INVESTMENTS, beginning of year 107,226 30,402 45,333
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, end of year 207,388 $ 107,226 $ 30,402
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
25
INTERPOOL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(1) Nature of operations and significant accounting policies:
The nature of operations and the significant accounting policies used by
Interpool, Inc. and subsidiaries (the "Company" or "Interpool") in the
preparation of the accompanying consolidated financial statements are summarized
below. The Company's accounting records are maintained in United States dollars
and the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
Nature of operations--
The Company and its subsidiaries conduct business principally in a single
industry segment, the leasing of intermodal dry freight standard containers,
chassis and other transportation related equipment. Within this single industry
segment, the Company has two reportable segments: container leasing and domestic
intermodal equipment. The container leasing segment specializes in the leasing
of intermodal dry freight standard containers, while the domestic intermodal
equipment segment specializes in the leasing of intermodal container chassis and
other equipment namely freight rail cars and intermodal trailers. The Company
leases its containers principally to international container shipping lines
located throughout the world. The customers for the Company's chassis are a
large number of domestic companies, many of which are domestic subsidiaries or
branches of international shipping lines. Equipment is purchased directly or
acquired through conditional sales contracts and lease agreements, many of which
qualify as capital leases.
Basis of consolidation--
The consolidated financial statements include the accounts of the Company and
subsidiaries more than 50% owned. All significant intercompany transactions have
been eliminated. Minority interest in equity of subsidiaries represents the
minority stockholders' proportionate share of the equity in the income of the
subsidiaries. In connection with acquisitions in 1988 and 1993 of certain
consolidated subsidiaries, the excess of fair value of assets acquired over the
acquisition cost was allocated proportionately to certain assets to reduce the
value assigned to those assets. For accounting purposes this allocation has only
been recorded in the consolidation of the Company and its subsidiaries.
In connection with certain investments in which the Company does not own a
majority interest, these investments are accounted for using the equity method
of accounting. The excess of costs over the fair value of net assets acquired is
being amortized on a straight-line basis over twenty years. In addition, the
Company's equity in the income and/or loss from such equity investments is
included in other (income)/expense, net. The Company's investment in its equity
method investees is included in other assets.
The Company's equity in the income and/or loss from such equity investments, net
of goodwill amortization, is included in other (income)/expense, net and was
approximately $1,315 and ($686) for the years ended December 31, 1999 and 1998,
respectively. The Company had no income and/or loss from such equity investments
in 1997.
Goodwill--
Goodwill represents the excess of costs over the fair value of net assets
acquired and is being amortized on a straight-line basis over twenty years.
Translation of foreign currencies--
The Company considers the U. S. dollar its functional currency and therefore,
translates foreign currency statements using an average exchange rate for
revenue and expense accounts and the rate of exchange in effect at the balance
sheet date for assets and liabilities. Substantially all transactions are U.S.
dollar denominated.
26
(dollars in thousands, except per share amounts)
Revenues--
Equipment leasing revenues include revenue from operating leases and income on
direct financing leases, which is recognized over the term of the lease using
the effective interest method.
Leasing equipment--
As of December 31, 1999, in excess of 98% of leasing equipment is on lease to
customers. The net value of equipment available for hire is not material.
Depreciation and amortization of leasing equipment (both equipment currently
on-lease to customers and available for hire) are provided under the
straight-line method based on the following estimated useful lives:
Dry freight standard containers 12-1/2 to 15 years
Chassis 15 years
Other 3 to 25 years
Effective July 1, 1997, the Company revised its estimate of the depreciation
life of chassis from 20 years to 15 years and also changed the estimated salvage
value of these chassis from one thousand two hundred dollars per unit to two
thousand six hundred dollars per unit. The effect of this change was to decrease
depreciation expense by $853 for the six months ended December 31, 1997.
Gains or losses resulting from the disposition of leasing equipment are recorded
in the year of disposition.
The residual value of leasing equipment is estimated based on the projections
for the economic value and market value of intermodal equipment as well as the
Company's experience in leasing and selling similarly aged equipment. Such
projected values are reviewed and updated when market and/or economic conditions
change. The Company continually reviews leasing equipment and other long lived
assets to evaluate whether changes have occurred that would suggest these assets
may be impaired based on the estimated cash flows of the assets over the
remaining amortization period. If this review indicates that the remaining
estimated useful life requires revision or that the asset is not recoverable,
the carrying amount of the asset is reduced to its fair value.
Marketable and other investment securities--
Management has determined that all securities are to be held for an indefinite
period of time and classified as securities available-for-sale carried at market
value. Unrealized holding gains and losses for available-for-sale securities are
credited (charged) to a component of stockholders' equity net of related income
taxes. Management determines the appropriate classifications of securities at<