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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 0-24464
THE CRONOS GROUP
(Exact name of Registrant as specified in its charter)
LUXEMBOURG NOT APPLICABLE
(State or other Jurisdiction of incorporation (I.R.S Employer Identification No.)
or organization)
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODES:
(352) 453145
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
Title of each class Name of each exchange on which registered
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
COMMON SHARES, $2 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 23, 2000 (Common Shares) was approximately
$49,744,305.
The number of Common Shares outstanding as of March 23, 2000:
CLASS NUMBER OF SHARES OUTSTANDING
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Common 9,158,378
Portions of the following documents have been incorporated by reference
into this report.
DOCUMENT PARTS IN WHICH INCORPORATED
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Registrant's Registration Statement On Form S-8, dated
February 25, 2000 Part I
Registrant's Current Report On Form 8-K, dated January 21,
2000 Part I
Registrant's Quarterly Report On Form 10-Q, for the Quarter
Ended June 30, 1999 Part II
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THE CRONOS GROUP
TABLE OF CONTENTS
PAGE
----
Introductory Note........................................... ii
PART I
Item 1 -- Description of Business........................... 1
Item 2 -- Properties........................................ 10
Item 3 -- Legal Proceedings................................. 11
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................... 12
PART II
Item 5 -- Market for the Company's Common Equity and Related
Stockholder Matters....................................... 13
Item 6 -- Selected Financial Data........................... 14
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 7A -- Quantitative and Qualitative Disclosures about
Market Risk............................................... 22
Item 8 -- Financial Statements and Supplementary Data....... 23
Item 9 -- Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 23
PART III
Item 10 -- Directors and Executive Officers of Registrant... 24
Item 11 -- Executive Compensation........................... 27
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management............................................ 33
Item 13 -- Certain Relationships and Related Transactions... 35
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 37
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INTRODUCTORY NOTE
Unless the context indicates otherwise, the "Company" means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
"Cronos" means The Cronos Group together with its subsidiaries and predecessors.
"TEU" means twenty-foot equivalent units, the standard unit of physical
measurement in the container industry. All references herein to "$" or "Dollars"
are to United States dollars.
All statements in this report regarding the market for the Company's
container leasing services and the Company's revenues, expenses, and financial
condition, and any statement containing the words "anticipate," "believe,"
"plan," "estimate," "expect," "intend," or other similar expressions, constitute
forward-looking statements. Our actual results of operations may differ
materially from those contained in any forward-looking statement. This
cautionary statement applies to all forward-looking statements wherever they
appear in this report.
An investment in the Common Shares of the Company involves a high degree of
risk. The risks that attend the Company and its business include the following:
The Company is heavily dependent upon third parties to supply it with
the capital needed to acquire containers; such capital may not be available
to the Company to enable it to expand its fleet of containers.
The Company is in a dispute with a group of container owners who claim
that the Company owes it $2.6 million.
The Company settled an SEC investigation in November 1999. The Company
agreed to cease and desist from committing or causing any future violation
of certain antifraud, reporting, record keeping, and internal control
provisions of the Federal securities laws.
The market for the Company's outstanding shares of Common Stock is not
liquid. The Company's four largest groups of shareholders control
approximately 60% of its outstanding Common Shares. For 1999, the average
daily trading volume in the Company's shares was 9,288 shares, or
approximately 0.1% of the Company's outstanding shares.
For a fuller statement of the risk factors attendant to an investment in
the Company's Common Shares, see the section entitled "Risk Factors" in the
Registration Statement on Form S-8 that the Company filed with the SEC on
February 25, 2000. For a discussion of the container leasing industry and the
Company's business, see "Description of Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" herein. For a
discussion of the Company's legal proceedings, see "Legal Proceedings" herein;
and for a discussion of the market for the Company's Common Shares, see "Market
for the Company's Common Equity and Related Shareholder Matters" herein.
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PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme) organized in
Luxembourg with its registered office at 16, Allee Marconi, Boite Postale 260,
L-2120 Luxembourg (telephone (352) 453145). The Company is registered with the
Luxembourg Registrar of Companies under registration number R.C.S. Lux. B.
27489. Cronos Containers Limited, the Company's principal container leasing
subsidiary, is a UK corporation located at Orchard Lea, Winkfield Lane,
Winkfield, Windsor, Berkshire, SL4 4RU, England.
Cronos is the successor to Intermodal Equipment Associates ("IEA") and
Leasing Partners International ("LPI"). IEA began managing and leasing dry cargo
containers in 1978, primarily under master leases. LPI was established in 1983
to manage and lease refrigerated containers. In 1990, LPI acquired IEA and the
companies combined their operations under the new name Cronos. In December 1995
and January 1996, the Company and Barton Holding Ltd., a selling shareholder,
sold in a public offering (the "Public Offering") 3,643,000 Common Shares of the
Company.
Cronos is one of the world's leading lessors (by aggregate TEU capacity) of
intermodal marine containers. It owns and manages a fleet of dry cargo,
refrigerated, tank and other specialized containers. Through an extensive global
network of offices and agents, Cronos leases both its own and other owners'
containers to over 400 ocean carriers and transport operators, including all of
the 20 largest ocean carriers.
INDUSTRY BACKGROUND
A marine cargo container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. Containers are manufactured to conform to worldwide standards of
container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long X 8' wide X 8'6" high (one TEU) or 40' long X 8' wide X 8'6" high (two
TEU). Standardization of the construction, maintenance and handling of
containers, allows containers to be picked up, dropped off, stored and repaired
effectively throughout the world. This standardization is the foundation on
which the container industry has developed.
Standard dry cargo containers are rectangular boxes with no moving parts,
other than doors and are typically made of steel or aluminum. They are
constructed to carry a wide variety of cargoes ranging from heavy industrial raw
materials to light-weight finished goods. Specialized containers include, among
others, refrigerated containers for the transport of temperature-sensitive
goods, tank containers for the carriage of liquid cargo and cellular palletwide
containers ("CPCs") with extra width. Dry cargo containers currently constitute
approximately 87% (in TEU) of the worldwide container fleet. Refrigerated
containers and tank containers currently constitute approximately 8% (in TEU) of
the worldwide container fleet, with open-tops and other specialized containers
constituting the remaining 5%.
One of the primary benefits of containerization has been the ability of the
shipping industry to effectively lower freight rates due to the efficiencies
created by standardized intermodal containers. Containers can be handled much
more efficiently than loose cargo and are typically shipped via several modes of
transportation, including truck, rail and ship. Containers require loading and
unloading only once and remain sealed until arrival at the final destination,
significantly reducing transport time, labor and handling costs and losses due
to damage and theft. Efficient movement of containerized cargo between ship and
shore reduces the amount of time that a ship must spend in port and reduces the
transit time of freight moves.
The logistical advantages and reduced freight rates brought about by
containerization have been major catalysts for world trade growth since the late
1960's, resulting in increased demand for containers. The world's container
fleet has grown from an estimated 270,000 TEU in 1969 to approximately 13
million TEU by mid-1999.
The container leasing business is cyclical, and depends largely upon the
rate of increase in world trade. The container leasing industry has experienced
cyclical downturns during the last fifteen years.
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BENEFITS OF LEASING
Leasing companies own approximately 46% of the world's container fleet with
the balance owned predominantly by shipping lines. Shipping lines, which
traditionally operate on tight profit margins, often supplement their owned
fleet of containers by leasing a portion of their equipment from container
leasing companies, and in doing so, achieve the following financial and
operational benefits:
Leasing allows the shipping lines to utilize the equipment they need
without having to make large capital expenditures;
Leasing offers a shipping line an alternative source of financing in a
traditionally capital-intensive industry;
Leasing enables shipping lines to expand their routes and market
shares at a relatively low cost without making a permanent commitment to
support their new structure;
Leasing allows shipping lines to respond to changing seasonal and
trade route demands, thereby optimizing their capital investment and
storage costs.
TYPES OF LEASES
FINANCE LEASES are usually long-term in nature and require relatively low
levels of customer service. They ordinarily require fixed payments over a
defined period and provide customers with an option to purchase the subject
containers at the end of the lease term. Per diem rates typically include an
element of repayment of capital and therefore are higher than rates charged
under either long-term or short-term leases.
MASTER LEASES are usually short-term leases under which a customer reserves
the right to lease a certain number of containers as needed under a general
agreement between the lessor and the lessee. Such leases provide customers with
greater flexibility by allowing customers to pick-up and drop-off containers
where and when needed, subject to restrictions and availability, on pre-agreed
terms. The commercial terms of master leases are negotiated annually. Master
leases also define the number of containers that may be returned within each
calendar month, the return locations and applicable drop-off charges. Due to the
increased flexibility they offer, master leases usually command higher per diem
rates and generate more ancillary fees (including pick-up, drop-off, handling
and off-hire fees) than term leases.
TERM LEASES are for a fixed period of time and include both long and
short-term commitments, with most extending from three to five years. Term lease
agreements may contain early termination penalties that apply in the event of
early redelivery. In most cases, however, equipment is not returned prior to the
expiration of the lease. Term leases provide greater revenue stability to the
lessor, but at lower lease rates than master leases. Ocean carriers use
long-term leases when they have a need for identified containers for a specified
term. Short-term lease agreements have a duration of less than one year and
include one-way, repositioning and round-trip leases. They differ from master
leases in that they define the number and the term of the containers to be
leased. Ocean carriers generally use one-way leases to manage trade imbalances
(where more containerized cargo moves in one direction than another) by picking
up a container in one port and dropping it off at another location after one or
more legs of a voyage.
The terms and conditions of the Company's leases provide that customers are
responsible for paying all taxes and service charges arising from container use,
maintaining the containers in good and safe operating condition while on lease
and paying for repairs, excluding ordinary wear and tear, upon redelivery. Some
leases provide for a "damage protection plan" whereby lessees, for an additional
payment (which may be in the form of a higher per diem rate), are relieved of
the responsibility of paying some of the repair costs upon redelivery of the
containers. The Company has historically provided this service on a limited
basis to selected customers. Repairs provided under such plans are carried out
by the same depots, under the same procedures, as are repairs to containers not
covered by such plans. Customers are also required to insure leased containers
against physical damage, loss and against third party liability for loss,
damage, bodily injury or death.
The percentage of equipment on term leases as compared to master leases
varies widely among leasing companies, depending upon each company's strategy on
margins, operating costs and cash flows.
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Lease rates depend on several factors including the type of lease, length
of term, maintenance provided, type and age of the equipment and market
conditions.
COMPANY STRATEGY
Cronos targets operating leases, with an emphasis on master leases for its
dry cargo containers and term leases for refrigerated and tank containers.
LEASE PROFILE
Cronos offers flexible leasing arrangements primarily through master leases
on dry cargo containers. Cronos' specialized containers are generally leased on
longer-term leases because the higher cost, value and complexity of this
equipment make it more expensive to frequently redeliver and lease out.
PERCENTAGE OF FLEET ON-HIRE
---------------------------------------------
DRY FREIGHT
TYPE OF LEASE DRY CARGO REFRIGERATED TANK SPECIALS
- ------------- --------- ------------ ---- -----------
Master............................................. 73% 47% 16% 11%
Term............................................... 20% 49% 84% 47%
Finance............................................ 7% 4% -- 42%
---- ---- ---- ----
Total......................................... 100% 100% 100% 100%
==== ==== ==== ====
CUSTOMERS
Cronos is not dependent upon any particular customer or group of customers.
None of the Company's customers accounts for more than 10% of its revenue and
the ten largest customers accounted for approximately 48% of the total TEU
fleet-on-hire. Substantially all of Cronos' customers are billed and pay in
United States dollars.
Cronos sets maximum credit limits for all customers, limiting the number of
containers leased to each customer according to established credit criteria.
Cronos continually tracks its credit exposure to each customer. Cronos' credit
committee meets quarterly to analyze the performance of existing customers and
to recommend actions to be taken in order to minimize credit risks. Cronos uses
specialist third party credit information services and reports prepared by local
staff to assess credit applications.
The Company is subject to unexpected loss in rental revenue from lessees of
its containers that default under their container lease agreements.
FLEET PROFILE
Cronos focuses on supplying to its customers high-quality containers,
manufactured to specifications that exceed International Standards Organization
standards and designed to minimize repair and operating costs. Cronos operates
primarily dry cargo and refrigerated containers but, since 1993, it has
diversified into tanks and other specialized containers. Cronos believes that
this fleet diversification enables it to increase business with its customers by
supplying a wide range of their equipment requirements.
During 1999, the size of the total fleet increased by 8,400 TEU
representing new container production of 19,000 TEU net of disposals of 10,600
TEU. Total new container production in 1999 represented an investment of $25.9
million. Approximately $22.6 million, or 87%, of the new container investment
related to dry cargo containers. Of the balance of new container purchases, $1.4
million was invested in CPCs, $1.3 million was invested in flatracks and the
remaining $0.6 million was invested primarily in roll-trailers.
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CRONOS CONTAINER FLEET (IN TEU THOUSANDS)
AT DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Dry Cargo............................................. 346.6 337.8 345.9 322.0 250.2
Refrigerated.......................................... 13.6 14.7 16.0 16.2 14.3
Tank.................................................. 2.0 2.0 2.0 1.7 1.0
Roll-Trailer.......................................... 1.9 2.2 2.0 1.7 --
CPCs.................................................. 3.1 2.4 2.4 -- --
Other Dry Freight Specials............................ 2.7 2.3 1.5 1.2 0.1
----- ----- ----- ----- -----
Total Fleet...................................... 369.9 361.4 369.8 342.8 265.6
===== ===== ===== ===== =====
Dry cargo containers are the most commonly used type of container in the
shipping industry. Over 95% of Cronos' dry cargo fleet is constructed of all
Corten (R) steel (i.e., Corten (R) roofs, walls, doors and undercarriage), which
is a high-tensile steel yielding greater damage and corrosion resistance than
mild steel. The Company believes that, among its major competitors, it has the
highest percentage of dry cargo containers constructed of all Corten (R) steel.
Refrigerated containers are used to transport temperature-sensitive
products, such as meat, fruit, vegetables and photographic film. All of Cronos'
refrigerated containers have high-grade stainless steel interiors. The majority
of Cronos' 20' refrigerated containers have high-grade stainless steel walls,
while most of the 40' refrigerated containers are steel framed with aluminum
outer walls to reduce weight. As with the dry cargo containers, all refrigerated
containers are designed to minimize repair and maintenance and maximize damage
resistance. Cronos' refrigerated containers are designed and manufactured to
include the latest generation refrigeration equipment, with the most recently
built units controlled by modular microprocessors. Cronos did not buy new
refrigerated containers in the three years ended December 31, 1999 due to the
weak refrigerated container leasing market resulting from oversupply.
Cronos' tank containers are constructed in compliance with International
Maritime Organization ("IMO") standards and recommendations. The tanks purchased
by Cronos to date have all been IMO-1 type tanks constructed to comply with IMO
recommendations that require specific pressure ratings and shell thicknesses.
These containers are designed to carry highly-flammable materials, corrosives,
toxics and oxidizing substances. They are also capable of carrying non-hazardous
materials and foodstuffs. They have a capacity of 21,000-24,000 litres and are
generally insulated and equipped with steam or electrical heating.
Dry freight special containers, a small but growing segment of the world
container fleet, include rolltrailers, CPCs, open-top and flatrack containers.
Cronos diversified into dry freight specials in 1996, when it acquired
Intermodal Leasing AB, a Swedish company with a fleet of approximately 800
rolltrailers, a type of heavy-duty chassis used for moving cargo onto and off
ships. Cronos markets this product on a worldwide basis through its network of
offices and agents, and has increased its rolltrailer fleet to 1,930 TEU at the
end of 1999. Cronos owns the patents of the CPC, a specialized container
designed specifically for the carriage of European short sea cargo on
"Europallets". Since 1996, Cronos has added 3,115 TEU of CPCs into its container
fleet.
PURCHASING POLICY
Cronos' purchasing policy is driven by market requirements and anticipated
future demand, including demand generated by trade growth and the replacement of
containers retired from fleets around the world. The Company believes that the
worldwide manufacturing capacity for all container types is adequate to meet its
current and near-term requirements.
Cronos purchases dry cargo containers from manufacturers in China, Korea,
Taiwan, Indonesia, Thailand, India, Malaysia, Turkey and South Africa as part of
its policy to source container production in locations where it can meet
customer demands most effectively. No single manufacturer supplied more than 28%
of Cronos' dry cargo container purchases during 1999.
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Cronos' refrigerated containers were purchased mainly from Korean
manufacturers. The majority of its refrigeration units were purchased from
Carrier Transicold, the primary supplier of container refrigeration units in the
United States.
To date, all of the Company's tank containers have been purchased from
United Kingdom and South African manufacturers.
REPAIR AND MAINTENANCE
All containers are inspected and repaired when redelivered by customers who
are obligated to pay for all damage repairs, excluding wear and tear, according
to standardized industry guidelines. Depots in major port areas perform repair
and maintenance that is verified by independent surveyors or the Cronos
technical and operations staff.
Before any repair or refurbishment is authorized on older containers in the
Cronos fleet, the Cronos technical and operations staff reviews the age,
condition and type of container and its suitability for continued leasing.
Cronos compares the cost of such repair or refurbishment with the prevailing
market resale price that might be obtained for that container and makes the
appropriate decision whether to repair or sell the container. Cronos is
authorized to make this decision for most of the owners for whom it manages
equipment and makes these decisions by applying the same standards to the
managed containers as to its own containers.
MARKET FOR USED CONTAINERS
Cronos estimates that the period for which a dry cargo or refrigerated
container may be used as a leased marine cargo container ranges from 10 to 15
years. Tank containers generally may be used for 12 to 18 years.
Cronos disposes of used containers in a worldwide market in which buyers
include wholesalers, mini-storage operators, construction companies and others.
The market for used refrigerated and tank containers is not as stable as the
market for used dry cargo containers. Although a used refrigerated container
will command a higher price than a dry cargo container, a dry cargo container
will achieve a higher percentage of its original price. Historically, the
Company has not derived a material proportion of its revenues from selling used
containers due to the age profile of its fleet.
OPERATIONS
Cronos' sales and marketing operations are conducted through Cronos
Containers Limited ("CCL"), a wholly-owned subsidiary based in the United
Kingdom. CCL is supported in this role by area offices and dedicated agents
located in San Francisco, California; Iselin, New Jersey; Hamburg; Antwerp;
Genoa; Gothenburg, Sweden; Singapore; Hong Kong; Sydney; Tokyo; Taipei; Seoul;
Rio de Janeiro; Shanghai and Madras, India.
Cronos also maintains agency relationships with over 25 independent agents
around the world, who are generally paid a commission based upon revenues
generated in the region or the number of containers that are leased from their
area. These agents are located in jurisdictions where the volume of Cronos'
business necessitates a presence in the area but is not sufficient to justify a
fully-functioning Cronos office or dedicated agent. Agents provide marketing
support to the area offices covering the region, together with limited
operational support.
In addition, Cronos relies on the services of over 300 independently owned
and operated depots around the world to inspect, repair, maintain and store
containers while off-hire. The Company's area offices authorize all container
movements into and out of the depot and supervise all repairs and maintenance
performed by the depot. The Company's technical staff sets the standards for
repair of the Cronos fleet throughout the world and monitors the quality of
depot repair work. The depots provide a link to the Company's operations, as the
redelivery of a container into a depot is the point at which the container is
off-hired from one customer and repaired in preparation for re-leasing to the
next.
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Cronos' global network is integrated with its computer system and provides
24-hour communication between offices, agents and depots. The system allows
Cronos to manage and control its fleet on a global basis, providing Cronos with
the responsiveness and flexibility necessary to service the master lease market
effectively. This system is an integral part of Cronos' service, as it processes
information received from the various offices, generates billings to lessees and
generates a wide range of reports on all aspects of the Company's leasing
activities. The system records the life history of each container, including the
length of time on-hire, repair costs, as well as port activity trends, leasing
activity and equipment data per customer. The operations and marketing data is
fully interfaced with Cronos' finance and accounting system to provide revenue,
cost and asset information to management and staff around the world. Cronos
intends to continue to enhance its computer system as needs arise in the future.
COMPETITION
Competition among container leasing companies is based upon several
factors, including the location and availability of inventory, lease rates, the
type, quality and condition of the containers, the quality and flexibility of
the service offered and the confidence in and professional relationship with the
lessor. Other factors include the speed with which a leasing company can prepare
its containers for lease and the ease with which a lessee believes it can do
business with a lessor or its local area office. Not all container leasing
companies compete in the same market as some supply only dry cargo containers
and not specialized containers, while others offer only long-term leases. Cronos
has historically targeted three particular markets: the master lease dry cargo
container market, the refrigerated container market and the tank container
market. In recent years, however, the Company has expanded into other
specialized container products and other types of leases.
Cronos competes with various container leasing companies in the markets in
which it conducts business, including Transamerica Leasing, GE Seaco, Triton
Container International Ltd., Textainer Corp. and others. Mergers and
acquisitions have been a feature of the container leasing industry for over a
decade and the leasing market is essentially comprised of three distinct groups:
the very large (in TEU terms) market leaders Transamerica Leasing and GE Seaco,
who between them, with fleets of around 1 million TEU each in mid-1999, control
in excess of one third of the total leased fleet; a substantial middle tier of
companies possessing fleets in the 200,000 to 850,000 TEU range, and the smaller
more specialist fleet operators. In recent years, several major leasing
companies, as well as numerous smaller ones, have been acquired by competitors.
Cronos believes that the current trend toward consolidation in the container
leasing industry will continue, up to a point. There appears to be an upper
limit to the size of the optimum fleet, beyond which dis-economies of scale
and/or barriers against further market share development become apparent.
Furthermore, ocean carriers have a tendency to support a number of lessors
simultaneously, in order to maximize competition and increase the number of
available locations for redelivery of containers. Economies of scale, worldwide
operations, diversity, size of fleet and financial strength are increasingly
important to the successful operation of a container leasing business.
Additionally, as containerization continues to grow, as regions such as South
America and the Indian sub-continent become ever bigger generators of
containerized cargo, customers may demand more flexibility from leasing
companies, particularly regarding per diem rates, pick-up and drop-off
locations, and the availability of containers.
Some of Cronos' competitors have greater financial resources than Cronos
and may be more capable of offering lower per diem rates on a larger fleet. In
Cronos' experience, however, ocean carriers will generally lease containers from
more than one leasing company in order to minimize dependence on a single
supplier. Furthermore, by having as many suppliers as possible, the carrier is
able to maximize the number of off-hires and off-hire locations available, as
typically each supplier may limit the number of containers which can be
off-hired by location. The advantage to the carrier is that this prevents the
carrier from being burdened with an excess number of off-hired containers, which
incur both storage and per diem charges, in a low demand market.
OPERATING SEGMENTS
Cronos has three operating segments which are determined based on source of
container funding:
1. US Public Limited Partnerships ("US Limited Partnerships"),
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2. Other Container Owners, and
3. Owned Containers.
Cronos uses various financing programs within its three segments. These
financing programs enable Cronos to expand its fleet without being dependent
upon any single source of financing. Cronos believes it is important to
diversify its financing sources both by market and type of financial instrument.
This diversification reduces its reliance on individual financial markets and
provides for a more balanced financing structure.
The following chart summarizes the composition of the Cronos fleet (based
on original equipment cost) at December 31 of each of the years indicated:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
US Limited Partnerships.............................. 33% 34% 35% 38% 45%
Other Container Owners............................... 45% 41% 40% 29% 34%
Owned Containers..................................... 22% 25% 25% 33% 21%
---- ---- ---- ---- ----
Total........................................... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
As of December 31, 1999, no single owner, other than the Company, held more
than 13% of the Cronos fleet (based upon original equipment cost).
All containers, whether owned or managed, are leased as part of a single
global fleet, without regard to ownership. No customer generates more than 10%
of a segment's revenues or of the total revenues of the Company. The Company
evaluates the performance of its operating segments based on operating profit or
loss. Substantially all of the Company's lease revenue is earned on containers
used in global trade routes. This revenue is deemed to be earned based on the
physical location of the containers while on lease. Accordingly, the Company
believes that it does not possess discernible geographic reporting segments as
defined in Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information". See Note 2 to the 1999
Consolidated Financial Statements.
Segment revenues from external customers, operating profit or loss and
total assets are disclosed in the Company's Financial Statements and are
incorporated herein by reference.
US LIMITED PARTNERSHIPS
Cronos has been raising capital through its investment syndication
activities since 1979 through the organization and sponsorship of public limited
partnership offerings. To date, Cronos has sponsored 16 of these public limited
partnerships. Cronos has raised over $478 million from over 37,000 investors,
providing the means to purchase 181,000 TEU of dry cargo containers, 3,500 TEU
of refrigerated containers and 300 TEU of tank containers. A majority of the
limited partners in a partnership can remove the general partner, thereby
terminating the agreement with Cronos. However, upon any such removal, the
general partner is entitled to payment, generally over five years, of the
present fair market value of its interest in the partnership.
As an operating company, Cronos believes that its substantial experience in
the container leasing industry has been integral to the successful syndication
of public limited partnerships. However, no public offerings have been made in
the US since early 1997.
The US Limited Partnerships provide compensation to Cronos consisting of
the following fees and commissions:
- Acquisition fees: equal to 5% of the original cost of equipment purchased
by the partnerships, recognized over a 12-year period;
- Base management fees: equal to 7% of gross lease revenue for operating
leases and 2% of gross lease revenue for direct financing leases;
- General partner share: equal to 5% of distributable cash generated by the
partnerships' operating activities;
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- Incentive fees: equal to 15% of distributable cash after the limited
partners have received a return of their adjusted capital contributions
and distributions in an amount equal to a cumulative compounded rate
between 8 to 10% per annum (depending on the program);
- Reimbursed administrative expenses: for certain overhead and operating
expenses.
Management and acquisition fees, as well as syndication commissions
(representing amounts earned on the sale of Limited Partnership interests)
earned by the Company, were $8.6 million, $11.3 million, and $12 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
OTHER CONTAINER OWNERS
In addition to US Limited Partnerships, Cronos manages containers pursuant
to agreements negotiated directly with corporations, partnerships and private
individuals located in Europe, Asia, the United States and South Africa. Cronos'
obligations to investors in the partnerships and the investor programs are
substantially similar. The terms of the agreements vary from 1 to 15 years. The
agreements generally contain provisions which permit earlier termination under
certain conditions upon 60-90 days' notice. Under the agreements with Other
Container Owners, the container owner can generally terminate the agreement if
average payments by Cronos are less than a certain percentage (specified in each
agreement) of total capital invested. Cronos believes that early termination is
unlikely in normal circumstances.
These management agreements generally provide compensation to Cronos
consisting of management fees of between 5% and 20% of the net lease revenue
generated by the containers. Cronos also earns an acquisition fee of
approximately 2.5% to 5% of the aggregate original equipment cost of the
equipment managed for the owners where Cronos has negotiated the purchase of the
equipment. In certain cases, an incentive fee may also be earned. Acquisition
fees under the investor programs are generally recognized in Cronos' statements
of operations over periods ranging from 7 to 15 years, representing the life of
the agreements to which they relate.
Total fees earned by the Company from Other Container Owners were $5.9
million, $7.4 million and $7.3 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The containers managed for these owners may be combined into pools with
containers of similar age and type and managed pursuant to generally similar
management agreements. The owners of the containers in each pool share revenues
and expenses, which are allocated pro rata in order to minimize the effect of
possible over-utilization or under-utilization of any particular containers.
Pooling was designed to minimize conflicts of interest and promote
administrative convenience.
Revenues and expenses are allocated among owners based upon the aggregate
original equipment cost of the containers owned by each owner and the number of
days that such containers were in the pool, compared to the total aggregate
original equipment cost of all containers in the pool and the total number of
days in the period.
OWNED CONTAINERS
Cronos uses various forms of debt funding to finance its owned fleet
including bank loans, private placements, and capital leases. Container
ownership provides the Company with the ability to generate lease revenues over
the life of the container, matched with relatively fixed costs of interest and
depreciation expenses. Most of the Company's long term debt facilities have
principal maturities of less than seven years, after which containers financed
under such facilities provide increased cash flows. In general, the Company
believes that container ownership is more profitable over the life of the
container when compared to the corresponding profits generated from container
management. However, unlike container management, container ownership can often
require an initial cash investment in order to secure cost effective debt
financing.
From time to time, Cronos also owns containers on a temporary basis until
such time that the containers are sold to its US Limited Partnerships and Other
Container Owner Programs. Most containers targeted for transfer to managed
programs are purchased new by Cronos, and sold to a managed container owner
within six months. This strategy allows Cronos more flexibility to negotiate and
buy containers strategically, based on market conditions
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and later sell these containers to third party owners after the initial lease
profile is established for a particular group of containers.
ENVIRONMENTAL
Countries that are signatories to the Montreal Protocol on the environment
agreed in November 1992 to restrict the use of environmentally destructive
refrigerants, banning production (but not use) of chlorofluorocarbon compounds
("CFCs") beginning in January 1996. CFCs are used in the operation, insulation
and manufacture of refrigerated containers. All of Cronos' refrigerated
containers purchased since June 1993 use non-CFC refrigerant gas in the
operation and insulation of the containers, although a reduced quantity of CFCs
is still used in the container manufacturing process. The replacement
refrigerant used in the Company's new refrigerated containers may also become
subject to similar governmental regulations. Depending on market pressures and
future governmental regulations, certain of the Company's refrigerated
containers may require retrofitting with non-CFC refrigerants. Cronos' technical
staff has cooperated with refrigeration manufacturers in conducting
investigations into the most effective and economical retrofit plan. In the
future, the Company may bear the costs related to retrofitting certain of its
Owned Containers, which constitute approximately 9% of its total owned
refrigerated container fleet. Cronos believes that any such further expenses,
should they be required, would not be material to its financial position or
results of operations. In addition, refrigerated containers that are not
retrofitted may command lower prices in the used container market.
EMPLOYEES
As of December 31, 1999, Cronos had 100 employees worldwide, 27 were
located in the United States, 56 in Europe and 17 in Asia. None of Cronos'
employees is covered by a collective bargaining agreement.
RECENT DEVELOPMENTS
On September 21, 1999, the Company received an unsolicited merger proposal
from the President of Interpool, Inc. ("Interpool"). Interpool is a competitor
of the Company. Cronos' container fleet consists of 369,900 TEUs, both owned and
managed for third parties. Interpool's fleet consists of approximately 500,000
TEUs. Whereas the Company concentrates primarily on the short-term and master
lease market, meaning that most of the Company's leases have terms of less than
one year, Interpool concentrates on the longer-term lease market, with the bulk
of its fleet of containers leased under leases of terms of three years or more.
By its proposal, Interpool proposed a merger of Cronos with Interpool's
50%-owned Nevada subsidiary, Container Applications International, Inc. ("CAI").
Interpool proposed, subject to conditions, that the shareholders of Cronos would
receive $5.00 per share in the transaction. Interpool's proposal was subject to
numerous conditions, including the conduct of "confirmatory" due diligence, the
absence of a material adverse effect prior to closing, the negotiation of a
definitive acquisition agreement, and the obtaining of regulatory and other
approvals.
While Interpool indicated in its letter a willingness to discuss its
proposal and its structure, Interpool gave the Company 24 hours to provide a
"satisfactory response," or Interpool threatened to take its proposal "directly
to [the Company's] shareholders". On September 23, 1999, Interpool filed its
preliminary proxy statement with the SEC proposing an alternative slate of
nominees for the Board of Directors of Cronos, whose sole purpose would be to
merge Cronos with and into CAI pursuant to the Interpool proposal.
Promptly after the Company received Interpool's September 21st proposal,
the Board of Directors of the Company instructed the Company's financial
advisors, First Union Securities, Inc. ("First Union"), to evaluate it. On
October 4 and 8, 1999, the Board met and unanimously determined that the
Interpool proposal, in its then current form, be rejected as inadequate and not
in the best interest of the Company and its shareholders. At the same time, the
Board instructed First Union to pursue strategic alternatives to enhance
shareholder value, including a possible sale of the Company.
The Company has entered into confidentiality and standstill agreements with
several parties, and has supplied these parties with financial and other
information about the Company. On January 4, 2000, the Company
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also entered into a confidentiality agreement with Interpool, whereby the
Company agreed to provide Interpool with access to the same information as the
Company made available to other interested parties. Interpool also agreed not to
pursue a transaction with Cronos on an unsolicited basis until April 30, 2000.
Interpool may pursue a transaction with the Company on an unsolicited basis
earlier than April 30, 2000, in the event that Cronos enters into a letter of
intent or an agreement in principle to merge, or engages in a business
combination or like transaction with another entity, or if another entity or
Cronos makes a tender or an exchange offer for 25% or more of the outstanding
shares of Common Stock of Cronos.
The Company, with its advisor, First Union, has continued to hold
discussions with Interpool and other interested parties. However, at this time,
the Company is unable to predict whether a transaction will result from these
discussions.
INSURANCE
Cronos' lease agreements typically require lessees to obtain insurance to
cover all risks of physical damage and loss of the equipment under lease, as
well as public liability and property damage insurance. However, the precise
nature and amount of the insurance carried by each ocean carrier varies from
lessee to lessee.
In addition, Cronos has purchased secondary insurance effective in the
event that a lessee fails to have adequate primary coverage. This insurance
covers liability arising out of bodily injury and/or property damage as a result
of the ownership and operation of the containers, as well as insurance against
loss or damage to the containers, loss of lease revenues in certain cases and
costs of container recovery and repair in the event that a customer goes into
bankruptcy. Cronos believes that the nature and amounts of its insurance are
customary in the container leasing industry and subject to standard industry
deductions and exclusions.
ITEM 2 -- PROPERTIES
Cronos owns the real property known as Orchard Lea, located west of London,
England. Orchard Lea consists of a 22,820 square foot office building on four
acres of land and is the head office of Cronos' container leasing operations.
The Company is negotiating an agreement to sell its Orchard Lea office building
to an unaffiliated third party for approximately $10.8 million, payable in cash
at the closing. After payment of expenses and retirement of applicable mortgage
debt, the Company would realize proceeds of approximately $4.5 million. Under
the terms of a further loan agreement, the Company would utilize such proceeds
to repay debt. The sale is scheduled to close in April 2000. The Company will
lease back 10,342 square feet in the office building from the buyer in the form
of two leases for 7,000 square feet and 3,342 square feet respectively, for a
full term of 3 years, and at a market rental rate. Both agreements contain terms
that enable the Company or the purchaser to terminate the leases at the end of
two years and the second lease grants the Company and the purchaser an
additional option to end after 6 months. As the sale is subject to the
fulfillment of closing conditions, there can be no assurance that it will be
consummated.
Cronos also leases approximately 12,160 square feet of office space in San
Francisco, California, where its US Limited Partnership activities are based.
Cronos also conducts container leasing operations from offices in Iselin, New
Jersey; Hamburg; Genoa; Gothenburg; Hong Kong; Singapore and Sydney generally
under shorter-term leases of varying durations. The containers owned and managed
by Cronos are described under Item 1 -- "Description of Business -- Company
Strategy -- Fleet Profile, Operating Segments -- US Limited Partnerships, Other
Container Owners and Owned Containers", above. As of December 31, 1999, Cronos
owned 41,658 TEU of dry cargo containers, 6,300 TEU of refrigerated containers,
730 TEU of tank containers and 5,268 TEU of other specialized equipment. As of
December 31, 1999, Cronos managed a total of 346,557 TEU of dry cargo
containers, 13,576 TEU of refrigerated containers, 2,010 TEU of tank containers
and 7,724 TEU of other specialized equipment.
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ITEM 3 -- LEGAL PROCEEDINGS
DISPUTE WITH THE CONTRIN GROUP
The Company manages containers for investment entities sponsored by or
affiliated with Contrin Holding S.A., a Luxembourg holding company (collectively
"Contrin"). Approximately 2% (measured by TEUs) of the fleet of managed
containers is owned by members of the Contrin Group. The Company is in a dispute
with Contrin over funds that Contrin claims to have remitted to Cronos for the
purchase of containers. Contrin claims that in 1994 it transmitted $2.6 million
to Cronos for the purchase of containers. The Company believes that these funds
were not received by the Company but were diverted to an account in the name of
and/or controlled by a former chairman of the Company, Stefan M Palatin, and
that this was known or should have been known by Contrin. The Company also
believes that the bank that received the funds is at fault. Contrin's counsel
has advised the Company that Contrin will institute proceedings for the recovery
of the $2.6 million against Cronos, together with accrued interest. The Company
is unable to predict the outcome of the dispute.
THE SEC'S NOVEMBER 15, 1999 CEASE-AND-DESIST ORDER
On November 15, 1999, the Company consented to the entry by the SEC of an
administrative cease-and-desist order (the "Order"). Without admitting or
denying the findings made by the SEC in the Order, the Company agreed to cease
and desist from committing or causing any future violation of certain antifraud,
reporting, record keeping, and internal control provisions of the Federal
securities laws. The SEC's investigation of the Company began in February 1997
and was triggered by the actions of Mr. Palatin. Cronos' Board removed Mr.
Palatin as CEO in May 1998 and, in July 1998, Mr. Palatin resigned from the
Board. While Mr. Palatin is no longer an officer or director of the Company, he
continues to control approximately 20% of the outstanding common shares of the
Company.
The SEC made certain findings by its Order. The Company neither admitted
nor denied the findings made by the SEC. The SEC found that Cronos, under the
domination and control of Mr. Palatin, misrepresented, through affirmative
misstatements and omissions in its public statements and filings with the SEC,
transactions it had with Mr. Palatin for the period from December 1995 through
1997, including --
That Mr. Palatin had intercepted payments between Cronos and one of
its major customers (which Mr. Palatin also controlled);
That Cronos paid Mr. Palatin millions of dollars in 1994 before Cronos
first sold its shares of Common Stock to the public;
That Mr. Palatin had sold shares in Cronos' initial public offering
through another entity that he controlled;
That Cronos paid additional monies to Mr. Palatin shortly after the
1995 offering;
That Mr. Palatin did not own certain collateral that he pledged to
secure loans he owed to Cronos; and
That Cronos systematically fired or demoted employees and directors
who challenged or questioned Mr. Palatin's transactions or the disclosures
of the Company related thereto.
While the Order did not impose any fine or penalty against Cronos, the
Company is unable to predict what impact, if any, it will have on its future
business or whether it will lead to future litigation involving Cronos. Under
the Order, the Company has designated an agent for service of process with
respect to any proceeding instituted by the SEC to enforce the Order or with
respect to any future investigation of the Company by the SEC. In addition, the
entry of the Order precludes the Company and persons acting on its behalf from
relying upon certain protections accorded to forward-looking statements by the
Securities Act of 1933 and the Securities Exchange Act of 1934 until November
14, 2002.
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COLLECTION OF PALATIN NOTES
In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York (Case No. 604963/99), for payment of the
remaining balances due under two promissory notes, both dated July 14, 1997, by
and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin, as
payor.
On February 8, 2000, the Supreme Court of the State of New York entered its
default judgment against Mr. Palatin. Pursuant to the judgment, the Payee is to
recover from Mr. Palatin $6.2 million, plus interest at 9% per annum from June
21, 1999 to February 8, 2000 in the amount of $0.4 million, for a total recovery
of $6.6 million.
The Payee currently is pursuing execution of the judgment against Mr.
Palatin's beneficial ownership of the Common Shares of the Company. According to
filings made with the SEC by the shareholder of Klamath Enterprises S.A.
("Klamath"), Mr. Palatin is the beneficial owner of the 1,793,798 outstanding
shares of Common Stock of the Company owned of record by Klamath. On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts against Mr. Palatin and against the
Company's transfer agent, EquiServe Limited Partnership, preliminarily enjoining
them from selling, transferring, assigning, or otherwise encumbering, disposing
of, or diminishing the value of the Common Shares of the Company held of record
by Klamath.
The Company is also pursuing an attachment order in the Swiss courts
against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the Common Shares of the Company owned by Klamath.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of Common Shares beneficially owned in
the Company by Mr. Palatin to the Payee or by a liquidation of the shares in an
amount sufficient to fully discharge the judgment. The Company is unable to
predict at the present time whether it will succeed in achieving its objectives.
SPECIAL LITIGATION COMMITTEE
The Board of Directors of the Company established a Special Litigation
Committee ("Committee") of the Board in July 1998 to examine the relationships
between Mr. Palatin and Contrin Holding S.A., Barton Holding Ltd. ("Barton"),
and affiliated persons. The Committee is also investigating transactions between
the Company and its present and former officers and directors since January 1,
1995, to determine whether improper self-dealing occurred between the Company
and such persons. The Committee intends to complete its investigation by March
31, 2000. The Committee has the power, for and on behalf of the Company, and in
consultation with counsel, to pursue the recovery of any damages the Committee
concludes may have been suffered by the Company as a result of the transactions
or conduct the Committee investigates.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 annual meeting of shareholders on January 13,
2000, in Luxembourg. At the meeting, five directors were elected, and the
Company's 1999 Stock Option Plan and the appointment of Deloitte Touche Tohmatsu
(Deloitte & Touche SA) as the Company's independent auditors for the 1999 fiscal
year were approved. For a complete report on the matters submitted to a vote of
the shareholders, see the Company's Current Report on Form 8-K, dated January
21, 2000.
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PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 23, 2000, there were outstanding 9,158,378 Common Shares. They
were held of record by approximately 446 holders.
Prior to December 1995, there was no trading market for the Company's
Common Shares. Since the Company's Public Offering, the Common Shares have been
quoted and traded over-the-counter on the NASDAQ National Market System under
the symbol "CRNSF". In March 1999, the Company announced that it would comply
with the reporting requirements applicable generally to US public companies and
would therefore trade under the symbol "CRNS". There is no trading market for
the Common Shares outside the United States. The table below shows the high and
low reported closing prices for the Common Shares on the NASDAQ National Market
System for the last two years for the quarterly periods ending on the dates
indicated. Closing prices are market quotations and reflect inter dealer prices,
without retail mark up, mark down or commission and may not necessarily
represent actual transactions.
PRICE RANGE
(DOLLARS)
----------------
HIGH LOW
------ ------
March 31, 1998.............................................. $7.250 $5.125
June 30, 1998............................................... $7.125 $5.000
September 30, 1998.......................................... $5.969 $4.875
December 31, 1998........................................... $6.625 $3.375
March 31, 1999.............................................. $5.938 $4.125
June 30, 1999............................................... $4.875 $3.500
September 30, 1999.......................................... $4.625 $3.500
December 31, 1999........................................... $5.625 $4.563
There are currently no Luxembourg foreign exchange control restrictions on
the payment of dividends on the Common Shares or on the conduct of Cronos'
operations. In addition, there are no limitations on holding or voting
applicable to foreign holders of Common Shares, imposed by law, by the Company's
Articles of Incorporation or otherwise, other than those restrictions which
apply equally to Luxembourg holders of Common Shares. No dividend declarations
have been made by the Company since its initial public offering in December
1995.
Under the terms of certain loan agreements, the Company is restricted from
declaring or making dividend payments unless it achieves specified financial
criteria.
The following summary of the material Luxembourg tax consequences is not a
comprehensive description of all of the tax considerations that are applicable
to the holders of Common Shares, and does not deal with the tax consequences
applicable to all categories of holders, some of which may be subject to special
rules.
Under present Luxembourg law, as long as the Company maintains its status
as a holding company, no income tax, withholding tax (including with respect to
dividends), capital gains tax or estate inheritance tax is payable in Luxembourg
by shareholders in respect of the Common Shares, except for shareholders
domiciled, resident (or, in certain circumstances, formerly resident) or having
a permanent establishment in Luxembourg. The reciprocal tax treaty between the
United States and Luxembourg limiting the rate of any withholding tax is
therefore inapplicable.
UNREGISTERED SALES OF SECURITIES
On August 2, 1999, MeesPierson N.V., a Dutch financial institution
("MeesPierson"), and First Union National Bank, a national banking association
("FUNB"), lent $50 million to a special purpose subsidiary organized by the
Company, the proceeds of which were used to repay existing indebtedness of the
Company and its subsidiaries. The Company described this financing in its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
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In connection with the August 1999 refinancing, each of MeesPierson and
FUNB were issued 150,000 of the Company's authorized but unissued Common Shares
(300,000 shares in total), and the Company entered into a Warrant Agreement with
MeesPierson and FUNB. The issuance of the Common Shares was made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act").
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth consolidated financial information for the
Company as of and for the periods noted. The balance sheet and statement of
operations data for each of the five years for the period ended December 31,
1999, have been derived from the Consolidated Financial Statements of the
Company. The table should be read in conjunction with Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the 1999 Consolidated Financial Statements and related notes thereto included
elsewhere in this Annual Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Gross lease revenue......................................... $132,140 $157,546 $160,848 $154,011 $150,429
Commissions, fees and other operating income................ 5,949 4,955 5,545 7,460 6,942
Interest income............................................. 1,011 1,154 861 1,333 1,329
Equity in earnings of affiliates............................ -- -- -- 1,397 1,895
Gain on sale of investment.................................. 1,278 -- 321 5,260 --
-------- -------- -------- -------- --------
TOTAL REVENUES.............................................. 140,378 163,655 167,575 169,461 160,595
======== ======== ======== ======== ========
Direct operating expenses................................... 31,179 35,318 34,217 34,535 26,938
Payments to container owners................................ 63,943 75,527 73,945 72,894 77,073
Depreciation and amortization............................... 16,200 18,714 19,033 14,258 10,676
Selling, general and administrative expenses................ 16,569 21,164 22,683 23,834 24,133
Financing and recomposition expenses(1)..................... -- 5,375 7,384 2,149 --
Interest expense............................................ 10,809 15,718 17,758 11,368 11,238
Provision against amounts receivable from related
parties(2)................................................ -- -- 3,909 -- --
Reversal of unrealized holding gain on available for sale
securities(3)............................................. -- 1,929 -- -- --
Impairment losses(4)........................................ -- 6,500 11,668 -- --
-------- -------- -------- -------- --------
TOTAL EXPENSES.............................................. 138,700 180,245 190,597 159,038 150,058
======== ======== ======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES........................... 1,678 (16,590) (23,022) 10,423 10,537
Income taxes (benefit)...................................... (236) 306 -- 2,441 3,175
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................................... 1,914 (16,896) (23,022) 7,982 7,362
Preferred dividends......................................... -- -- -- -- 856
-------- -------- -------- -------- --------
Net income (loss) available for common shares............... $ 1,914 $(16,896) $(23,022) $ 7,982 $ 6,506
-------- -------- -------- -------- --------
Net income (loss) per common share (basic and diluted)...... $ 0.21 $ (1.91) $ (2.60) $ 0.90 $ 1.21
-------- -------- -------- -------- --------
Shares used in:
- -- basic net income (loss) per share calculations........... 8,983 8,858 8,858 8,853 5,383
- -- diluted net income (loss) per share calculations......... 8,998 8,858 8,858 8,853 5,383
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 8,701 $ 9,281 $ 14,455 $ 17,278 $ 24,243
Total assets................................................ 231,867 279,979 327,145 399,301 266,485
Long-term debt and capital lease obligations................ 93,401 61,195 88,682 141,435 89,600
Total debt and capital lease obligations.................... 109,978 148,466 171,399 198,989 106,620
Shareholders' equity........................................ 60,370 56,087 73,713 95,576 85,349
- ---------------
(1) In 1998, 1997 and 1996, the Company incurred costs in connection with
certain financing and other transactions, the restructuring of the Board of
Directors, senior management and other employee positions and a contingent
liability. Costs incurred and accrued were charged to the statement of
operations when the Company determined that no future benefit would be
derived from such costs.
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(2) At December 31, 1997, the Company provided $3.9 million against loans to
the then Chairman due to concern over its collectability and the Company's
ability to exercise the pledge over shares put up as collateral for the
loans.
(3) At December 31, 1998, in response to claims made against certain escrow
funds holding Transamerica shares pending final determination of
post-closing reports and adjustments, the Company provided $1.9 million
against the unrealized holding gain of $1.7 million recognized in 1996
together with a $0.2 million charge related to a reduction in the number of
shares held.
(4) At December 31, 1998 and 1997, the Company recorded accounting charges
relating to the impairment of certain long-lived assets as required by the
Statement of Financial Accounting Standards 121.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the 1999 Consolidated Financial
Statements and the notes thereto and the other financial and statistical
information appearing elsewhere in this Annual Report. The 1999 Consolidated
Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by managed container owners or by the Company
itself. These leases, which generate most of the Company's revenues, are
generally operating leases.
The segment information presented in Note 2 to the Company's 1999
Consolidated Financial Statements relates to the portions of the Company's fleet
owned by the Company itself ("Owned Containers"), or by the Company's managed
container programs ("Managed Container Owners") which are comprised of US
Limited Partnerships and Other Container Owners ("Other Container Owners").
Owned Containers include containers held for resale, the financing costs of
which are borne by the Company prior to the sale of such containers to Managed
Container Owners, and are accounted for in the Owned Container segment. The
Company bears the risk of ownership with respect to containers in Owned
Containers but not with respect to the majority of containers in the Managed
Container Owners segments, although the Company bears the risk that the
management agreements could be terminated, resulting in the removal of the
corresponding managed containers from the fleet. At December 31, 1999,
approximately 33%, 45% and 22% of the Company's fleet (by original equipment
cost) was owned by US Limited Partnerships, Other Container Owners and Owned
Containers, respectively.
All containers, whether owned or managed, are operated as part of a single
fleet. The Company has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Company's management agreements with the Managed Container Owners meet the
definition of leases in Statement of Financial Accounting Standards No. 13, they
are accounted for in the Company's financial statements as leases under which
the container owners are lessors and the Company is lessee. The agreements with
container owners generally provide that the Company will make payments to the
container owners based upon the rentals collected from ocean carriers after
deducting direct operating expenses and a management fee. The majority of
payments to container owners are therefore contingent upon the leasing of the
containers by the Company to ocean carriers and the collection of lease rentals.
Minimum lease payments on the agreements which have fixed payment terms are
presented in Note 13(c) to the Company's 1999 Consolidated Financial Statements.
Over 85% of payments to container owners represent a percentage of the rentals
collected from the ocean carriers to whom containers are leased by the Company.
Gross lease revenue represents revenue from operating leases, excluding
billings in advance. These amounts are billed in US dollars on a monthly basis.
Amounts due under master leases are calculated by the Company at the end of each
month and billed approximately 6 to 8 days thereafter. Amounts due under
short-term and long-term leases are set forth in the respective lease agreements
and are generally payable monthly. Changes in gross lease revenue depend
primarily upon fleet growth, utilization rates and per diem rates.
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The Company has expanded its fleet since December 31, 1995 from 265,600 TEU
to 369,900 TEU at December 31, 1999. During 1998 and 1997, the ability of the
Company to purchase new equipment for both the owned and managed fleets was
constrained by the levels of financing available to the Company.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost) at the dates indicated:
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
Utilization................................................. 80% 75% 84%
The short-term objective of the Company is to improve utilization by
offering greater leasing incentives and actively repositioning equipment to
higher-demand locations. The Company continues to take advantage of its
marketing resources in order to seek out leasing opportunities. While this
short-term strategy will increase repositioning expenses, it may also reduce
those expenses related to storing off-hire containers. These measures will also
provide the longer-term advantage of placing the containers where the demand is
greatest.
During the course of 1999, economic reforms in Asia, as well as in Latin
America, have begun to produce gradual improvement in terms of world trade, and
there are preliminary indications that containerized trade volumes from North
America and Europe to Asia, in particular, may be increasing. Intra-Asian trade,
which also had stagnated since the Asian financial crisis began nearly two years
ago, has shown increased activity in recent months. These favorable signs,
however, have yet to produce any significant positive impact on the Company's
operating performance.
In 1998, utilization declined reflecting the deteriorating economic
position in Asian, South American and other markets. Utilization experienced
steady growth during 1997 due to marketing efforts and improved inventory
management.
The Company's average per diem rates have fallen consistently throughout
1999, 1998 and 1997. This reflects the rationalization in the global shipping
industry and competitive market conditions. During the course of 1999, the
Company's combined per diem rate fell by approximately 11% from the combined
rate at December 1998.
Commissions, fees and other operating income includes acquisition fees
relating to the Company's managed container programs, income from direct
financing leases (principally containers leased under lease-purchase
arrangements), fees earned in connection with the manufacture and sale of dry
freight special and other products, fees from the disposal of used containers,
syndication fees relating to the Company's limited partnership offerings and
miscellaneous other fees and income. This item is affected by the size of new
managed programs, the purchase price of containers acquired for new managed
programs, the quantity of dry freight special and other products manufactured
and sold, the number and value of direct financing leases and income from
disposals of used containers. Although acquisition fees are generally received
in cash at the inception of a managed container program and are non-refundable,
they are amortized in the statement of operations on a straight-line basis over
the period of the managed container agreement to which they relate.
Direct operating expenses are direct costs associated with leasing
containers, both owned and managed. These expenses include depot costs such as
repairs, maintenance, handling and storage, non-depot expenses such as
insurance, agent fees and repositioning costs, and other expenses such as
provisions for doubtful accounts and legal costs. Direct operating expenses are
affected primarily by fleet size and utilization. The majority of direct
operating expenses relate to off-hire containers, and therefore these costs are
sensitive to the quantity of off-hire containers as well as the frequency at
which containers are re-delivered.
Payments to container owners reflect the amounts due to Managed Container
Owners, computed in accordance with the terms of the individual agreements.
Selling, general and administrative expenses include all employee and
office costs, professional fees and computer systems costs.
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Operating profit or loss, for reported segments, includes items directly
attributable to specific containers in each of the Company's operating segments,
as well as items not attributable to any specific container but instead are
allocated across operating segments. Items directly attributable to operating
segments include gross lease revenue, direct operating expenses, payments to
container owners, container interest and depreciation expense. Indirect items
allocated across segments include selling, general and administrative expenses
and interest, depreciation and impairment charges on the Company's non-container
assets.
RESULTS OF OPERATIONS
The following chart represents certain key performance measurements,
expressed as a percentage of gross lease revenue:
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
% % %
Payments to container owners................................ 48 48 46
Direct operating expenses................................... 24 22 21
Selling, general and administrative expenses................ 13 13 14
Depreciation and amortization............................... 12 12 12
Interest expense............................................ 8 10 11
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In 1999, the Company implemented a strategy that was designed to reduce
overhead expenses and to refinance short-term debt.
First, the Company made significant reductions to selling, general and
administrative expenses under a program that involved the reorganization of key
activities together with the termination of certain employee positions.
Second, in the first half of the year the Company reduced its short-term
debt by $20.6 million under a program that involved the sale of container
equipment to third party investor programs. The refinancing plan was completed
in August with the closure of a $50 million transaction, the proceeds of which
were used to refinance $47.8 million of debt and capital lease obligations. See
also "Liquidity and Capital Resources -- Capital Resources".
Approximately 91% of new container investment in 1999 was financed within
the Managed Container Owners segments, compared to 85% in 1998. The remaining 9%
in 1999 and 15% in 1998 was financed within the Owned Container segment by
operating cash flow and borrowings.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US Limited Partnerships increased by approximately $0.4 million, or 21%,
from $1.9 million in 1998 to $2.3 million in 1999. Reduced operating profit
before indirect items, reflecting a smaller fleet size and lower average
utilization and per diem rates, were more than offset by lower allocations of
selling, general and administrative expenses and the absence of an impairment
charge in 1999.
Other Container Owners generated an operating profit of $0.2 million in
1999, compared to an operating loss of $0.7 million in 1998. Operating profit
before allocations of indirect items decreased by $1.5 million as the effect of
a larger fleet size was more than offset by the combined effects of lower
average utilization and per diem rates. Indirect allocations of $5.8 million
were $2.4 million lower than in 1998 as a result of the reduction in selling,
general and administrative expenses and without the effect of the $0.8 million
impairment loss recorded in 1998 relating to the Company's real property in
England.
Owned Containers generated an operating profit of $0.9 million in 1999
compared to a loss of $8.1 million in 1998. Of the loss reported in 1998, $5
million was attributable to impairment losses recorded on container assets and
real property. In 1999, the total charge for container depreciation and interest
was $7.3 million lower
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than in 1998 due to the sale of container assets to the Other Container Owner
segment and to the repayment and refinancing of debt. This more than offsets the
$5.7 million decrease in net lease revenue which was caused by a smaller fleet
size together with lower average utilization and per diem rates. In addition,
the reduction in selling, general and administrative expenses and the increase
in the level of commissions and fees and other operating income contributed to
the improvement in operating profit.
Gross lease revenue decreased by approximately $25.4 million, or 16%, to
$132.1 million in 1999. Of the decrease, approximately 91% was caused by the
combined effect of lower average per diem and utilization rates and the balance
was attributable to a smaller average fleet size.
Commissions, fees and other operating income increased to $5.9 million in
1999, an increase of $1 million, or 20%, over 1998. This was primarily due to a
$1.3 million increase in commissions and fees earned in connection with the
manufacture and sale of dry freight special and other products partly offset by
a $0.3 million reduction in income from direct financing leases and a $0.1
million reduction in fees from the disposal of containers.
Investment gains of $1.3 million represent the cash received that had been
held pending post-closing reports and adjustments related to the Agreement and
Plan of Merger between Transamerica Corporation and Trans Ocean Limited in 1996.
Direct operating expenses of $31.2 million were $4.1 million, or 12%, lower
than in 1998. A $2.4 million, or 18%, increase in inventory related costs,
reflecting a larger off-hire fleet, was more than offset by reductions in
activity related costs of $2.3 million, or 15%, and by reduced charges for legal
expenses and doubtful accounts of $4.2 million, or 61%.
Payments to container owners decreased to $63.9 million in 1999, a decrease
of $11.6 million, or 15%, over the prior year. Payments to Other Container
Owners were $39.7 million in 1999, a decrease of $4 million, or 9%, over 1998
due to a $5.3 million reduction in net lease revenue for this segment. An
increase in the average fleet size, due to transactions involving the sale of
equipment from the Owned to the Other Container Owner segment in the first half
of 1999 together with new container production in the second half of the year,
was more than offset by lower average utilization and per diem rates. Payments
to US Limited Partnerships decreased by $7.6 million to $24.3 million, a 24%
decrease when compared to 1998. The $10.8 million reduction in gross lease
revenue for the segment was caused by lower average utilization and per diem
rates and a smaller dry cargo container fleet.
Depreciation and amortization decreased to $16.2 million in 1999, a
reduction of $2.5 million, or 13%, compared to 1998. This was primarily due to
the sale of equipment in the first six months of the year.
Selling, general and administrative expenses were $16.6 million in 1999,
compared to $21.2 million in 1998, a decrease of $4.6 million, or 22%. Manpower
costs were $2.4 million, or 21%, lower due to the completion of the
restructuring program announced in December 1998. The Company also achieved cost
savings over 1998 of 61% for legal and other professional fees, 26% for
information technology expenses, 11% for occupancy expenses and 20% for
communication expenses.
Interest expense decreased to $10.8 million in 1999, a decrease of $4.9
million, or 31%, over 1998, reflecting a $38.5 million reduction in the total
debt balance during the course of the year and a lower average interest rate due
to the refinancing of short-term debt.
Income taxes. The Company recorded an income tax benefit of $0.2 million
in 1999 reflecting losses that have arisen in the Company's US operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the size of the total fleet decreased by 8,400 TEU,
representing disposals of 11,200 TEU, net of new container production of 2,800
TEU. Total new container production in 1998 represented an investment of $9.8
million compared with $92.0 million in 1997. Approximately $3.8 million, or 39%,
of the new container investment before disposals related to dry cargo
containers, compared to $68.0 million, or 74%, in 1997. Of the
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remaining new container purchases, $2.7 million was invested in flatracks, $2.0
million was invested in roll-trailers and $1.3 million in tank containers.
Approximately 85% of new container investment in 1998 was financed within
the Managed Container Owners segments, compared to 69% in 1997. The remaining
balance of 15% in 1998 and 31% in 1997 was financed within the Owned Container
segment by operating cash flow and borrowings.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US Limited Partnerships declined by approximately $0.3 million, or 11%,
from $2.2 million in 1997 to $1.9 million in 1998 due to lower net lease
revenues generated from a smaller fleet size, offset partially by lower
allocations of selling, general and administrative expenses.
Other Container Owners generated an operating loss of $0.7 million in 1998,
compared to an operating profit of $0.9 million in 1997. Increased net lease
revenues resulting from a larger fleet size, were offset by higher allocations
of selling, general and administrative expenses and an allocation of impairment
losses in 1998 of $0.8 million related to the Company's real property in
England. Operating profit before allocations of indirect items increased
slightly due to a larger fleet under management
Owned Containers generated a loss from operations in 1998 of $8.1 million
compared to a loss of $7.1 million in 1997. Lower net lease revenues resulting
from a softer leasing market as well as a smaller owned fleet and higher
interest rates on container debt contributed to the decline in this segment's
performance. Additionally, the Company took an impairment charge of $4.5 million
in 1998 on refrigerated and selected dry cargo containers, in anticipation of a
sale of these assets to various third party investor programs in the first half
of 1999. These sales reflected the Company's strategy of refinancing its
short-term debt and reducing the Company's cost of debt financing. In 1997, the
Company booked a $7.4 million impairment charge to write down the carrying value
of refrigerated containers.
Gross lease revenue decreased by approximately 2% in 1998, primarily due to
lower average utilization rates on dry cargo containers, a smaller average
refrigerated container fleet and lower average per diem rates on most product
types. Gross lease revenue from dry cargo containers decreased by 2% in 1998 and
represented approximately 73% of the overall total, unchanged from 1997.
Refrigerated container gross lease revenue declined by $2.8 million, or 9%, to
$29.9 million in 1998 due to a reduction in average fleet size following a
program of targeting uneconomic equipment for disposal during the year.
Refrigerated container gross lease revenue represented 19% of the overall total
compared to 20% in 1997. Gross lease revenue from tank containers increased by
$1.2 million to $8.3 million, an increase of 17% over 1997, due to improved
utilization and a larger average fleet size. The roll-trailer fleet contributed
$2.9 million, or 2%, to total gross lease revenue in 1998 compared to $2.8
million, or 2%, in 1997.
Commissions, fees and other operating income decreased to $5.0 million in
1998, a decrease of $0.6 million, or 11%, over 1997. This was primarily due to
reduced income from direct financing leases which was partly offset by increased
fees from the disposal of containers and increased property rental income.
Direct operating expenses increased to $35.3 million in 1998, an increase
of $1.1 million, or 3%, over 1997. Reductions in storage, repositioning,
handling and agent costs were more than offset by increases in repair costs and
in charges in respect of dry cargo and refrigerated container legal expenses and
doubtful accounts. Dry cargo container storage costs decreased by $1.0 million,
or 10%, to $8.9 million reflecting stronger exchange rates and the negotiation
of lower storage rates in several locations. As a percentage of gross lease
revenue, direct operating expenses increased to 22% in 1998 from 21% in 1997.
Payments to container owners increased to $75.5 million in 1998, an
increase of $1.6 million, or 2%, over the prior year. Payments to Other
Container Owners were $43.6 million in 1998, an increase of $6.1 million, or
16%, over 1997 due to a larger average fleet size which more than offset lower
average dry cargo container utilization and per diem rates. The increase in the
average fleet size was mainly due to transactions involving the sale of
equipment from the Owned to the Other Container Owner segment in the second half
of 1997 together with new container production. Payments to US Limited
Partnerships decreased by $4.6 million to $31.9 million, a 12% decrease compared
to 1997. The $6.6 million reduction in gross lease revenue for the segment was
caused by lower average utilization and per diem rates and a smaller dry cargo
container fleet which more than offset a
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$1.3 million reduction in direct operating expenses. The US Limited Partnership
fleet declined from 138,600 TEU at December 1997 to 128,700 TEU at December 1998
as a result of the disposal of older container equipment, including sales of
equipment to the Other Container Owner segment. At December 1998, the managed
container fleet comprised 75% of the total fleet, by original equipment cost,
which was almost unchanged from 1997.
Depreciation and amortization decreased slightly to $18.7 million in 1998,
a reduction of $0.3 million, or 2%, compared to 1997, due to a smaller average
Owned Container fleet which was partly offset by an increase in the depreciation
charge for refrigerated containers following a change in the depreciation policy
at the beginning of 1998.
Selling, general and administrative expenses were $21.2 million in 1998,
compared to $22.7 million in 1997, a decrease of $1.5 million, or 7%, due to
lower manpower, professional service and communication costs.
Financing and recomposition expenses decreased to $5.4 million in 1998, a
reduction of $2.0 million, or 27%. During 1998, $3.4 million of charges were
incurred related to professional, financing and termination costs together with
a $2.0 million provision in connection with a restructuring plan. Charges
incurred during 1997 were comprised of a $3.4 million provision against a
contingent liability (see Note 16 to the 1999 Consolidated Financial Statements)
and $4.0 million in costs related to professional and financing fees.
Interest expense decreased to $15.7 million in 1998, a decrease of $2.0
million, or 11%, over 1997 due to a lower average debt balance which was partly
offset by a higher average interest rate. The average debt balance was $160.9
million in 1998 compared to $185.1 million in 1997, a decrease of $24.2 million.
The reduction in the average debt balance was due to debt repayments of $22.1
million from operating cash during 1998 together with container sales from the
Owned Container fleet to the managed container fleet in the second half of 1997.
Reversal of unrealized holding gain on available for sale securities
represented a $1.9 million charge to reduce the anticipated proceeds from
investment securities held in escrow accounts.
Impairment losses of $6.5 million in 1998 comprised a $4.5 million charge
related to container equipment and a $2.0 million adjustment to record a
property at estimated market value.
Income taxes of $0.3 million in 1998 represented charges against profits
arising in European and Asian marketing offices. There was no income tax charge
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The funding sources available to the Company and its consolidated
subsidiaries include operating cash flow and borrowings. The Company's operating
cash flow is derived from lease revenues generated by the Company's fleet and
fee revenues from its managed container programs. The Company's working capital
requirements generally relate to day-to-day fleet support and servicing the
current portion of long-term debt outstanding. The Company derives all of its
operating income and cash flow from its subsidiaries. Dividends of $3.2 million
were paid to the Company by its subsidiaries during 1998. There were no such
dividends in 1999.
The Company purchases new containers for its own account and for resale to
its managed container programs. In recent years the Company has targeted
container purchases to take advantage of strategic purchasing and leasing
opportunities, once the related financing was secured. During 1998 and 1997 the
ability to purchase new containers was limited by the reduced levels of
financing available to the Company.
Cash from Operating Activities. Net cash provided by operating activities
was $15 million and $15.2 million in 1999 and 1998, respectively. Net cash used
by operating activities was $20.6 million in 1997. The cash generated in 1999
represented cash provided by operations together with a $6.5 million reduction
in the net amounts due from lessees and a release of $4.9 million of deposits
from escrow accounts of which $2.7 million was utilized to make payments to
third party container owners. During 1999, cash was primarily utilized to pay
amounts due to container owners and to reduce the balance of Other amounts
payable and accrued expenses by $9.4 million, including payments of amounts due
under a restructuring plan and under the terms of loan extension agreements. The
net cash generated in 1998 reflected cash generated from operations and $7.9
million of
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proceeds from new container equipment for sale. The net cash used in 1997
reflected payments to container manufacturers of $26.4 million together with the
addition of new container equipment for resale of $6.7 million.
Cash for Investing Activities. The Company uses cash for investing
activities to acquire containers for its owned fleet, to purchase property and
other assets related to the operation of its worldwide office network and on
occasion to acquire subsidiaries and other investments. Net cash provided by
investing activities was $18.9 million and $44.6 million in 1999 and 1997,
respectively. Net cash used in investing activities was $1.4 million in 1998.
During 1999, $21.7 million was generated by the sales of container equipment and
finance lease equipment, primarily to third party container owners. Cash
payments in 1998 included acquisitions of container equipment and computer
equipment of $1.8 million and $1.1 million, respectively. Included in cash paid
in 1997 was $38.7 million relating to the purchase of owned container equipment
and $3.7 million relating to loans made to the then Chairman. Cash received in
1997 related to proceeds from the sale of container equipment of $61.5 million
and proceeds from the sale of an investment in finance lease equipment of $25.1
million. Also included in cash received in 1997 was the return of $1.5 million
paid by the Company purportedly related to professional fees relating to a
proposed strategic alliance.
Cash from Financing Activities. The Company uses cash from financing
activities to fund capital acquisition requirements and short-term purchasing
requirements of new containers held for resale. Net cash used in financing
activities was $34.5 million, $19 million and $26.7 million in 1999, 1998 and
1997, respectively. In 1999, the Company utilized the proceeds of a $50 million
loan to refinance $47.8 million of indebtedness. In addition to this, debt and
capital lease obligations included $20.6 million of repayments in connection
with transactions involving container equipment sales. In 1998, net cash used by
financing activities included $22.1 million of debt and capital lease repayments
from operating cash.
CAPITAL RESOURCES
On August 2, 1999, the Company refinanced approximately $47.8 million of
its short-term and other indebtedness by establishing a Loan Facility (the "Loan
Facility") with MeesPierson N.V., a Dutch financial institution, as agent for
itself and First Union National Bank (collectively, the "Lenders"). The borrower
under the Loan Facility was Cronos Finance (Bermuda) Limited ("Cronos Finance"),
a newly-organized, wholly-owned, special purpose subsidiary of the Company.
Cronos Finance borrowed $50 million under the Loan Facility for the purpose of
acquiring containers from three other direct or indirect wholly-owned
subsidiaries (the "Sellers") of the Company and paying certain fees associated
with the establishment of the Loan Facility and the fees of certain former
lenders. The Sellers utilized the cash proceeds from the sale of the containers
to Cronos Finance to repay $47.8 million in principal due by the Sellers to
eight different creditors or groups of creditors of the Group, including all
indebtedness owed to a group of banks for which Fleet Bank, N.A. acted as agent.
For establishing the Loan Facility, the Lenders were paid an arrangement
fee of 1.50% of the facility amount, issued 300,000 shares of Common Stock of
the Company (150,000 shares to each Lender) and each granted a warrant to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$4.41 per share.
In conjunction with the new facility, the Company has agreed to new
financial covenant levels with all of its current lenders and has obtained
waivers of non-compliance under current financial covenants. In addition, as
part of the facility, all lenders have agreed that the new covenant levels will
not be tested until the first quarter of 2000.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures for containers in 1999, 1998 and 1997 were $2.7
million, $1.8 million and $38.7 million, respectively. Other capital
expenditures in 1999, 1998 and 1997 were $0.2 million, $1.1 million, and $0.6
million, respectively.
During the year ended December 31, 1996, the Company advanced $5.5 million
to the then Chairman of the Group, of which $5.5 million was outstanding as of
December 31, 1996. In January 1997, the Company advanced a further $3.7 million.
As at December 31, 1997, no payments had been received against these loans. In
October
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1996, $1.5 million was placed into an escrow account, purportedly in respect of
professional fees relating to a proposed strategic alliance. This alliance did
not take place and the escrow funds were released to the Company in January
1997. In June 1999, $5.3 million was received from the sale of the Company's
stock held as collateral on the loans and was utilized in reducing the
indebtedness to the Company under these loans. See Item 13 -- "Certain
Relationships and Related Transactions" below.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and how it is designated. A variable cash flow
hedge of a forecasted transaction is initially recorded as comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Gains and losses from foreign currency exposure hedges are
reported in other comprehensive income as part of the cumulative translation
adjustment. Gains and losses from fair value hedges are recognized in earnings
in the period of any changes in the fair value of the related recognized asset
or liability or firm commitment. Gains and losses on derivative instruments that
are not designated as a hedging instrument are recognized in earnings in the
period of change. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and should not be
applied retroactively to financial statements for prior periods. The Company is
assessing the impact that SFAS 133 will have in accounting for its derivative
transactions and hedging activities.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 was
to have been effective in the first quarter of 2000. On March 24, 2000, the
Staff of the SEC announced that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000 may take an additional three months to
implement SAB No. 101. The Company is evaluating the impact, if any, of SAB No.
101 on the Company's financial statements.
YEAR 2000
The Company did not experience nor does it currently anticipate any
material adverse effects on the Company's business, results of operations or
financial condition as a result of Year 2000 issues involving its internal use
systems, third party products or any of its software products. Costs incurred in
preparing for Year 2000 issues were expensed as incurred. The Company does not
anticipate any additional material costs in connection with Year 2000 issues.
INFLATION
Management believes that inflation has not had a material adverse effect on
the Company's results of operations.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item should be read in conjunction with and by reference to Note 14 to
the 1999 Consolidated Financial Statements.
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The following table sets forth principal cash flows and related weighted
average interest rates by expected maturity dates for debt and capital lease
obligations at December 31, 1999:
EXPECTED MATURITY DATE OF DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------------------------
2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- -------- -------
(US DOLLAR EQUIVALENT, IN THOUSANDS)
Long-term debt and capital lease
obligations:
Fixed rate ($US).................... $ 4,019 $ 4,143 $ 3,769 $ 3,649 $12,119 $ --
Average interest rate %............. 8.7 8.6 8.6 8.6 8.6 --
Fixed rate (GBP).................... -- -- $ 5,750 -- -- --
Average interest rate %............. 9.8 9.8 9.8 -- -- --
Variable rate ($US)................. $12,558 $12,148 $12,362 $13,131 $24,494 $1,836
Average interest rate %............. 7.6 7.6 7.6 7.6 7.5 7.5
Interest rate risk: outstanding borrowings are subject to interest rate
risk. At December 31, 1999, 70% of total borrowings had floating interest rates.
The Company performed an analysis of borrowings with variable interest rates to
determine their sensitivity to interest rate changes. In this analysis, the same
change was applied to the current balance outstanding leaving all other factors
constant. It was found that if a 10% increase was applied to market rates, the
expected effect would be to reduce annual cash flows by $0.6 million.
Exchange rate risk: substantially all of the Company's revenues are billed
and paid in US dollars and approximately 78% of costs in 1999 were incurred and
paid in US dollars. Of the remaining costs, approximately 82% are individually
small, unpredictable and incurred in various denominations and thus are not
suitable for cost effective hedging. From time to time, Cronos hedges a portion
of the expenses that are predictable and are principally in UK pounds sterling.
In addition, almost all of the Company's container purchases are paid for in US
dollars.
As exchange rates are outside of the control of the Company, there can be
no assurance that such fluctuations will not adversely affect its results of
operations and financial condition. By reference to 1999, it is estimated that
for every 10% fall in value of the US dollar, the effect would be to reduce cash
flows by $1.4 million in any similar year.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1999 Independent Auditors' Report
1998 Report of Independent Public Accountants
The financial statements listed in this Item 8 are set forth herein beginning on
page F1:
Consolidated Balance Sheets -- At December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors, in general, delegates the daily management of the
Company's business to the Company's executive officers. The following table sets
forth information with respect to the executive officers and directors of the
Company.
YEAR INITIALLY ELECTED
NAME AGE OR APPOINTED POSITION
- ---- --- ---------------------- --------
OFFICERS AND DIRECTORS:
Dennis J Tietz................. 47 1998 Chairman of the Board of Directors and
Chief Executive Officer
Peter J Younger................ 43 1997 Director, Executive Vice President and
Chief Financial Officer
Maurice Taylor................. 39 1998 Outside Director
Charles Tharp.................. 49 1999 Outside Director
Stephen N Walker............... 45 1999 Outside Director
Robert M Melzer................ 59 2000 Outside Director
John M Foy..................... 54 1999 Senior Vice President
Nico Sciacovelli............... 50 1999 Senior Vice President
John C Kirby................... 46 1999 Senior Vice President
DENNIS J TIETZ. Mr. Tietz, age 47, was appointed Chief Executive Officer
of the Company on December 11, 1998, and Chairman of the Board of Directors on
March 30, 1999, to fill the vacancies created by the resignation of Rudolph J
Weissenberger as Chief Executive Officer and Chairman of the Board. Mr. Tietz
will serve as a director until the annual meeting in 2001 and his successor is
elected. From 1986 until his election as Chief Executive Officer of the Company,
Mr. Tietz was responsible for the organization and marketing of investment
programs managed by Cronos Capital Corp. ("CCC"), (formerly called Intermodal
Equipment Associates), a subsidiary of the Company. From 1981 to 1986, Mr. Tietz
supervised container lease operations in both the United States and Europe.
Prior to joining CCC in 1981, Mr. Tietz was employed by Trans Ocean Leasing
Corporation, San Francisco, California, a container leasing company, as regional
manager based in Houston, with responsibility for leasing and operational
activities in the US Gulf. Mr. Tietz holds a B.S. degree in Business
Administration from San Jose State University. Mr. Tietz is a licensed principal
with the National Association of Securities Dealers ("NASD").
PETER J YOUNGER. Mr. Younger, age 43, was elected to the Board of
Directors of the Company on January 13, 2000. Mr. Younger will serve as a
director until the annual meeting in 2001 and his successor is elected. Mr.
Younger was appointed as Executive Vice President of the Company in April 1999
and its Chief Financial Officer in March 1997. From 1991 to 1997, Mr. Younger
served as Vice President of Finance for Cronos Containers Ltd., located in the
UK. From 1987 to 1991 Mr. Younger served as Vice President and Controller for
CCC in San Francisco. Prior to 1987, Mr. Younger was a certified public
accountant and a principal with the accounting firm of Johnson, Glaze and Co. in
Salem, Oregon. Mr. Younger holds a B.S. degree in Business Administration from
Western Baptist College, Salem, Oregon.
MAURICE TAYLOR. Mr. Taylor, age 39, was appointed to the Board of
Directors of the Company as an outside director on July 9, 1998. Mr. Taylor will
serve as a director until the annual meeting for the year 2000 and his successor
is elected. Mr. Taylor, based in Geneva, Switzerland, is and has been an
independent consultant in international trade finance for the last five years.
He serves on the boards of numerous privately-held trading companies in Europe.
Mr. Taylor holds a B.A. degree in Mathematical Economics from Brown University.
CHARLES THARP. Mr. Tharp, age 49, was appointed to the Board of Directors
of the Company as an outside director on March 31, 1999, to fill the vacancy
created by the resignation of Dr. Axel Friedberg. Mr. Tharp will serve as a
director until the annual meeting for the year 2000 and his successor is
elected. Mr. Tharp is based in Washington D.C. and has for the last four years
acted as a consultant to pension funds and foundations on international
investment policy, fiduciary issues, and financial management. Mr. Tharp is a
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director of The Info/Change Foundation, Washington D.C. He held several
positions, including Executive Director (the Chief Executive Officer) of the
Pension Benefit Guaranty Corporation, a federal agency, from 1982 to 1985. Mr.
Tharp has served on the boards of insurance companies, pension funds, and real
estate holding companies in California, Ohio, and Bermuda. Mr. Tharp holds a
B.A. degree in History from Yale University and an M.A. in Jurisprudence from
Oxford University, England.
STEPHEN NICHOLAS WALKER. Mr. Walker, age 45, was appointed to the Board of
Directors of the Company as an outside director on October 5, 1999, to fill the
vacancy created by the resignation of Ernst-Otto Nedelmann, and was elected to
the Board by the shareholders at the January 13, 2000 meeting. Mr. Walker will
serve as a director until the annual meeting in 2002 and his successor is
elected. Since 1995, Mr. Walker has served as Senior Vice President of
Investments of Paine Webber Inc. From 1982 until he joined PaineWebber, he
served as Senior Vice President of Investments of Prudential Securities Inc. Mr.
Walker holds an M.A. degree in Jurisprudence from Oxford University, England.
ROBERT M MELZER. Mr. Melzer, age 59, was elected to the Board of Directors
of the Company as an outside director on January 13, 2000, and will serve as a
director until the annual meeting in 2002 and his successor is elected. Mr.
Melzer served as President and Chief Executive Officer of Property Capital
Trust, Inc., a publicly-traded real estate investment trust ("REIT"), from 1992
until May 1999 when the company completed its plan to dispose of its investments
and distributed the proceeds to its shareholders. Since May 1999, Mr. Melzer has
devoted his business activities to consulting and to serving as a director or
trustee of various business and charitable organizations. Mr. Melzer serves as a
director of Genesee & Wyoming, Inc., a short-line railroad holding company; a
director of Beacon Capital Partners, Inc., a REIT; a trustee of MGI Properties,
a REIT; and chair of the board of trustees of Beth Israel Deaconess Medical
Center. Mr. Melzer holds a B.A. degree in Economics from Cornell University and
an M.B.A. from the Harvard Business School. The Board proposed Mr. Melzer as a
candidate for director in its preliminary proxy statement filed with the SEC on
August 24, 1999, and, on October 21, 1999, appointed Mr. Melzer as a non-voting
member of the Board's Transaction Committee, which was organized to assess the
proposal made by Interpool, Inc. to acquire the Company and to consider
alternative means of enhancing shareholder value. See "Description of
Business -- Recent Developments" above.
JOHN M FOY. Mr. Foy, 54, was appointed Senior Vice President Americas, on
April 1, 1999. Mr. Foy is responsible for lease marketing and operations in
North and South