##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2006
 OR
 o
    
    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
  LUXEMBOURG
    
    NOT APPLICABLE(State or other Jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 5, Rue Guillaume Kroll, L-1882 LUXEMBOURG
 
 
 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 þ NO o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
 Large accelerated filer o Accelerated filer o Non- accelerated filer þ
 Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2) Yes o No þ
 The number of Common Shares outstanding as of November 10, 2006:
 Class
    
    Number of Shares OutstandingCommon
    
    7,640,673




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##### Table of Contents



The Cronos Group
 TABLE
OF CONTENTS
 PART I  FINANCIAL INFORMATION
    
    
    1Item 1  Financial Statements
    
    
    1Management Representation
    
    
    1Condensed Unaudited Consolidated Statements of Income and Comprehensive Income
    
    
    2Condensed Unaudited Consolidated Balance Sheets
    
    
    3Condensed Unaudited Consolidated Statements of Cash Flows
    
    
    4Consolidated Unaudited Statement of Shareholders Equity
    
    
    5Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
    
    
    23Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
    
    
    25Liquidity and Capital Resources
    
    
    29Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4  Controls and Procedures
    
    
    31PART II  OTHER INFORMATION
    
    
    32Item 1  Legal Proceedings
    
    
    32Item 1A  Risk Factors
    
    
    32Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3  Defaults Upon Senior Securities
    
    
    32Item 4  Submission of Matters to a Vote of Security Holders
    
    
    33Item 5  Other Information
    
    
    33Item 6  Exhibits
    
    
    33EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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##### Table of Contents



The Cronos Group
 
 PART I  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 
        1




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##### Table of Contents



The Cronos Group
 
 Condensed Unaudited Consolidated Statements of Income and Comprehensive Income
 (US dollar amounts in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross lease revenue
    
    $
    35,947
    
    
    $
    35,007
    
    
    $
    106,249
    
    
    $
    103,480Equipment trading revenue
    
    
    526
    
    
    
    260
    
    
    
    3,901
    
    
    
    2,210Commissions, fees and other income:- Related parties
    
    
    209
    
    
    
    209
    
    
    
    541
    
    
    
    614- Unrelated parties
    
    
    1,131
    
    
    
    1,187
    
    
    
    3,371
    
    
    
    3,737Gain on settlement of litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333Total revenues
    
    
    37,813
    
    
    
    36,663
    
    
    
    114,062
    
    
    
    111,374Direct operating expenses
    
    
    3,179
    
    
    
    4,264
    
    
    
    12,494
    
    
    
    13,504Payments to Managed Container Programs:- Related parties
    
    
    15,135
    
    
    
    11,381
    
    
    
    41,486
    
    
    
    27,816- Unrelated parties
    
    
    7,848
    
    
    
    9,177
    
    
    
    23,049
    
    
    
    27,281Equipment trading expenses
    
    
    493
    
    
    
    227
    
    
    
    3,454
    
    
    
    1,978Depreciation and amortization
    
    
    2,978
    
    
    
    3,293
    
    
    
    8,879
    
    
    
    12,463Selling, general and administrative expenses
    
    
    4,951
    
    
    
    5,635
    
    
    
    15,100
    
    
    
    16,337Interest expense
    
    
    1,844
    
    
    
    1,562
    
    
    
    5,343
    
    
    
    4,937Recovery of amount payable to Managed Container Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (703
    )Total expenses
    
    
    36,428
    
    
    
    35,539
    
    
    
    109,805
    
    
    
    103,613Income before income taxes and equity in earnings of affiliate
    
    
    1,385
    
    
    
    1,124
    
    
    
    4,257
    
    
    
    7,761Income taxes
    
    
    (208
    )
    
    
    (169
    )
    
    
    (639
    )
    
    
    (1,154
    )Equity in earnings of unconsolidated affiliate
    
    
    1,576
    
    
    
    1,238
    
    
    
    4,187
    
    
    
    2,692Net income
    
    
    2,753
    
    
    
    2,193
    
    
    
    7,805
    
    
    
    9,299Other comprehensive (loss) income:- change in fair value of derivatives held by affiliate, net of tax
    
    
    (1,072
    )
    
    
    483
    
    
    
    (270
    )
    
    
    669Comprehensive income
    
    $
    1,681
    
    
    $
    2,676
    
    
    $
    7,535
    
    
    $
    9,968Basic net income per common share
    
    $
    0.36
    
    
    $
    0.30
    
    
    $
    1.04
    
    
    $
    1.26Diluted net income per common share
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.96
    
    
    $
    1.17
  2




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##### Table of Contents



The Cronos Group
 
 Condensed Unaudited Consolidated Balance Sheets
 (US dollar amounts in thousands, except per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    12,739
    
    
    $
    15,829Restricted cash
    
    
    250
    
    
    
    4,200Amounts due from lessees, net
    
    
    28,958
    
    
    
    28,540Amounts receivable from Managed Container Programs
    
    
    2,258
    
    
    
    3,391New container equipment for resale
    
    
    18,386
    
    
    
    38,142Net investment in direct financing leases
    
    
    13,005
    
    
    
    12,678Investments in unconsolidated affiliates
    
    
    41,426
    
    
    
    31,358Container equipment, net
    
    
    121,624
    
    
    
    121,988Other equipment, net
    
    
    660
    
    
    
    1,130Goodwill
    
    
    11,038
    
    
    
    11,038Other intangible assets, net
    
    
    205
    
    
    
    345Other assets
    
    
    4,039
    
    
    
    3,093Total assets
    
    $
    254,588
    
    
    $
    271,732Liabilities and shareholders equityAmounts payable to Managed Container Programs
    
    
    25,812
    
    
    
    25,462Amounts payable to container manufacturers
    
    
    26,924
    
    
    
    52,790Direct operating expense payables and accruals
    
    
    3,886
    
    
    
    5,432Other amounts payable and accrued expenses
    
    
    5,408
    
    
    
    11,873Debt and capital lease obligations
    
    
    96,970
    
    
    
    87,780Current and deferred income taxes
    
    
    3,131
    
    
    
    3,174Deferred income and unamortized acquisition fees
    
    
    7,396
    
    
    
    7,684Total liabilities
    
    
    169,527
    
    
    
    194,195Shareholders equityCommon shares issued (7,673,073; 7,519,959 shares)
    
    
    15,347
    
    
    
    15,040Additional paid-in capital
    
    
    43,489
    
    
    
    43,807Common shares held in treasury (112,000 shares)
    
    
    (297
    )
    
    
    (297
    )Accumulated other comprehensive income
    
    
    610
    
    
    
    880Restricted retained earnings
    
    
    1,832
    
    
    
    1,832Retained earnings
    
    
    24,080
    
    
    
    16,275Total shareholders equity
    
    
    85,061
    
    
    
    77,537Total liabilities and shareholders equity
    
    $
    254,588
    
    
    $
    271,732
  3




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##### Table of Contents



The Cronos Group
 
 Condensed Unaudited Consolidated Statements of Cash Flows
 (US dollar amounts in thousands, except per share amounts)
 Nine Months EndedSeptember 30,2006
    
    
    2005Net cash provided by operating activities
    
    $
    8,277
    
    
    $
    21,989Cash flows from investing activitiesPurchase of container and other equipment
    
    
    (23,980
    )
    
    
    (24,338
    )Investment in unconsolidated affiliate
    
    
    (5,271
    )
    
    
    (9,654
    )Investment in equipment acquired for direct financing lease
    
    
    (266
    )
    
    
    (6,689
    )Proceeds from sales of container and other equipment
    
    
    11,954
    
    
    
    82,090Restricted cash
    
    
    3,950
    
    
    
    1,239Net cash (used in) provided by investing activities
    
    
    (13,613
    )
    
    
    42,648Cash flows from financing activitiesProceeds from issuance of term debt
    
    
    16,659
    
    
    
    20,744Repayments of term debt and capital lease obligations
    
    
    (13,534
    )
    
    
    (86,395
    )Dividend paid
    
    
    (1,572
    )
    
    
    (1,170
    )Recovery of related party loan
    
    
    
    
    
    
    1,280Proceeds from issuance of common stock
    
    
    693
    
    
    
    334Net cash provided by (used in) financing activities
    
    
    2,246
    
    
    
    (65,207
    )Net decrease in cash and cash equivalents
    
    
    (3,090
    )
    
    
    (570
    )Cash and cash equivalents at beginning of period
    
    
    15,829
    
    
    
    17,579Cash and cash equivalents at end of period
    
    $
    12,739
    
    
    $
    17,009Supplementary disclosure of cash flow information:Cash paid during the period for:- interest
    
    $
    4,571
    
    
    $
    5,256- income taxes
    
    
    640
    
    
    
    818Cash received during the period for:- interest
    
    
    98
    
    
    
    196- income taxes
    
    
    
    
    
    
    53Non-cash activities:- container equipment acquired under capital lease
    
    
    3,767
    
    
    
    1,495- container equipment transferred to direct financing leases
    
    
    1,970
    
    
    
    1,279- direct finance lease equipment acquired under capital lease
    
    
    2,107
    
    
    
    523
  4




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The Cronos Group
 
 Consolidated Unaudited Statement of Shareholders Equity
 (US dollar amounts in thousands, except per share amounts)
 Nine months ended September 30, 2006
 AccumulatedAdditional
    
    
    Common
    
    
    other
    
    
    Restricted
    
    
    
    
    
    
    TotalCommon
    
    
    paid-in
    
    
    shares held
    
    
    comprehensive
    
    
    retained
    
    
    Retained
    
    
    shareholdersshares
    
    
    capital
    
    
    in treasury
    
    
    income
    
    
    earnings
    
    
    earnings
    
    
    equityBalance,
January 1, 2006
    
    $
    15,040
    
    
    $
    43,807
    
    
    $
    (297
    )
    
    $
    880
    
    
    $
    1,832
    
    
    $
    16,275
    
    
    $
    77,537Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,805
    
    
    
    7,805Issue of common shares
    
    
    307
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    732Declaration of dividend
    
    
    
    
    
    
    (1,065
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,065
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    
    
    
    
    (270
    )Stock based
compensation
    
    
    
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322Balance,
September 30, 2006
    
    $
    15,347
    
    
    $
    43,489
    
    
    $
    (297
    )
    
    $
    610
    
    
    $
    1,832
    
    
    $
    24,080
    
    
    $
    85,061
 Nine months ended September 30, 2005
 AccumulatedAdditional
    
    
    Common
    
    
    other
    
    
    Restricted
    
    
    
    
    
    
    TotalCommon
    
    
    paid-in
    
    
    shares held
    
    
    comprehensive
    
    
    retained
    
    
    Retained
    
    
    shareholdersshares
    
    
    capital
    
    
    in treasury
    
    
    income
    
    
    earnings
    
    
    earnings
    
    
    equityBalance,
January 1, 2005
    
    $
    14,763
    
    
    $
    45,358
    
    
    $
    (297
    )
    
    $
    230
    
    
    $
    1,832
    
    
    $
    8,473
    
    
    $
    70,359Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,299
    
    
    
    9,299Issue of common shares
    
    
    333
    
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589Declaration of dividend
    
    
    
    
    
    
    (961
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (961
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    
    
    
    
    669Stock based
compensation
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Balance,
September 30, 2005
    
    $
    15,096
    
    
    $
    44,717
    
    
    $
    (297
    )
    
    $
    899
    
    
    $
    1,832
    
    
    $
    17,772
    
    
    $
    80,019
  5




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
     i. 1998 stock option
  ii. 1999 stock option plan
  iii. The non-employee directors equity plan
   6




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 iv. 2005 equity incentive plan
   v. Stock grant
  vi. Stock appreciation rights
   7




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
  vii. Summary of Stock Option Activity Under All Plans
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    (in thousands)Outstanding on January 1, 2006
    
    
    902,504
    
    
    $
    4.741
    
    
    
    4.0Exercised
    
    
    (142,126
    )
    
    $
    5.046Outstanding at September 30, 2006
    
    
    760,378
    
    
    $
    4.684
    
    
    
    3.2
    
    
    $
    6,323Exercisable at September 30, 2006
    
    
    760,378
    
    
    $
    4.684
    
    
    
    3.2
    
    
    $
    6,323
 viii. Adoption of new accounting standard
      8




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The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income:- as reported
    
    $
    2,193
    
    
    $
    9,299- add stock-based compensation expense included in
reported net income, net of related tax effects
    
    
    
    
    
    
    - deduct stock-based compensation expense computed
in accordance with SFAS 123, net of related tax effects
    
    
    
    
    
    
    - pro forma
    
    $
    2,193
    
    
    $
    9,299Basic net income per share:- as reported
    
    $
    0.30
    
    
    $
    1.26- pro forma
    
    $
    0.30
    
    
    $
    1.26Diluted net income per share:- as reported
    
    $
    0.27
    
    
    $
    1.17- pro forma
    
    $
    0.27
    
    
    $
    1.17
 9




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
    USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalThree months ended September 30, 2006Items directly attributable to segments:- gross lease revenue
    
    $
    4,251
    
    
    $
    14,320
    
    
    $
    10,065
    
    
    $
    7,311
    
    
    $
    35,947- direct operating expenses
    
    
    (366
    )
    
    
    (995
    )
    
    
    (1,260
    )
    
    
    (558
    )
    
    
    (3,179
    )net lease revenue
    
    
    3,885
    
    
    
    13,325
    
    
    
    8,805
    
    
    
    6,753
    
    
    
    32,768- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    452- payments to Managed Container Programs
    
    
    (2,941
    )
    
    
    (12,194
    )
    
    
    (7,848
    )
    
    
    
    
    
    
    (22,983
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,864
    )
    
    
    (2,864
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,844
    )
    
    
    (1,844
    )Segment profit
    
    $
    944
    
    
    $
    1,131
    
    
    $
    957
    
    
    $
    2,497
    
    
    $
    5,529Segment assets at end of period
    
    $
    5,772
    
    
    $
    55,613
    
    
    $
    10,693
    
    
    $
    182,510
    
    
    $
    254,588
 USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalThree months ended September 30, 2005Items directly attributable to segments:- gross lease revenue
    
    $
    5,844
    
    
    $
    9,099
    
    
    $
    11,928
    
    
    $
    8,136
    
    
    $
    35,007- direct operating expenses
    
    
    (857
    )
    
    
    (607
    )
    
    
    (1,731
    )
    
    
    (1,069
    )
    
    
    (4,264
    )net lease revenue
    
    
    4,987
    
    
    
    8,492
    
    
    
    10,197
    
    
    
    7,067
    
    
    
    30,743- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    450- payments to Managed Container Programs
    
    
    (3,633
    )
    
    
    (7,748
    )
    
    
    (9,177
    )
    
    
    
    
    
    
    (20,558
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,180
    )
    
    
    (3,180
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,561
    )
    
    
    (1,561
    )Segment profit
    
    $
    1,354
    
    
    $
    744
    
    
    $
    1,020
    
    
    $
    2,776
    
    
    $
    5,894Segment assets at end of period
    
    $
    7,679
    
    
    $
    38,517
    
    
    $
    12,630
    
    
    $
    171,572
    
    
    $
    230,398
 10




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalNine months ended September 30, 2006Items directly attributable to segments:- gross lease revenue
    
    $
    13,508
    
    
    $
    38,925
    
    
    $
    30,950
    
    
    $
    22,866
    
    
    $
    106,249- direct operating expenses
    
    
    (1,844
    )
    
    
    (3,047
    )
    
    
    (5,169
    )
    
    
    (2,434
    )
    
    
    (12,494
    )net lease revenue
    
    
    11,664
    
    
    
    35,878
    
    
    
    25,781
    
    
    
    20,432
    
    
    
    93,755- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,299
    
    
    
    1,299- payments to Managed Container Programs
    
    
    (8,666
    )
    
    
    (32,820
    )
    
    
    (23,049
    )
    
    
    
    
    
    
    (64,535
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,533
    )
    
    
    (8,533
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,341
    )
    
    
    (5,341
    )Segment profit
    
    $
    2,998
    
    
    $
    3,058
    
    
    $
    2,732
    
    
    $
    7,857
    
    
    $
    16,645Segment assets at end of period
    
    $
    5,772
    
    
    $
    55,613
    
    
    $
    10,693
    
    
    $
    182,510
    
    
    $
    254,588
 USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalNine months ended September 30, 2005Items directly attributable to segments:- gross lease revenue
    
    $
    18,093
    
    
    $
    19,411
    
    
    $
    35,551
    
    
    $
    30,425
    
    
    $
    103,480- direct operating expenses
    
    
    (2,719
    )
    
    
    (1,283
    )
    
    
    (5,437
    )
    
    
    (4,065
    )
    
    
    (13,504
    )net lease revenue
    
    
    15,374
    
    
    
    18,128
    
    
    
    30,114
    
    
    
    26,360
    
    
    
    89,976- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,263
    
    
    
    1,263- payments to Managed Container Programs
    
    
    (11,298
    )
    
    
    (16,518
    )
    
    
    (27,281
    )
    
    
    
    
    
    
    (55,097
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,133
    )
    
    
    (12,133
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,019
    )
    
    
    (5,019
    )Segment profit
    
    $
    4,076
    
    
    $
    1,610
    
    
    $
    2,833
    
    
    $
    10,471
    
    
    $
    18,990Segment assets at end of period
    
    $
    7,679
    
    
    $
    38,517
    
    
    $
    12,630
    
    
    $
    171,572
    
    
    $
    230,398
 11




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,US dollar amounts in thousands
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Segment profit
    
    $
    5,529
    
    
    $
    5,894
    
    
    $
    16,645
    
    
    $
    18,990Equipment trading revenue
    
    
    526
    
    
    
    260
    
    
    
    3,901
    
    
    
    2,210Unallocated commissions, fees and other operating income
    
    
    790
    
    
    
    837
    
    
    
    2,294
    
    
    
    2,888Gain on settlement of litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333Other interest income
    
    
    98
    
    
    
    109
    
    
    
    319
    
    
    
    200Equipment trading expenses
    
    
    (493
    )
    
    
    (227
    )
    
    
    (3,454
    )
    
    
    (1,978
    )Amortization of intangible assets
    
    
    (47
    )
    
    
    (47
    )
    
    
    (141
    )
    
    
    (141
    )Non container depreciation
    
    
    (67
    )
    
    
    (66
    )
    
    
    (205
    )
    
    
    (189
    )Selling, general and administrative expenses
    
    
    (4,951
    )
    
    
    (5,635
    )
    
    
    (15,100
    )
    
    
    (16,337
    )Non container interest (expense) credit
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    82Recovery of amount payable to a Managed Container Program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Income before income taxes and equity in earnings of affiliate
    
    $
    1,385
    
    
    $
    1,124
    
    
    $
    4,257
    
    
    $
    7,761
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,US dollar amounts in thousands
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues directly attributable to segments:- gross lease revenue
    
    $
    35,947
    
    
    $
    35,007
    
    
    $
    106,249
    
    
    $
    103,480- direct financing lease income
    
    
    452
    
    
    
    450
    
    
    
    1,299
    
    
    
    1,26336,399
    
    
    
    35,457
    
    
    
    107,548
    
    
    
    104,743Other revenues:- equipment trading revenue
    
    
    526
    
    
    
    260
    
    
    
    3,901
    
    
    
    2,210- unallocated commissions, fees and other operating income
    
    
    790
    
    
    
    837
    
    
    
    2,294
    
    
    
    2,888- gain on settlement of litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333- other interest income
    
    
    98
    
    
    
    109
    
    
    
    319
    
    
    
    200Total revenues
    
    $
    37,813
    
    
    $
    36,663
    
    
    $
    114,062
    
    
    $
    111,374
   12




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The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 3.
    
    Earnings per common shareThe components of basic and diluted net income per share were as follows (US dollar amounts are
in thousands, except per share amounts):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income available for common shareholders
    
    $
    2,753
    
    
    $
    2,193
    
    
    $
    7,805
    
    
    $
    9,299Average outstanding shares of common stock
    
    
    7,561,073
    
    
    
    7,432,807
    
    
    
    7,535,227
    
    
    
    7,356,058Dilutive effect of:- 1998 stock option
    
    
    193,070
    
    
    
    186,888
    
    
    
    194,563
    
    
    
    186,523- 1999 stock option plan
    
    
    188,741
    
    
    
    256,559
    
    
    
    199,786
    
    
    
    264,459- non-employee directors equity plan
    
    
    102,519
    
    
    
    118,699
    
    
    
    106,378
    
    
    
    140,833- 2005 equity incentive plan
    
    
    87,715
    
    
    
    
    
    
    
    72,291
    
    
    
    Common stock and common stock equivalents
    
    
    8,133,118
    
    
    
    7,994,953
    
    
    
    8,108,245
    
    
    
    7,947,873Basic net income per share
    
    $
    0.36
    
    
    $
    0.30
    
    
    $
    1.04
    
    
    $
    1.26Diluted net income per share
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.96
    
    
    $
    1.17
 13




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
   US dollar amounts in thousandsCostBalance, December 31, 2004
    
    $
    294,575Additions
    
    
    64,457Disposals
    
    
    (161,551
    )Balance, December 31, 2005
    
    $
    197,481Additions
    
    
    21,707Disposals
    
    
    (38,890
    )Balance, September 30, 2006
    
    $
    180,298Accumulated depreciationBalance, December 31, 2004
    
    $
    127,991Depreciation expense
    
    
    14,890Disposals
    
    
    (67,388
    )Balance, December 31, 2005
    
    $
    75,493Depreciation expense
    
    
    8,533Disposals
    
    
    (25,352
    )Balance, September 30, 2006
    
    $
    58,674Book valueSeptember 30, 2006
    
    $
    121,624December 31, 2005
    
    $
    121,988
   14




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The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
         15




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
       i
 ii
 iii
 iv
    16




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
    §
    
    Container equipment  depreciable lives;§
    
    Container equipment  valuation;§
    
    Deferred taxation;§
    
    Allowance for doubtful accounts;§
    
    Goodwill;§
    
    Reporting lease revenue on a gross basis for Managed Container Programs; and,§
    
    US Limited Partnership Programs  evaluation of expected losses and expected residual
returns in accordance with FIN 46R.
 11.
    
    Commitments and contingencies (to be read in conjunction with Note 17 to the Companys 2005
consolidated financial statements on Form 10-K).
 i. Commitments
  ii. Parent Guarantee under Agreements with Private Container Programs
    17




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 iii. Guarantees under fixed non-cancellable operating leases
  US dollar amounts in thousandsOctober 1 to December 31, 2006
    
    $
    6312007
    
    
    2,5222008
    
    
    2,5222009
    
    
    2,5222010
    
    
    7,6122011 and thereafter
    
    
    2,304Total
    
    $
    18,113
 iv. Agreements with Private Container Programs  early termination options
  v. Agreements with Private Container Programs  change of control provisions
  vi. Joint Venture Program  change of control provisions
  18




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##### Table of Contents



The Cronos Group
 Notes to the Condensed Unaudited Consolidated Financial Statements
 vii. TOEMT & Provision for legal claims
       19




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##### Table of Contents



The Cronos Group
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
  Funding Overview
    Owned Containers
      20




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##### Table of Contents



The Cronos Group
 Managed Container Programs
 Joint Venture Program:
 §
    
    The revolving credit period was extended for one year until October 31, 2007;§
    
    The maximum debt funding commitment increased from $300 million to $350 million; and,§
    
    The interest rate margin over the one month London Inter-Bank Offered Rate
(Libor) declined from 1.625% to 1.25%.
   US Limited Partnership Programs:
  Private Container Programs:
  21




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##### Table of Contents



The Cronos Group
 Overview of Operating Performance
  Cronos Fleet Container AdditionsFor the nine months ended September 30,(in USD millions)
    
    2006
    
    
    2005Dry cargo containers
    
    $
    16.8
    
    
    $
    35.4Specialized containers:Refrigerated containers
    
    
    45.2
    
    
    
    22.2Tank containers
    
    
    22.6
    
    
    
    17.6Dry freight specials
    
    
    29.9
    
    
    
    18.0Total
    
    $
    114.5
    
    
    $
    93.2
   September 30,
    
    
    December 31,
    
    
    September 30,2006
    
    
    2005
    
    
    2005Utilization at end of period
    
    
    93
    %
    
    
    91
    %
    
    
    92
    %
   22




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##### Table of Contents



The Cronos Group
 
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
  Analysis & Discussion
 Gross lease revenue (GLR)
 Direct operating expenses
 Operating segment information
 USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalThree months ended September 30, 2006Items directly attributable to segments:- gross lease revenue
    
    $
    4,251
    
    
    $
    14,320
    
    
    $
    10,065
    
    
    $
    7,311
    
    
    $
    35,947- direct operating expenses
    
    
    (366
    )
    
    
    (995
    )
    
    
    (1,260
    )
    
    
    (558
    )
    
    
    (3,179
    )net lease revenue
    
    
    3,885
    
    
    
    13,325
    
    
    
    8,805
    
    
    
    6,753
    
    
    
    32,768- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    452- payments to Managed Container Programs
    
    
    (2,941
    )
    
    
    (12,194
    )
    
    
    (7,848
    )
    
    
    
    
    
    
    (22,983
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,864
    )
    
    
    (2,864
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,844
    )
    
    
    (1,844
    )Segment profit
    
    $
    944
    
    
    $
    1,131
    
    
    $
    957
    
    
    $
    2,497
    
    
    $
    5,529
 US Limited Partnership Programs:
 §
    
    Net lease revenue declined by $1.1 million due to the effect of the disposal of
containers at the end of their useful economic life and the liquidation of four
partnership programs in the preceding twelve months; and,§
    
    Payments to US Limited Partnership Programs declined in line with net lease revenue.
 23




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##### Table of Contents



The Cronos Group
 Joint Venture Program:
 §
    
    Net lease revenueincreased by $4.8 million in the third quarter of 2006 reflecting the
significant investment in additional equipment for the program, including the acquisition
of $73.8 million of container fixed assets from the Group in August 2005; and,§
    
    Payments to the Joint Venture Programincreased by $4.4 million in the third quarter of
2006, in line with the increase in net lease revenue for this segment.
 Private Container Programs:
 §
    
    Net lease revenueof $8.8 million declined by $1.4 million when compared to the
corresponding period of 2005 due primarily to a reduction in the quantity of containers
owned by these programs;§
    
    Payments to Private Container Programsdeclined by $1.3 million in the third quarter of
2006 reflecting the decline in net lease revenue; and,§
    
    The ratio of segment profit to net lease revenueincreased from 10% to 11% due to the
expiration of an agreement with relatively high fixed payment terms in the second half of
2005.
 Owned Containers:
 §
    
    Net lease revenueof $6.8 million was $0.3 million lower than in the corresponding
period of 2005, reflecting the decline in the size of the owned container fleet;§
    
    Container depreciationof $2.9 million in the third quarter of 2006 was $0.3 million
lower than in the same period of 2005. The primary factors for the decline were:
 -
    
    The sale of the container fixed assets to the Joint Venture Program in
the third calendar quarter of 2005; and,-
    
    The change in the estimate of useful lives for tank, rolltrailer and
flat rack products on October 1, 2005.
 §
    
    Container interest expenseof $1.8 million was $0.3 million higher when compared to the
third quarter of 2005 due primarily to increased interest rates.
 Equipment trading revenue
 Commissions, fees and other income
 Selling, general and administrative expenses
 §
    
    A $1 million charge recorded in the third quarter of 2005 for one-off termination
benefits relating to involuntary employee terminations. There was no equivalent
charge in the third quarter of 2006.
  §
    
    A $0.2 million increase in the charge for a stock appreciation rights plan in the
third quarter of 2006 due to a larger increase in the Companys share price in this
period than in the corresponding period of 2005.
 Income Taxes
 Equity in earnings of unconsolidated affiliate
 24




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##### Table of Contents



The Cronos Group
 
 Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Overview
  §
    
    The growth and profitability of the Joint Venture Program;§
    
    Increased interest expense of $0.4 million reflecting higher interest rates; and,§
    
    A $0.4 million decline in gains recorded on the disposals from the Owned Container fleet.
   §
    
    Income of $1.3 million recognized on the recovery of amounts owed by a related party;§
    
    The recovery of $0.8 million payable to a Private Container Program;§
    
    One-off termination charges of $0.8 million (net of income tax adjustments) recorded in
connection with the implementation of restructuring plans; and,§
    
    Legal expenses of $1.6 million incurred in connection with actions involving a former
chairman and TOEMT.
 Analysis & Discussion
 Gross lease revenue (GLR)
 Direct operating expenses
 Operating segment information
 USLimited
    
    
    Joint
    
    
    PrivatePartnership
    
    
    Venture
    
    
    Container
    
    
    OwnedUS dollar amounts in thousands
    
    Programs
    
    
    Program
    
    
    Programs
    
    
    Containers
    
    
    TotalNine months ended September 30, 2006Items directly attributable to segments:- gross lease revenue
    
    $
    13,508
    
    
    $
    38,925
    
    
    $
    30,950
    
    
    $
    22,866
    
    
    $
    106,249- direct operating expenses
    
    
    (1,844
    )
    
    
    (3,047
    )
    
    
    (5,169
    )
    
    
    (2,434
    )
    
    
    (12,494
    )net lease revenue
    
    
    11,664
    
    
    
    35,878
    
    
    
    25,781
    
    
    
    20,432
    
    
    
    93,755- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,299
    
    
    
    1,299- payments to Managed Container Programs
    
    
    (8,666
    )
    
    
    (32,820
    )
    
    
    (23,049
    )
    
    
    
    
    
    
    (64,535
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,533
    )
    
    
    (8,533
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,341
    )
    
    
    (5,341
    )Segment profit
    
    $
    2,998
    
    
    $
    3,058
    
    
    $
    2,732
    
    
    $
    7,857
    
    
    $
    16,645
 25




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##### Table of Contents



The Cronos Group
 US Limited Partnership Programs:
 §
    
    Net lease revenuefor this segment decreased by $3.7 million over the corresponding
period in 2005 due primarily to the effect of the disposal of containers at the end of
their useful economic life and the liquidation of four partnership programs in the
preceding twelve months;§
    
    Payments to US Limited Partnership Programsdeclined by $2.6 million when compared to
the corresponding period in 2005 reflecting the decline in net lease revenue; and,§
    
    The ratio of segment profit to net lease revenueremained unchanged at approximately
26%.
 Joint Venture Program:
 §
    
    Net lease revenuefor this segment increased by $17.8 million in the first nine months
of 2006 reflecting the significant investment in additional equipment for the program; and,§
    
    Payments to the Joint Venture Programincreased by $16.3 million in the first nine
months of 2006, which is in line with the increase in net lease revenue for this segment.
 Private Container Programs:
 §
    
    Net lease revenuefor this segment declined by $4.3 million when compared to the first
nine months of 2005 due primarily to the disposal of equipment at the end of its economic
life;§
    
    Payments to Private Container Programsdecreased by $4.2 million over the corresponding
period of 2005 reflecting the decline in net lease revenue; and,§
    
    The ratio of segment profit to net lease revenueincreased to 11% in the first nine
months of 2006, from 10% in the same period of 2005. This was due to the expiration of an
agreement with relatively high fixed payment terms in the second half of 2005.
 Segment profit on Owned Containers
 §
    
    Net lease revenueof $20.4 million was $5.9 million lower than in the corresponding
period of 2005 reflecting the decline in the size of the owned container fleet;§
    
    Container depreciationof $8.5 million was $3.6 million lower than in the same period of
2005. The decline was due primarily to:
 -
    
    The sale of the container fixed assets to the Joint Venture Program in
the third calendar quarter of 2005; and,-
    
    The change in the estimate of useful lives for tank, rolltrailer and
flat rack products on October 1, 2005.
 §
    
    Container interest expenseof $5.3 million was $0.3 million higher when compared to the
first nine months of 2005. The increase in interest expense attributable to higher
interest rates was partially offset by the effect of lower debt balances further to the
repayment of $64.2 million of debt utilizing part of the proceeds generated by the fixed
asset sale to the Joint Venture Program in August 2005.
 Equipment trading revenue
 26




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##### Table of Contents



The Cronos Group
 Commissions, fees and other income
 Gain on settlement of litigation:
    Selling, general and administrative expenses
 §
    
    A decline in the level of legal expenses recorded for actions involving TOEMT and
the former chairman; and,§
    
    The first nine months of 2005 included $1.2 million of charges in respect of
one-time termination benefits that were incurred pursuant to a reorganization of the
Groups marketing and operations structures. There was no corresponding charge in
the first nine months of 2006.
  §
    
    Increased manpower and professional services costs in the first nine months of
2006.
 Recovery of amount payable to a Managed Container Program:
    27




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##### Table of Contents



The Cronos Group
   Income Taxes
 Equity in earnings of unconsolidated affiliate
 28




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##### Table of Contents



The Cronos Group
 
 Liquidity and Capital Resources
  Balance Sheet and Cash Flows
 Cash and cash equivalents
        Restricted cash
  Amounts due from lessees, net
   29




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##### Table of Contents



The Cronos Group
 Amounts receivable from Managed Container Programs
  New container equipment held for resale & Amounts payable to container manufacturers
  Other amounts payable and accrued expenses
  Commitments to container manufacturers
  Declared dividends
     
 Item 3  Quantitative and Qualitative Disclosures about Market Risk
 Interest rate risk:
 Exchange rate risk: .
  30




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##### Table of Contents



The Cronos Group
 Credit risk
 
 Item 4  Controls and Procedures
   31




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##### Table of Contents



The Cronos Group
 
 PART II  OTHER INFORMATION
 
 Item 1  Legal Proceedings
 Settlement of TOEMT Litigation
        
 Item 1A  Risk Factors
   
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  32




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##### Table of Contents



The Cronos Group
 
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 (a)
    
    Exhibits
 Number
    
    Exhibit10.1
    
    Amendment Number 11 to Loan Agreement, dated as of November 8,
2006, by and among CF Leasing Ltd. (CF Leasing), Fortis Bank
(Nederland) N.V. (Fortis Bank), as agent and lender, and the
other lenders.10.2
    
    Amendment Number 5, dated as of November 8, 2006, to Members
Agreement, dated as of September 18, 2002, by and among CF
Leasing, FB Transportation Capital LLC and Cronos Equipment
(Bermuda) Limited, and joined by The Cronos Group.10.3
    
    Amendment Number 6, dated as of November 8, 2006, to Members
Agreement, dated as of September 18, 2002, by and among CF
Leasing, FB Transportation Capital LLC, FB Aviation & Intermodal
Finance Holding B.V. and Cronos Equipment (Bermuda) Limited, and
joined by The Cronos Group.10.4
    
    Engagement letter, dated as of November 8, 2006, by and between
CF Leasing and Fortis Capital Corp.31.1
    
    Rule 13a-14 Certification31.2
    
    Rule 13a-14 Certification32
    
    Section 1350 Certifications
 
 Signatures
   SIGNATURE
    
    
    
    TITLE
    
    DATEBy
    
    /s/ PETER J. YOUNGER
    
    President and Chief Operating Officer
    
    November 13, 2006Peter J. Younger/s/ FRANK P. VAUGHAN
    
    Chief Financial Officer,
    
    November 13, 2006Frank P. Vaughan
    
    Senior Vice President
(Principal Financial and Accounting Officer)
 33




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##### Table of Contents



The Cronos Group
 
 Exhibit Index
 Number
    
    Exhibit10.1
    
    Amendment Number 11 to Loan Agreement, dated as of November 8,
2006, by and among CF Leasing Ltd. (CF Leasing), Fortis Bank
(Nederland) N.V. (Fortis Bank), as agent and lender, and the
other lenders.10.2
    
    Amendment Number 5, dated as of November 8, 2006, to Members
Agreement, dated as of September 18, 2002, by and among CF Leasing,
FB Transportation Capital LLC and Cronos Equipment (Bermuda)
Limited, and joined by The Cronos Group.10.3
    
    Amendment Number 6, dated as of November 8, 2006, to Members
Agreement, dated as of September 18, 2002, by and among CF Leasing,
FB Transportation Capital LLC, FB Aviation & Intermodal Finance
Holding B.V. and Cronos Equipment (Bermuda) Limited, and joined by
The Cronos Group.10.4
    
    Engagement letter, dated as of November 8, 2006, by and between CF
Leasing and Fortis Capital Corp.31.1
    
    Rule 13a-14 Certification31.2
    
    Rule 13a-14 Certification32
    
    Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. *
 
 *
    
    This certification, required by Section 906 of the
Sarbanes-Oxley Act of 2002, other than as required by Section 906, is not
deemed to be filed with the Commission or subject to the rules and
regulations promulgated by the Commission under the Securities Exchange Act of
1934, as amended, or to the liabilities of Section 18 of said Act. 34