Back to GetFilings.com
1
NY--204796.11
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
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 (I.R.S. Employer
incorporation or organization) Identification No.)
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area codes:
(352) 453145
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
Title of each class Name of each exchange
on which registered
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT.
Common Shares, $2 par value per share
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO BE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. YES NO X
THE AGGREGATE MARKET VALUE OF VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AS OF MARCH 26, 1999 (COMMON SHARES) WAS APPROXIMATELY
$33,283,497.
THE NUMBER OF COMMON SHARES OUTSTANDING AS OF MARCH 29, 1999:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Common 8,858,378
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE
INTO THIS REPORT.
DOCUMENT PARTS IN WHICH INCORPORATED
REGISTRANT'S PROXY STATEMENT FOR THE PART III
1999 ANNUAL MEETING OF SHAREHOLDERS
2
TABLE OF CONTENTS
THE CRONOS GROUP
Page
Introductory Note.......................................................................ii
PART I
Item 1 -- Description of Business..................................................................1
Item 2 -- Properties..............................................................................11
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..................14
Item 6 -- Selected Financial Data.................................................................15
Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations...16
Item 8 -- Financial Statements and Supplementary Data.............................................26
Item 9 -- Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....26
PART III
Item 10 -- Directors and Officers of Registrant...................................................27
Item 11 -- Executive Compensation.................................................................27
Item 12 -- Security Ownership of Certain Beneficial Owners and Management.........................27
Item 13 -- Certain Relationships and Related Transactions.........................................27
PART IV
Item 14 -- Exhibits, Finance Statement Schedules, and Reports of Form 8K..........................28
i
3
INTRODUCTORY NOTE
Unless the context indicates otherwise, the "Company" means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
"Cronos" 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.
This report discusses certain forward looking matters that involve risks
and uncertainties that could cause actual results to vary materially from
estimates. Risks and uncertainties include, amongst other things, changes in
international operations, including exchange rate risks, the Company's success
in refinancing its outstanding debt, changes in market conditions for the
Company's container lease operations and the Company's ability to provide
innovative and cost-effective solutions.
ii
4
PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme)
incorporated 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 U.K. 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 in owning and managing 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. The Company is currently seeking to refinance
approximately $47.7 million due under the Bank Facility and the Company's other
credit facilities by securing new term debt financing and investment by managed
container owners. Until the refinancing is completed, there is substantial doubt
that the Company will be able to continue as a going concern. See Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
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 83% (in teu) of the worldwide container fleet. Refrigerated
containers and tank containers currently constitute approximately 7% (in teu) of
the worldwide container fleet, with open-tops and other specialized containers
constituting the remaining 10%.
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
The Cronos Group 1
5
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 during the
last 25 years, resulting in increased demand for containerization. The world's
container fleet has grown from an estimated 270,000 TEU in 1969 to approximately
12.2 million TEU by mid-1998.
BENEFITS OF LEASING
Leasing companies own approximately 47% 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 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 inexpensive 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 and 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 Cronos Group 2
6
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.
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 redeliver and on-hire frequently.
Percentage of Fleet On-Hire
---------------------------------
Type of Lease Dry cargo Refrigerated Tank
- ------------- --------- ------------ ----
Master............ 76% 39% 9%
Term.............. 16 56 91
Finance........... 8 5 --
--- --- ---
Total......... 100% 100% 100%
=== === ===
CUSTOMERS
Cronos currently serves over 400 customers, consisting primarily of
ocean carriers. Cronos supplies containers to all of the 20 largest ocean
carriers worldwide. 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 37.6%
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 Cronos Group 3
7
FLEET PROFILE
Cronos focuses on supplying to its customers high-quality containers,
manufactured to specifications that exceed International Standards Organization
(ISO) standards and designed to minimize repair and operating costs. Cronos
operates primarily dry cargo and refrigerated containers but, since 1993, it has
diversified into tanks and other specialized containers. Cronos believes that
this fleet diversification enables it to increase business with its customers by
supplying a wide range of their equipment requirements.
Cronos Container Fleet (in TEU thousands)
at December 31,
---------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Dry Cargo 211.5 250.2 322.0 345.9 337.8
Refrigerated 14.6 14.3 16.2 16.0 14.7
Tank 0.4 1.0 1.7 2.0 2.0
Roll-Trailer -- -- 1.7 2.0 2.2
CPCs -- -- -- 2.4 2.4
Other Dry Freight Specials 0.1 0.1 1.2 1.5 2.3
----- ----- ----- ----- -----
Total Fleet 226.6 265.6 342.8 369.8 361.4
===== ===== ===== ===== =====
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 Company's 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 has not
purchased new refrigerated containers since early 1997 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 2,200 TEU at
the end of 1998. 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 2,400 TEU of CPCs into its container
fleet.
The Cronos Group 4
8
PURCHASING POLICY
Cronos' purchasing policy is driven by market requirements and
anticipated future demand, including demand generated by trade growth and the
replacement of containers retired from fleets around the world. The 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 supplies more than 30%
of Cronos' annual dry cargo container purchases.
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 a
customer, and customers 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, a wholly-owned subsidiary based in the United Kingdom, with
support provided by area offices and dedicated agents located in San Francisco,
California; Iselin, New Jersey; Windsor, England; Hamburg; Antwerp; Genoa;
Gothenburg, Sweden; Singapore; Hong Kong; Sydney; Tokyo; Taipei; Seoul; Rio de
Janeiro; Shanghai and Auckland.
Cronos also maintains agency relationships with over 20 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
The Cronos Group 5
9
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.
Cronos' global network is integrated with its computer system and
provides 24-hour communication between offices and agents. 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, Genstar Container
Corp. (now GE Seaco), Triton Container International Ltd., Textainer Corp. and
others. In a series of recent consolidations, 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, making economies of scale, worldwide operations,
diversity, size of fleet and financial strength increasingly important to the
successful operation of a container leasing business. Additionally, as
containerization grows, customers may demand more flexibility from leasing
companies regarding per diem rates, pick-up and drop-off locations, availability
of containers and other terms.
Some of Cronos' competitors may 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.
The Cronos Group 6
10
OPERATING SEGMENTS
Cronos has three operating segments which are determined based on source
of container funding:
1. U.S. Public Limited Partnerships
2. Other Container Owners
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 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:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
U.S. Public Limited Partnerships.... 48% 45% 38% 35% 34%
Other Container Owners ............. 28% 34% 29% 40% 41%
Owned Containers ................... 24% 21% 33% 25% 25%
--- --- --- --- ---
Total .................... 100% 100% 100% 100% 100%
=== === === === ===
As of December 31, 1998, no single owner (other than as specified above)
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 10% or more of
a segment's revenues. The Company evaluates the performance of its operating
segments based on operating profit or loss. Substantially, all of the Group's
lease revenue is earned on containers used in global trade routes. This revenue
is deemed to be earned based on the physical location of the containers while on
lease. Accordingly, the Group believes that it does not possess discernible
geographic reporting segments as defined in Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". See Note 2 to the 1998 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.
U.S. PUBLIC 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.
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 U.S. since early 1997. The Company is currently seeking to
refinance approximately $47.7
The Cronos Group 7
11
million of indebtedness. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources". In addition, since early 1997 the Company has been the subject of an
investigation by the U.S. Securities and Exchange Commission. See Item 3 --
"Legal Proceedings". The Company's ability to offer additional investor programs
will likely require a satisfactory resolution of these matters.
The U.S. Public Limited Partnerships provide compensation to Cronos
consisting of the following fees and commissions:
- Syndication commissions: equal to 10% of the gross proceeds from the
offering, of which approximately 8% is paid to independent
broker-dealers;
- Acquisition fees: equal to 5.0% of the original cost of equipment
purchased by the partnerships, recognized over a 12-year period;
- Base management fees: equal to 7% of gross lease revenue for
operating leases and 2% of gross lease revenue for direct financing
leases;
- General partner share: equal to 5% of distributable cash generated by
the partnerships' operating activities;
- Incentive fees: equal to 15% of distributable cash after the limited
partners have received a return of their adjusted capital
contributions and distributions in an amount equal to a cumulative
compounded rate between 8 to 10% per annum (depending on the
program);
- Sales proceeds fees: equal to a 25% share of container sales proceeds
after limited partners have received a return equal to their adjusted
capital contribution plus 8% per annum for the leveraged programs;
and
- 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 $15.0 million, $12.0 million, and $11.3 million for
the years ended December 31, 1996, 1997 and 1998, respectively.
The Cronos Group 8
12
OTHER CONTAINER OWNERS
In addition to U.S. Public 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 between 5% and 20% of the net lease revenue
generated by the containers. Cronos also earns an acquisition fee of
approximately 2.5% to 5.0% 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' income
statements over periods ranging from 7 to 15 years.
Total fees earned by the Company were $7.4 million, $7.3 million and
$7.4 million for the years ended December 31, 1996, 1997 and 1998, respectively.
All of the containers managed for these owners are combined into pools
with containers of similar age and type and are managed pursuant to generally
similar management agreements. Occasionally an owner will have its own pool, due
to the size of its fleet or to differences in the structure or terms of the
management agreement. 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. Until the Company completes its short term debt refinancing,
additional investment in container ownership will be restricted. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Cronos also owns containers on a temporary basis until such time that
the containers are sold to its U.S. Limited Partnerships and Other Container
Owner Programs. Most containers targeted for transfer to managed programs are
purchased new by Cronos, and sold to a managed container owner within six
months. This strategy allows Cronos more flexibility to negotiate and buy
containers strategically, based on market conditions and later sell these
containers to third party owners after the initial lease profile is established
for a particular group of containers. Cronos also intends to use managed
container programs to help it refinance containers held under short-term debt
agreements, some of which it has completed in the first quarter of 1999.
The Cronos Group 9
13
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, many 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 its Owned Containers, which constitute
approximately 25% of its total 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, 1998, Cronos had 139 employees worldwide, 32 were
located in the United States, 80 in Europe and 27 in Asia. None of Cronos'
employees are covered by a collective bargaining agreement.
Executive Officers of the Company
---------------------------------
Name Position Age
---- -------- ---
Dennis J. Tietz Chief Executive Officer 46
Peter J. Younger Chief Financial Officer 42
Stephen J. Brocato President of Leasing Division 46
A brief summary of the recent business and professional
experience of each executive officer is set forth below:
DENNIS J. TIETZ. Mr. Tietz, 46, was elected Chief Executive Officer of
The Cronos Group in December 1998 and Chairman of the Board of Directors in
March 1999. Since 1986, Mr. Tietz has been responsible for the organization and
marketing and after-market support of investment programs managed by Cronos
Capital Corp. ("CCC"), a subsidiary of the Company. Mr. Tietz was a regional
manager for CCC, responsible for various container leasing activities in the
U.S. and Europe from 1981 to 1986. Prior to joining CCC in December 1981, Mr.
Tietz was employed by Trans Ocean Leasing Corporation as Regional Manager based
in Houston, with responsibility for all leasing and operational activities in
the U.S. Gulf. Mr. Tietz holds a B.S. degree in Business Administration from San
Jose State University and is a Registered Securities Principal with the National
Association of Securities Dealers ("NASD").
PETER J. YOUNGER. Mr. Younger, 42, was elected Chief Financial Officer
of The Cronos Group in March, 1997, and is based in the United Kingdom. Mr.
Younger was appointed Vice President and Controller of Cronos in 1991. He joined
IEA in 1987 and served as Director of Accounting and Vice President and
Controller, based 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.
The Cronos Group 10
14
STEPHEN J. BROCATO. Mr. Brocato, 46, was elected President of the
Leasing Company's container division in June 1997, and is based in the United
Kingdom. Mr. Brocato has held various positions since joining Cronos including,
Vice President - Corporate Affairs and Director of Marketing - Refrigerated
Containers for Cronos in North and South America. Prior to joining Cronos, Mr.
Brocato was a Vice President for ICCU Containers from 1983 to 1985 and was
responsible for dry cargo container marketing and operations for the Americas.
From 1981 to 1983, he was Regional Manager for Trans Ocean Leasing Ltd. On March
31, 1999 Mr. Brocato resigned from his position as President of the Leasing
Company's container division and has left the Company to pursue other interests.
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 22,000 square foot office building on
four acres of land. Orchard Lea is the head office of Cronos' container leasing
operations. It is subject to a mortgage and other liens and encumbrances. Cronos
leases approximately 12,160 square feet of office space in San Francisco,
California, where its U.S. Limited Partnership activities are based. Cronos also
conducts container leasing operations from offices in Iselin, New Jersey;
Hamburg; Antwerp; Genoa; Gothenburg, Sweden; Hong Kong; Singapore; Sydney;
Tokyo; Rio de Janeiro; Shanghai and Auckland, 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 - U.S. Public Limited Partnerships, Other Container
Owners and Owned Containers", above. As of December 31, 1998, Cronos owned
50,487 TEU dry cargo containers, 7,537 TEU refrigerated containers, 671 TEU tank
containers, 2,419 TEU CPC containers and 2,309 TEU of other specialized
equipment. As of December 31, 1998, Cronos managed a total of 287,339 TEU dry
cargo containers, 7,165 TEU refrigerated containers, 1,341 TEU tank containers
and 2,171 TEU of other specialized equipment.
ITEM 3 -- LEGAL PROCEEDINGS
In February 1997, as reported in the Company's Form 6-K, Arthur Andersen
resigned as auditors to The Cronos Group and its subsidiaries and related
partnerships. In connection with its resignation, Arthur Andersen also prepared
a report pursuant to Section 10A of the Securities Exchange Act of 1934 citing
its inability to obtain what it considered to be adequate responses to its
inquiries primarily regarding the payment of $1.5 million purportedly in respect
of professional fees relating to the proposed strategic alliance referred to in
Note 17 to the 1998 Consolidated Financial Statements.
The Securities and Exchange Commission ("SEC"), a United States
regulatory agency, subsequently commenced an investigation of the Company. The
SEC's investigation can result in several types of civil or administrative
sanctions against the Company and individuals associated with the Company,
including the
The Cronos Group 11
15
assessment of monetary penalties against the Company. Actions taken by the SEC
do not preclude additional actions by any other federal, civil or criminal
authorities or by other regulatory organizations or by third parties.
The SEC's investigation is continuing, and some of the Company's present
and former officers and directors and others associated with the Company have
given testimony. However, no conclusion of any alleged wrongdoing by the Company
or any individual has been communicated to the Company by the SEC. Accordingly,
management has not reached a conclusion regarding any possible liability of the
Company.
Since 1983, the Company has managed equipment for Austrian entities
sponsored by various Contrin companies. Contrin was formed in 1976 by Mr Rudolf
J. Weissenberger, a former Chief Executive Officer, Chairman and Director of the
Company. Subsequently, Mr Palatin, a former Chief Executive Officer, Chairman
and Director of the Company, joined Mr Weissenberger in the ownership and
management of Contrin. Mr Axel Friedberg, a former non-executive Director of the
Company from 1997 to March 1999, served as legal counsel to Mr Weissenberger and
some of the Contrin entities. Mr Weissenberger and Mr Palatin terminated their
respective positions with Contrin in 1991. Since then, Cronos has continued to
manage equipment for Contrin under Management Agreements.
Certain of the Contrin entities were liquidated in 1996 with alleged
losses to the investors in some of the Austrian entities that had provided
financing. Investigations that involved allegations of fraudulent dealings in
respect of Contrin were initiated against various persons and entities in the
Provincial Court of Vienna, Austria (Criminal Division) upon the complaint of
certain of the Contrin companies. In September 1997 the Provincial Court of
Vienna entered a temporary injunction that froze a payment being made by Cronos
Containers NV of 4,617,835 Austrian schillings (approximately $0.36 million)
pending the outcome of further legal proceedings. In December 1997 the Vienna
Court of Appeal (Criminal Division) sustained the temporary injunction. In its
opinion, the Court of Appeal noted that, upon motion of the Public Prosecutor,
investigations were then pending against, among others, Mr Palatin. The Court
also said that investigations were being initiated against additional persons,
including Mr Weissenberger and Mr Friedberg. Mr Palatin and Mr Friedberg have
since been formally charged. Such investigations, which are still pending, have
not resulted in any actions being taken against Mr Weissenberger, who has
informed the Company that he does not believe that there is any valid basis for
any such actions to be taken against him.
In May 1998, Mr Palatin was taken into custody by Austrian governmental
authorities pending further hearings on the allegations of fraud in connection
with various Contrin transactions. See Notes 17 and 21 to the 1998 Consolidated
Financial Statements. In June 1998, the Company's Board of Directors removed Mr
Palatin from his position as Chief Executive Officer. Mr Palatin resigned from
the Board of Directors on July 3, 1998.
In response to actions taken by Contrin, the Company terminated certain
of its Management Agreements with the various Contrin entities in 1998.
Discussions are taking place between Contrin and the Company and it is possible
these agreements may be reinstated.
Based on the information available to it, the Company considers that
prudent provision has been made in the 1997 and 1998 Financial Statements for
all matters concerning Contrin. See Note 17 to the Company's 1998 Consolidated
Financial Statements for additional information.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on October 29, 1998. The
following is a summary of the matters voted on at the meeting:
Resolution 1: to receive and approve the reports of the independent
auditor and of the Board of Directors; votes for 2,502,708; votes against
1,340,140; abstentions 1,075,200. Consequently, the resolution was passed.
The Cronos Group 12
16
Resolution 2: to ratify the appointment by the Board of Directors of Mr
Maurice Taylor on July 9, 1998 to fill a vacancy on the Board; votes for
2,502,508; votes against 1,339,140; abstentions 1,076,400. Consequently, Mr
Taylor's appointment by the Board of Directors was ratified.
Resolution 3: to approve the Consolidated and Unconsolidated Financial
Statements of the Company for the year ended December 31, 1997; votes for
2,173,108; votes against 1,340,940; abstentions 1,404,000. Consequently, the
Consolidated and Unconsolidated Financial Statements of the Company for the year
ended December 31, 1997 were approved.
Resolution 4: to discharge the Board of Directors (other than Mr
Palatin) pursuant to Article 74 of the Company Law (August 10, 1915) for the
execution of their mandate for the year ended December 31, 1997; votes for
2,496,098; votes against 1,343,000; abstentions 1,078,950. Consequently, the
discharge as proposed was granted.
Resolution 5: election of Directors
Votes
--------------------------------------
Nominee Term For Against Abstentions
- ------- ---- --- ------- -----------
E. A. Eriksen 2001 487,371 3,352,277 1,078,400
R. J. Weissenberger 2001 2,160,208 1,586,440 1,171,400
M. Taylor 2001 2,500,608 913,890 1,503,550
N. Walker 2001 708,010 1,337,840 2,872,198
Mr Friedberg and Mr Ernst Otto Nedelmann continued to serve as Directors
following the meeting.
Resolution 6: to rescind the authorization granted at the 1997 annual
meeting of shareholders of the Company to pay out dividends of up to 35% of
consolidated net earnings for the year ended December, 31 1996; votes for
3,732,958; votes against 106,040; abstentions 1,079,050. Consequently, the
authorization was rescinded.
Resolution 7: to approve the appointment of Moore Stephens S.a.r.l. as
the Company's independent auditor for the fiscal year 1998 and to authorize the
Directors to fix the independent auditors remuneration; votes for 3,499,348;
votes against 343,000; abstentions 1,075,700. Consequently, Moore Stephens
S.a.r.l was reappointed.
Resolution 8: to approve any dividends and allocate the results for the
year ended December 31, 1997; votes for 2,169,008; votes against 1,673,840;
abstentions 1,075,200.
Consequently, it was decided not to pay dividends.
The Cronos Group 13
17
PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As at March 29, 1999, there were outstanding 8,858,378 Common Shares.
They were held of record by 16 holders, including five non-U.S. persons holding
an aggregate of 2,857,017 shares.
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 U.S. 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 bid 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. Bid 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 Trading Volume
(Dollars) (# of Common Shares)
High Low
---- ---
March 31, 1997 7.375 2.750 2,704,887
June 30, 1997 6.875 4.000 1,833,200
September 30, 1997 8.125 6.250 1,671,623
December 31, 1997 7.375 4.500 1,092,334
March 31, 1998 7.250 5.125 1,397,942
June 30, 1998 7.125 5.000 552,233
September 30, 1998 5.969 4.875 1,101,394
December 31, 1998 6.625 3.375 297,081
February 28, 1999 5.938 3.500 137,290
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. The company is, under a
credit agreement, restricted in declaring or making dividend distributions
except in the case where such declarations or distributions are made solely and
limited to an amount equal to 35% of Consolidated Net Earnings of any year. No
dividend declarations have been made by the Company since its Initial Public
Offering in December 1995.
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.
The Cronos Group 14
18
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 income
statement data for the five years ended December 31, 1998, 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 1998 Consolidated
Financial Statements and related notes thereto included elsewhere in this Annual
Report. The Company is facing material financial uncertainties in connection
with its refinancing that may cause this data not to be indicative of future
financial condition or results of operations.
Year Ended December 31,
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Gross lease revenue ............................... $124,658 $150,429 $154,011 $ 160,848 $ 157,546
Commissions, fees and other operating income....... 5,667 6,942 7,460 5,545 4,955
Interest income ................................... 255 1,329 1,333 1,685 1,154
Equity in earnings of affiliates .................. 1,445 1,895 1,397 -- --
Gain on conversion of investment in affiliate...... -- -- 5,260 321 --
-------- -------- -------- --------- ---------
TOTAL REVENUES AND NON-OPERATING INCOME ........... 132,025 160,595 169,461 168,399 163,655
-------- -------- -------- --------- ---------
Direct operating expenses ......................... 23,783 26,938 34,535 34,217 35,318
Payments to container owners ...................... 62,288 77,073 72,894 73,945 75,527
Depreciation and amortization ..................... 8,711 10,676 14,258 19,033 18,714
Selling, general and administrative expenses....... 20,148 24,133 23,834 22,683 21,164
Financing and recomposition expenses(1)(2) ........ 1,900 -- 2,149 7,384 5,375
Interest expense .................................. 8,229 11,238 11,368 17,758 15,718
Provision against amounts receivable from
related parties(3) ................................ -- -- -- 4,733 --
Provision against available for sale
securities(4) ..................................... -- -- -- -- 1,500
Impairment losses(5) .............................. -- -- -- 11,668 6,500
-------- -------- -------- --------- ---------
TOTAL EXPENSES .................................... 125,059 150,058 159,038 191,421 179,816
-------- -------- -------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES ............... 6,966 10,537 10,423 (23,022) (16,161)
Income taxes ...................................... 3,031 3,175 2,441 -- 306
-------- -------- -------- --------- ---------
NET INCOME (LOSS) ................................. 3,935 7,362 7,982 (23,022) (16,467)
-------- -------- -------- --------- ---------
Preferred dividends ............................... 900 856 -- -- --
-------- -------- -------- --------- ---------
Earnings available for common shares .............. $ 3,035 $ 6,506 $ 7,982 $ (23,022) $ (16,467)
-------- -------- -------- --------- ---------
Earnings (loss) per common share .................. $ 0.58 $ 1.21 $ 0.90 $ (2.60) $ (1.86)
-------- -------- -------- --------- ---------
Dividends per common share ........................ $ .19 $ -- $ -- $ -- $ --
-------- -------- -------- --------- ---------
Shares used in per share calculations(6) .......... 5,215 5,383 8,853 8,858 8,858
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ......................... $ 7,493 $ 24,243 $ 17,278 $ 14,455 $ 9,281
Total assets ...................................... 222,337 266,485 399,301 327,145 279,979
Long-term debt and capital lease obligations....... 93,578 89,600 141,435 88,682 61,195
Total debt and capital lease obligations .......... 109,696 106,620 198,989 171,399 148,466
Shareholders' equity .............................. 53,186 85,349 95,576 73,713 56,087
(1) In 1994, $1.9 million ($.37 per share) of costs incurred in preparation for
the Company's Public Offering were written off because the offering,
originally planned for the summer of 1994, was postponed for more than 90
days. These costs were non-deductible for tax purposes.
The Cronos Group 15
19
(2) In 1996, 1997 and 1998 the Company incurred costs in connection with
certain financing and other transactions and the restructuring of the Board
of Directors and other employee positions. Costs incurred and accrued were
charged to the income statement where the Company determined that no future
benefit would be derived from such costs.
(3) As of December 31, 1997 the Company provided $4.7 million against a loan
and associated interest to the then Chairman due to concern over its
collectability and the Company's ability to exercize the pledge over shares
put up as collateral for the loan.
(4) As of December 31, 1998 the Company provided $1.5 million against the
escrow holding certain Transamerica shares pending final determination of
post-closing reports and adjustments.
(5) As of December 31, 1997 and 1998 the Company recorded accounting charges
relating to the impairment of certain long-lived assets as required by the
Statement of Financial Accounting Standards 121.
(6) Weighted average number of shares outstanding during the year.
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 1998 Consolidated
Financial Statements and the notes thereto and the other financial and
statistical information appearing elsewhere in this Annual Report. The 1998
Consolidated Financial Statements have been prepared in accordance with US
Generally Accepted Accounting Principles.
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by third-party 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 of the Notes to the
Company's 1998 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, U.S. Public Limited Partnerships ("U.S.
Limited Partnerships") and Other Container Owners ("Other Container Owners") and
together with U.S. Limited Partnerships, "Managed 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, 1998, approximately 34%, 41% and 25%
of the Company's fleet (by original equipment cost) was related to U.S. 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. Substantially all
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 minority of
The Cronos Group 16
20
agreements which have fixed payment terms are presented in note 14(c) of the
notes to the Company's 1998 Consolidated Financial Statements. Substantially all
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 U.S. 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 average per diem rates.
The Company has expanded its fleet since December 31, 1994 from 226,600
TEU to 361,400 TEU at December 31, 1998. Between 1994 and 1998 the owned and
managed fleets have grown from 36,700 TEU to 63,400 TEU and from 189,900 TEU to
298,000 TEU, respectively. During this period, the Company added containers
having an original equipment cost of $233 million and $135 million,
respectively, net of disposals, to its owned and managed fleet, increasing the
total original equipment cost of the fleet to $991 million. During 1997 and 1998
the ability of the Company to purchase new equipment for both the owned and
managed fleets was constrained by the levels of finance available to the
company.
Utilization of the Company's containers declined in 1996 as a result of
the increasing fleet size, an oversupply of containers in the industry,
relatively slow growth in world trade and increased competition. During 1997,
utilization experienced steady growth due to marketing efforts and improved
inventory management. In 1998, utilization declined reflecting the deteriorating
economic position in Asian, South American and other markets.
The Company's average per diem rates have fallen consistently throughout
1996, 1997 and 1998. This reflects the rationalization in the global shipping
industry and the resultant lowering of freight rates.
Commissions, fees and other operating income includes acquisition fees
relating to the Company's managed container programs, syndication fees relating
to the Company's limited partnership offerings, income from direct financing
leases (principally containers leased under lease-purchase arrangements), fees
from the disposal of used containers and miscellaneous other fees and income.
This item is affected by the size of new managed programs, the purchase price of
containers purchased for new managed programs, 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 income
statement 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.
Operating profit or loss 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 revenues, direct
The Cronos Group 17
21
operating costs, payments to container owners, container interest and
depreciation expense. Indirect items allocated across segments include selling,
general and administrative expenses, 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,
----------------------------
1996 1997 1998
---- ---- ----
% % %
Direct operating expenses 22.4 21.3 22.4
Selling, general and administrative expenses 15.5 14.1 13.4
Depreciation and amortization(1) 9.3 11.8 11.9
Interest expense 7.4 11.0 10.0
(1) Depreciation and amortization in 1996 includes the amortization of goodwill
on the acquisition of capital stock of an affiliate. In the income
statement data, this amortization is netted in calculating equity in
earnings of affiliates.
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 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.
Based on current market conditions and expected new container prices in
1999, the Company intends to allocate the majority of its 1999 production
funding to new dry cargo containers, and the balance to dry freight specials and
tank containers. The majority of new funding in 1999 is expected to come from
the Other Container Owner segment, most of which is expected to be used for new
production, with the balance targeted to purchase used containers currently
owned by the Company.
Operating profit, see Note 2 to the 1998 Consolidated Financial
Statements, from U.S. 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 an increased 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. The Company expects this trend
to continue in
The Cronos Group 18
22
1999, both from the funding for new containers purchases, as well as for used
containers currently owned by the Company. In the first quarter of 1999, third
party container owners purchased approximately $14.4 million in container assets
from the Company. The Company anticipates additional transactions of this kind
throughout the first half of 1999. In all cases, the assets will continue to be
managed by the Company as part of its Other Container Owner programs.
Owned Containers generated a loss from operations in 1998 of $8.1
million compared to a loss of $6.3 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 selected refrigerated and dry containers, in
anticipation of a sale of these assets to various third party investor programs
in the first half of 1999. These sales reflect 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.
Total allocations of selling, general and administrative expenses
between all segments in 1999 are expected to decline as a result of the
Company's announced restructuring program.
Gross lease revenue decreased by approximately 2% in 1998, primarily due
to lower average utilization rates on dry 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 higher 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 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 higher average fleet size which more than offset lower
average dry 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. Payment 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 container fleet which more than
offset a $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.
The Cronos Group 19
23
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 lower
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 in respect of professional and financing fees together with a $2.0
million provision in connection with a restructuring plan. Charges incurred
during 1997 comprised a $3.4 million provision against a contingent liability
(see Notes 3 and 17 to the 1998 Consolidated Financial Statements) and $4.0
million of costs in respect of professional and financing fees.
Interest expense decreased to $15.7 million in 1998, a decrease of $2.0
million, or 12%, 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.
Provision against available for sale securities represented a $1.5
million charge to reduce the anticipated proceeds from investment securities
presently held in escrow accounts.
Impairment losses of $6.5 million in 1998 comprised a $4.5 million
charge in respect of 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
During 1997, the Company added 27,000 TEU of dry and special purpose
containers to the fleet, compared with 77,200 TEU in 1996, net of disposals.
This represented an investment of $92.0 million in new containers in 1997
compared with $253.0 million in 1996. Approximately 74% of the new container
investment before disposals related to dry cargo containers, compared to 81% in
1996. Refrigerated container investment was $10.0 million in 1997 compared to
$50.0 million in 1996. Of the remaining new container purchases, $6.0 million
was invested in tank containers, $4.0 million was invested in palletwide
containers, $2.0 million was invested in roll-trailers and $1.0 million in
flatracks.
Approximately 69% of new container investment in 1997 was financed
within the Managed Container Owners segments, compared to 50% in 1996. The
remaining balance of 31% in 1997 and 50% in 1996 was financed within the Owned
Container segment by operating cash flow and borrowings.
Operating profit, see Note 2 to the 1998 Consolidated Financial
Statements, for US Limited Partnerships decreased by $0.1 million, or 3%,
compared to 1996. Net lease revenue net of payments to US Limited Partnerships
was $2.4 million, or 19%, lower than prior year due to a reduced fleet size and
lower per diem rates which were partly offset by improved utilization. The
allocation of indirect items decreased by $2.9 million, or 23%, reflecting lower
commissions on the sale of limited partnership units and a decrease in selling,
general and administrative expense allocations. Operating profit for Other
Container Owners increased by $0.3 million, or 55%. Net lease revenue net of
payments to container owners increased by $0.3 million, or 5%, due to a higher
average fleet size under management and improved utilization which was partly
offset by lower per diem rates. The average fleet size increased as a result of
investment in new containers during 1997 and purchases of containers from the
Owned Container segment in the second half of 1997. The Owned Container segment
The Cronos Group 20
24
experienced an operating loss of $6.3 million compared to an operating profit of
$6.3 million in 1996 as a result of increased interest and depreciation charges
and a charge in respect of a reduction in the carrying value of refrigerated
containers of $7.4 million.
Gross lease revenue increased to $160.8 million in 1997, an increase of
$6.8 million, or 4%, due to the expanded fleet size under management and higher
average utilization on dry containers which were partly offset by lower average
per diem rates. Dry cargo containers comprised 71% of the total fleet by
original equipment cost compared to 70% in 1997. Gross lease revenue from this
product type in 1997 remained unchanged from 1996, comprising 73% of the overall
total. Gross lease revenue from tank containers increased by $1.8 million to
$7.1 million, an increase of 34% over 1996. The roll-trailer fleet contributed
$2.8 million, or 1.7%, to total gross lease revenue in 1996.
Commissions, fees and other operating income decreased to $5.5 million
in 1997, a decrease of $1.9 million, or 26%, over 1996. This was due to lower
fees from the disposal of containers and lower syndication commissions resulting
from a reduction in the sale of U.S. Limited Partnership units.
Gain on conversion of investment in affiliate was $0.3 million in 1997
compared to $5.3 million in 1996. The gain resulted from the conversion of the
investment in Trans Ocean Limited in 1996. See Note 9 to the 1998 Consolidated
Financial Statements.
Direct operating expenses decreased to $34.2 million in 1997, a
reduction of $.3 million, or 1%, over 1996. Lower repositioning expenses
reflecting the continuing improvement in the dry container market were partly
offset by higher storage and handling costs and an increased provision for
doubtful accounts. Although storage and handling costs decreased in each quarter
in 1997 as dry utilization improved, the total cost for 1998 was $1.0 million
higher than in 1996. As a percentage of gross lease revenue, direct operating
expenses decreased to 21.3% in 1997 from 22.4% in 1996.
Payments to container owners increased to $73.9 million in 1997, an
increase of $1 million, or 1%, over the prior year. Payments to Other Container
Owners was $37.5 million in 1997, an increase of $4.9 million over 1996 due to a
higher average fleet size and higher dry utilization which more than offset
reduced per diem rates. Payment to US Limited Partnerships decreased by $3.9
million to $36.5 million, a 10% decrease compared to the prior year. The
decrease in average fleet size and reduction in per diem rates more than offset
the improvement in dry utilizations. The size of the total managed container
fleet increased from 242,700 TEU at December 31, 1996 to 303,100 TEU at December
31, 1997, an increase of 60,400 TEU, or 25%.
Depreciation and amortization increased to $19.0 million in 1997, an
increase of $4.8 million, or 33%, over 1996, due to a higher average Owned
Container fleet.
Selling, general and administrative expenses were $22.7 million in 1997,
compared to $23.8 million in 1996, a decrease of $1.1 million, or 5%, due to
lower employee costs and lower commissions paid on the sale of limited
partnership units, partly offset by higher professional fees.
Financing and recomposition expenses increased to $7.4 million in 1997,
an increase of $5.2 million over the prior year due to a $3.4 million provision
against a contingent liability (see Notes 3 and 17 to the 1998 Consolidated
Financial Statements) and higher levels of professional fees incurred in
connection with certain financing and other transactions.
Interest expense increased to $17.8 million in 1997, an increase of $6.4
million, or 56%, over 1996 due to higher average debt balances, a higher average
interest rate and increased loan fees. The average debt balance was $185.1
million in 1997 compared to $129.0 million in 1996, an increase of $56.1
million, reflecting a higher 1997 beginning debt position as a result of
significant additions to the Owned Container fleet in the second half of 1996.
The total debt balance decreased by $32.1 million between June 30, 1997 and
September 30, 1997 as a result of container sales from the Owned Container fleet
to the managed container fleet. The conversion of the Group's primary revolving
credit facility to a term loan resulted in a higher interest rate and increased
loan fees.
The Cronos Group 21
25
Provision against amounts receivable from related parties of $4.7
million in 1997 represents an adjustment in respect of outstanding loans and
unpaid interest. See Note 21 to the 1998 Consolidated Financial Statements.
Impairment losses of $11.7 million were recorded in 1997 in respect of
certain long-lived assets in accordance with Statement of Financial Account
Standards No. 121. A $7.4 million impairment loss was recognized in respect of
refrigerated container equipment to record the assets at fair value. A $4.3
million adjustment in respect of goodwill reflects the impairment of the Group's
ability to organize future public limited partnerships in the U.S. See Note 3 to
the 1998 Consolidated Financial Statements.
Income taxes: there was no income tax charge in 1997 reflecting the loss
before income taxes. In 1996 the charge was $2.4 million representing an
effective tax rate as a percentage of earnings before income taxes of 23.4%.
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 parent company derives all of
its operating income and cash flow from its subsidiaries. Dividends of $4.4
million and $3.2 million were paid to the parent company by its subsidiaries
during 1996 and 1998, respectively.
The Company purchases new containers for its own account and for resale
to its managed container programs. In recent years the Company has purchased
containers to take advantage of strategic purchasing and leasing opportunities.
These containers are held for periods of up to six months by the Company until
sold to one of the programs. If they are not sold, the Company retains them for
its own account. The Company believes that this activity allows the Company to
take advantage of opportunistic buying and increases the likelihood that the
containers will already be generating revenues at the time they are acquired by
the managed container programs, thereby providing managed container programs
with more attractive container prices and operating performance. The Company is
not obligated to continue this activity in the future. During 1997 and 1998 its
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 $19.1 million and $15.2 million in 1996 and 1998, respectively.
Net cash used by operating activities was $20.6 million in 1997. The net cash
generated in 1996 reflected earnings from operations together with a decrease in
new container equipment for resale of $6.4 million. The net cash used in 1997
reflected a payment to container manufacturers of $26.4 million together with
the addition of new container equipment for resale of $6.7 million. The net cash
generated in 1998 reflected cash generated from operations and $7.9 million of
proceeds from new container equipment for sale.
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 used for
investing activities was $121.2 million and $1.4 million in 1996 and 1998,
respectively. Net cash provided by investing activities was $44.6 million in
1997. Included in cash paid in 1996 was $3.4 million relating to the acquisition
of Intermodal Management AB and Intermodal Leasing AB, operators of a fleet of
roll-trailers and other roll-on roll-off terminal handling equipment. Also
included in cash paid in 1996 was $142.6 million relating to the purchase of
owned container equipment, $26.4 million relating to the purchase of container
equipment leased out under a lease purchase agreement, recorded in the Company's
balance sheet as Investment in direct financing leases, and $1.5 million in
respect of professional fees relating to a proposed strategic alliance. See Note
21 to the 1998 Consolidated Financial Statements. Cash received in 1996 related
to proceeds from the sale of container equipment of $36.4
The Cronos Group 22
26
million, and proceeds from the conversion and subsequent sale of the investment
in Trans Ocean Limited of $19.3 million. 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. See Note 21 to the 1998
Consolidated Financial Statements. 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 made in 1996. Also
included in cash received in 1997 was the return of $1.5 million paid by the
Company purportedly in respect of professional fees relating to a proposed
strategic alliance. Cash payments in 1998 included acquisitions of roll-trailer
and computer equipment of $1.6 million and $1.1 million respectively. Cash
receipts in 1998 included $1.1 million in respect of container equipment to a
third party container owner.
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 provided by financing
activities was $95.1 million in 1996. Net cash used by financing activities was
$26.7 and $19.0 million in 1997 and 1998, respectively. Included in the net cash
provided in 1996 was $2.1 million in net proceeds from the exercizing of options
on 243,000 shares by the underwriters following the Company's Public Offering.
In 1998, net cash used by financing activities included $22.1 million of debt
and capital lease repayments from operating cash.
Capital Resources
In 1993, the Company entered into a Credit Agreement with a group of
banks for which Fleet Bank, N.A. acts as Agent. This Credit Agreement, as
subsequently amended, is herein called the "Bank Facility". All borrowings under
the Bank Facility are secured by container equipment purchased with funds drawn
under it. The Bank Facility imposes certain financial covenants on the Company,
including requirements not to exceed a specific leverage ratio and to maintain a
minimum consolidated tangible net worth, a minimum debt service coverage ratio,
a fixed charge coverage ratio and other earnings related covenants.
An Amended and Restated Credit Agreement was executed in June 1997,
subject to various actions being taken by the Company including the provision of
additional collateral. This Agreement was further amended in July 1997 and
converted the facility to a term loan, payable in instalments, with a final
maturity date of May 31, 1998. This Agreement was again amended in December 1997
to amend the covenants relating to maintenance of various financial ratios.
The Company did not repay the Bank Facility at the amended maturity date
of May 31, 1998. On June 30, 1998, the Company entered into a Third Amendment to
the Bank Facility (the "Third Amendment"). Under the Third Amendment, the
remaining principal amount of approximately $36.8 million was to be amortized in
varying monthly instalments, beginning July 31, 1998 and ending January 8, 1999,
including a payment of approximately $27.2 million on September 30, 1998. These
instalments were subject to acceleration upon the occurrence of an event of
default. Interest was payable monthly at a rate per annum equal to 2.5% over the
higher of (i) Fleet Bank's prime rate or (ii) the Federal Funds Rate plus 50
basis points. Also, under the Third Amendment, the Company agreed to provide the
Banks with a security interest in certain shares of Transamerica Corporation
when they are released to the Company under a 1996 escrow agreement. See Note 9
to the 1998 Consolidated Financial Statements.
The principal payments due under the Third Amendment on September 30,
1998 and January 8, 1999 were not made. The balance outstanding on the facility
at December 31, 1998 was $33.1 million. In the first three months of 1999, the
Group repaid $7.3 million of the Bank Facility leaving an outstanding balance of
$25.8 million. In March 1999, the Company and the Banks entered into a
Forbearance Agreement and Fourth Amendment to the Bank Facility with a final
maturity date of September 1999 and with varying principal payments due between
April and September. The Fourth Amendment became effective as of March 31, 1999
subject to the satisfaction thereafter of various conditions.
In connection with the July 1997 amendment, the Company assigned to the
Banks as additional collateral certain promissory notes of Mr Palatin, together
with certain shares of the Company's stock that had been pledged
The Cronos Group 23
27
by Mr Palatin as collateral for the promissory notes. See Note 14 to the
Company's 1998 Consolidated Financial Statements. Mr Palatin has defaulted on
these notes and the Banks have notified the Company of their intention,
depending on market conditions, to exercize their rights to sell all or part of
1,463,636 shares under the collateral assignment in order to satisfy, to the
extent of the net proceeds, Mr Palatin's obligations under these notes. Any
resulting payments on these notes will reduce the Company's obligations under
the Bank Facility.
In December 1994 the Company borrowed $20.0 million under a Note
Purchase Agreement with Sun Life Insurance Company of America ("Sun").
Initially, the loan became due and payable in equal quarterly instalments ending
January 2003. However, during 1997 the Company was not in compliance with a
financial ratio covenant, and on November 1, 1997, the Agreement was amended, in
exchange for a waiver, to provide that the loan would become due and payable on
May 31, 1998. The Company did not repay the $13.9 million balance of the loan on
that date. In July 1998, the Company agreed and executed an Amendment to the
Note Purchase Agreement with the current holders of the Notes (as assignees of
Sun). Under the Amendment, 70% of the principal amount became due and payable on
September 30, 1998 and the balance on January 31, 1999. Prepayments were
required in the event of certain issuances of stock, sales of assets or
refinancings by the Company. Interest was payable monthly at the Citibank, N.A.
prime rate plus 2%.
The Company did not make the principal payments due on September 30,
1998 and January 31, 1999 and the balance outstanding under the facility at
December 31, 1998 was $13.9 million. A second Amendment to the Note Purchase
Agreement has been executed in January 1999 which extends the final maturity
date to September 1999 and also provides for interim principal payments to be
made in April and July. $1.2 million was repaid in February 1999 in lieu of the
April payment.
In March 1999, the Company agreed an amendment to a $20.0 million short
term revolving credit facility which had a maturity date of March 31, 1999,
under which $10.3 million was outstanding at December 31, 1998. The amendment
converted the facility to a short term loan with a final maturity date of
November 1999 and with varying principal payments due between April and
November.
The directors believe they are taking the necessary action to secure
alternative sources of finance and believe that refinancing will be arranged to
meet the Company's amended payment obligations.
Excluding the Bank Facility and the Sun Life Notes, as of December 31,
1998, the Company had total debt outstanding of $101.5 million secured by
specific containers and the headquarters of the Company's container leasing
operations. During the year ended December 31, 1998, interest rates on this debt
ranged from 6.6% to 9.8% and as of December 31, 1998, the debt bore an average
interest rate of 8.3% per annum. To the extent these facilities include
financial covenants, they are generally less restrictive than those imposed
under the Bank Facility. At December 31, 1998 the Company was not in compliance
with various financial covenants with various lenders. Waivers of the covenant
breaches have been received.
The Company manages equipment for third-party container owners and also
owns containers. Managed container programs have allowed the Company to expand
its fleet significantly without the capital expenditures required for container
ownership. Although container ownership may be more profitable for the Company
than the managed container programs over the life of the container, the managed
programs provide the company with revenue that is less sensitive to declines in
utilization and per diem rates.
Capital Expenditures and Commitments
Capital expenditures for containers in 1996, 1997 and 1998 were $142.6
million, $38.7 million and $1.8 million, respectively. Other capital
expenditures in 1996, 1997 and 1998 were $0.7 million, $0.6 million and $1.1
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. See Item 13 -- "Certain Relationships and Related
Transactions" and Note 21 of the Notes to the 1998 Consolidated Financial
Statements. In October 1996, $1.5 million was placed into an escrow account,
The Cronos Group 24
28
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. See Item 13 -- "Certain Relationships and Related
Transactions " below and Note 21 to the 1998 Consolidated Financial Statements.
The Company intends to refinance $47.7 million of amounts due under the
Bank Facility and the Company's other credit facilities by securing new term
debt financing and new investments by managed container owners. See "Liquidity
and Capital Resources - Capital Resources" above and Note 14 to the 1998
Consolidated Financial Statements. Until the refinancing has been completed,
there is substantial doubt that the Company will be able to continue as a going
concern.
YEAR 2000
The Company's computer systems are currently undergoing modifications in
order to render the systems ready for the year 2000. The Company has completed a
detailed inventory of all software and hardware systems and has identified all
components which need to be modified. The Company has completed all the
necessary changes and is now performing the required tests in a dedicated year
2000 environment. The Company anticipates that all testing will be completed by
mid 1999. The company has contacted all of its critical business suppliers and
has been advised that their systems are year 2000 compliant. Expenses associated
with addressing the year 2000 issues are being recognized as incurred.
Management has not yet assessed the year 2000 compliance expense but does not
anticipate the costs incurred to date or to be incurred in the future to be in
excess of $0.5 million. The Company believes it will be able to resolve any
major year 2000 issues.
The company is aware of the implications of a year 2000 computer system
failure and is currently in the process of developing its contingency plans.
Whilst management believe the possibility of a year 2000 system failure to be
remote, if the Company's internal systems, or those of its critical business
suppliers fail, the Company's consolidated financial position, liquidity or
results of operations may be adversely affected.
The company has assessed the introduction of a single European Currency,
the Euro, and believes that it will not be materially affected. In the past, the
effects of inflation on administrative and operating expenses have been largely
offset by the Company's ability to increase the operational economies of scale
through expansion of the fleet.
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 15
of the notes to the 1998 Consolidated Financial statements.
Interest rate risk: outstanding borrowings are subject to interest rate
risk. At December 31, 1998 65% 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 $0.8 million.
Exchange rate risk: substantially all of the Company's revenues are
billed and paid in U.S. dollars and approximately 79% of costs in 1998 were
incurred and paid in U.S. dollars. Of the remaining costs, approximately 81% 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 U.K. pounds
sterling. In addition, almost all of the Company's container purchases are paid
for in U.S. dollars.
The Cronos Group 25
29
As exchange rates are outside of the control of the Company, there can
be no assurance that such fluctuations will not adversely effect its results of
operations and financial condition. By reference to 1998, it is estimated that
for every 10% fall in value of the US dollar, the effect would be to reduce cash
flows by $1.9 million in any similar year.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in this Item 8 are set forth herein beginning on
page F1.
Report of Independent Public accountants
Consolidated Balance Sheets - At December 31, 1997 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1996, 1997
and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998
Notes to Consolidated Financial Statements
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In February 1997, as reported in the Company's Form 6-K, Arthur Andersen
resigned as auditors to The Cronos Group and its subsidiaries and related
partnerships. See Item 3 -"Legal Proceedings".
Arthur Andersen did not permit the inclusion of their audit report to
the 1995 Consolidated Financial Statements for The Cronos Group in the form 20-F
for the year ended December 31, 1997.
In April 1997, Moore Stephens were appointed as auditors to The Cronos
Group and its primary subsidiaries and related partnerships.
In the Audit Report to the 1997 Consolidated Financial Statements, Moore
Stephens drew attention to the fact that The Cronos Group was negotiating the
refinancing of certain loans and was not in compliance with the terms of an
escrow agreement. Moore Stephens advised that this and other factors raised
substantial doubt that the Group would be able to continue as a going concern.
In the Audit Report to the 1998 Consolidated Financial Statements, Moore
Stephens drew attention to the fact that The Cronos Group was negotiating the
refinancing of certain loans. Moore Stephens advised that these conditions raise
substantial doubt that the Group will be able to continue as a going concern.
In addition, Moore Stephens drew attention to certain notes to the 1997
and 1998 Consolidated Financial Statements relating to Financing and
recomposition expenses, Items affecting fourth quarter results of operations,
Commitments and contingencies and Related party transactions. Moore Stephens
advised that allegations had been made which could result in the Group becoming
defendants in lawsuits alleging various financial improprieties in the operation
of certain third party Austrian investment entities and their sponsoring
companies.
The Cronos Group 26
30
PART III
ITEM 10 -- DIRECTORS AND OFFICERS OF REGISTRANT
Information required by this Item 10 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange commission under the Securities Exchange Act of
1934. Information relating to the registrant's executive officers is set forth
on page 10 herein.
ITEM 11 -- EXECUTIVE COMPENSATION
Information required by this Item 11 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange commission under the Securities Exchange Act of
1934.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange commission under the Securities Exchange Act of
1934.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange commission under the Securities Exchange Act of
1934.
The Cronos Group 27
31
PART IV
ITEM 14 -- EXHIBITS, FINANCE STATEMENT SCHEDULES, AND REPORTS OF FORM 8K
Number Exhibit Page
- ------ ------- ----
3.1 Coordinated Articles of Incorporation (designated in the Company's
Annual Report on Form 20-F for the year ended December 31, 1997 (File
No. 0-24464) as exhibit 1.1)
10.1 Amended and Restated Credit Agreement, dated as of June 24, 1997, by and
among Cronos Containers N.V., Cronos Containers Ltd., Cronos Equipment
Ltd., Cronos Containers Inc., Cronos Capital Corp., and Cronos Equipment
(Bermuda) Limited, as joint and several borrowers, each of the banks
that is or may become a party thereto, Fleet Bank, N.A., as agent for
the banks, and The Cronos Group, as guarantor (the "Credit Agreement")
(designated in the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464) as exhibit 1.2)
10.2 First Amendment to the Credit Agreement, dated as of July 14, 1997
(designated in the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464) as exhibit 1.3)
10.3 Second Amendment to the Credit Agreement, dated as of December 3, 1997
(designated in the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464) as exhibit 1.4)
10.4 Third Amendment to the Credit Agreement, dated as of June 30, 1998
(designated in the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464) as exhibit 1.5)
10.5 Confirmation of Guaranties, Agreement and Power of Attorney by the
Cronos Group, dated June 30, 1998, pertaining to the Credit Agreement.
(designated in the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464) as exhibit 1.6)
10.6 Deed in lieu of foreclosure relating to shares given as collateral to the
Palatin loans. E1
10.7 Forbearance Agreeme