##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One)[ X ]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2004 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  LUXEMBOURG
    
    NOT APPLICABLE(State or other Jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 16, ALLÉE MARCONI, BOÎTE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices)(zip code) Registrants telephone number, including area codes:
(352) 453145    Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yeso Nox 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 NOo The number of Common Shares outstanding as of May 14, 2004 : Class
    
    Number of Shares OutstandingCommon
    
    7,260,080




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The Cronos Group TABLE OF CONTENTS PART I  FINANCIAL INFORMATION
    
    
    1Item 1  Financial Statements
    
    
    1Management Representation
    
    
    1Condensed Unaudited Consolidated Statements of Income
    
    
    1Condensed Unaudited Consolidated Balance Sheets
    
    
    2Condensed Unaudited Consolidated Statements of Cash Flows
    
    
    3Consolidated Unaudited Statement of Shareholders Equity
    
    
    4Notes to the Condensed Unaudited Consolidated Financial Statements
    
    
    5Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14General
    
    
    14Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
    
    
    18Liquidity and Capital Resources
    
    
    21Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4  Controls and Procedures
    
    
    25PART II  OTHER INFORMATION
    
    
    26Item 1  Legal Proceedings
    
    
    26Item 2  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    28Item 3  Defaults Upon Senior Securities
    
    
    28Item 4  Submission of Matters to a Vote of Security Holders
    
    
    28Item 5  Other Information
    
    
    29Item 6  Exhibits and Reports on Form 8-K
    
    
    29EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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The Cronos Group 
 PART I  FINANCIAL INFORMATION 
 Item 1  Financial Statements 
 Management Representation Unless the context indicates otherwise, the Company means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
Cronos or the Group means The Cronos Group together with its subsidiaries
and predecessors. The condensed unaudited consolidated interim financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Certain information and
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. These condensed unaudited consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Companys latest Annual Report on Form 10-K. This financial information reflects, in the opinion of management, all
adjustments necessary to present fairly, the results for the interim periods.
Such adjustments consist of only normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year. As discussed in the Companys 2003 Form 10-K, the Group adopted Financial
Accounting Standards Board (FASB) Interpretation No. 46 Revised -
Consolidation of Variable Interest Entities (FIN 46R) in December 2003 by
restating previously issued financial statements with a cumulative effect
adjustment at the beginning of 2001. This restatement included the first three
quarters of 2003. The information in this
Quarterly Report on Form 10-Q contains certain
forward-looking statements within the meaning of the
securities laws. These forward-looking statements reflect the current
view of the Group with respect to future events and financial
performance and are subject to a number of risks and uncertainties,
many of which are beyond the Groups control. All statements,
other than statements of historical facts included in this report,
regarding the Groups strategy, future operations, financial
position, estimated revenues, projected costs, prospects, plans and
objectives of the Group are forward-looking statements. When used in
this report, the words will, believe,
anticipate, intend, estimate,
expect, project, and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. All
forward-looking statements speak only as of the date of this report.
The Group does not undertake or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. 1




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 
 Condensed Unaudited Consolidated Statements of Income Three Months EndedMarch 31,2004
    
    2003RestatedGross lease revenue
    
    $
    30,903
    
    
    $
    28,753Equipment trading revenue
    
    
    2,576
    
    
    
    655Commissions, fees and other income:- Container Equity Programs
    
    
    223
    
    
    
    281- Unrelated parties
    
    
    334
    
    
    
    773Total revenues
    
    
    34,036
    
    
    
    30,462Direct operating expenses
    
    
    7,008
    
    
    
    5,685Payments to Managed Container Programs:- Container Equity Programs
    
    
    6,490
    
    
    
    5,465- Other Managed Container Programs
    
    
    7,952
    
    
    
    8,426Equipment trading expenses
    
    
    2,296
    
    
    
    570Depreciation and amortization
    
    
    4,294
    
    
    
    4,538Selling, general and administrative expenses
    
    
    4,242
    
    
    
    3,831Interest expense
    
    
    1,154
    
    
    
    1,493Total expenses
    
    
    33,436
    
    
    
    30,008Income before income taxes and equity in earnings of affiliate
    
    
    600
    
    
    
    454Income taxes
    
    
    (343
    )
    
    
    (171
    )Equity in earnings of unconsolidated affiliate
    
    
    532
    
    
    
    216Net income
    
    
    789
    
    
    
    499Other comprehensive income (loss):- change in fair value of forward exchange contracts, net of tax
    
    
    271
    
    
    
    - change in fair value of derivatives held by unconsolidated affiliate, net of tax
    
    
    (237
    )
    
    
    Comprehensive income
    
    $
    823
    
    
    $
    499Basic net income per common share
    
    $
    0.11
    
    
    $
    0.06Diluted net income per common share
    
    $
    0.10
    
    
    $
    0.06
 The accompanying notes are
an integral part of these condensed unaudited consolidated financial statements. 2




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 
 Condensed Unaudited Consolidated Balance Sheets March 31,
    
    December 31,2004
    
    2003AssetsCash and cash equivalents
    
    $
    9,460
    
    
    $
    8,432Restricted cash
    
    
    1,032
    
    
    
    1,033Amounts due from lessees, net
    
    
    22,452
    
    
    
    22,766Amounts receivable from Managed Container Programs
    
    
    3,543
    
    
    
    3,399New container equipment for resale
    
    
    13,966
    
    
    
    10,816Net investment in direct financing leases
    
    
    7,803
    
    
    
    8,376Investments
    
    
    9,241
    
    
    
    8,570Container equipment, net
    
    
    156,688
    
    
    
    155,504Other equipment, net
    
    
    615
    
    
    
    604Goodwill, net
    
    
    11,038
    
    
    
    11,038Other intangible assets, net
    
    
    674
    
    
    
    721Other assets
    
    
    6,623
    
    
    
    6,778Total assets
    
    $
    243,135
    
    
    $
    238,037Liabilities and shareholders equityAmounts payable to Managed Container Programs
    
    $
    16,992
    
    
    $
    17,643Amounts payable to container manufacturers
    
    
    20,670
    
    
    
    17,312Direct operating expense payables and accruals
    
    
    4,917
    
    
    
    5,269Other amounts payable and accrued expenses
    
    
    7,679
    
    
    
    8,489Debt and capital lease obligations
    
    
    120,866
    
    
    
    119,205Current and deferred income taxes
    
    
    2,965
    
    
    
    2,981Deferred income and unamortized acquisition fees
    
    
    6,187
    
    
    
    5,105Total liabilities
    
    
    180,276
    
    
    
    176,004Shareholders equityCommon shares issued and outstanding (7,372,080 shares)
    
    
    14,744
    
    
    
    14,744Additional paid-in capital
    
    
    46,555
    
    
    
    46,552Common shares held in treasury (112,000 shares)
    
    
    (297
    )
    
    
    (297
    )Accumulated other comprehensive loss
    
    
    (372
    )
    
    
    (406
    )Restricted retained earnings
    
    
    1,832
    
    
    
    1,832Retained earnings (accumulated deficit)
    
    
    397
    
    
    
    (392
    )Total shareholders equity
    
    
    62,859
    
    
    
    62,033Total liabilities and shareholders equity
    
    $
    243,135
    
    
    $
    238,037
 The accompanying notes are
an integral part of these condensed unaudited consolidated financial statements. 3




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 
 Condensed Unaudited Consolidated Statements of Cash Flows Three Months EndedMarch 31,2004
    
    2003RestatedNet cash provided by operating activities
    
    $
    5,588
    
    
    $
    6,004Cash flows from investing activitiesPurchase of container and other equipment
    
    
    (11,937
    )
    
    
    (6,652
    )Investment in unconsolidated affiliate
    
    
    (139
    )
    
    
    Investment in equipment acquired for direct financing lease
    
    
    
    
    
    
    (712
    )Proceeds from sales of container and other equipment
    
    
    6,238
    
    
    
    2,265Net cash used in investing activities
    
    
    (5,838
    )
    
    
    (5,099
    )Cash flows from financing activitiesProceeds from issuance of term debt
    
    
    11,929
    
    
    
    6,957Repayments of term debt and capital lease obligations
    
    
    (10,506
    )
    
    
    (7,323
    )Dividend paid
    
    
    (145
    )
    
    
    (147
    )Net cash provided by (used in) financing activities
    
    
    1,278
    
    
    
    (513
    )Net increase in cash and cash equivalents
    
    
    1,028
    
    
    
    392Cash and cash equivalents at beginning of period
    
    
    8,432
    
    
    
    5,626Cash and cash equivalents at end of period
    
    $
    9,460
    
    
    $
    6,018Supplementary disclosure of cash flow information:Cash paid during the period for:- interest
    
    $
    954
    
    
    $
    1,292- income taxes
    
    
    371
    
    
    
    361Cash received during the period for:- interest
    
    
    9
    
    
    
    73- income taxes
    
    
    
    
    
    
    60Non-cash activities:- container equipment acquired under capital lease
    
    
    268
    
    
    
    
 The accompanying notes are
an integral part of these condensed unaudited consolidated financial statements. 4




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 
 Consolidated Unaudited Statement of Shareholders Equity Three months ended March 31, 2004 Accumulated
    
    
    
    
    
    RetainedAdditional
    
    Common
    
    other
    
    Restricted
    
    earnings
    
    TotalCommon
    
    paid-in
    
    shares held
    
    comprehensive
    
    retained
    
    (accumulated
    
    shareholdersshares
    
    capital
    
    in treasury
    
    income / (loss)
    
    earnings
    
    deficit)
    
    equityBalance,
December 31, 2003
    
    $
    14,744
    
    
    $
    46,552
    
    
    $
    (297
    )
    
    $
    (406
    )
    
    $
    1,832
    
    
    $
    (392
    )
    
    $
    62,033Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    789
    
    
    
    789Amortization of
employee share
grant
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Other comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    34Balance,
March 31, 2004
    
    $
    14,744
    
    
    $
    46,555
    
    
    $
    (297
    )
    
    $
    (372
    )
    
    $
    1,832
    
    
    $
    397
    
    
    $
    62,859
 The accompanying notes are
an integral part of these condensed unaudited consolidated financial statements. 5




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 
 Notes to the Condensed Unaudited Consolidated Financial Statements 1. The condensed unaudited consolidated financial statements include the
accounts of The Cronos Group and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. Investments in
which the Group does not own a majority interest or otherwise control or have
the ability to assert significant influence over the investee have been
accounted for under the equity method of accounting. 2. Restatement of previously issued condensed unaudited consolidated
financial statements Quarterly financial data has been restated to reflect the adoption of FIN
46R. In addition, a reclassification has been made to the quarterly data in
order to conform to the presentation for the year ended December 31, 2003. Quarterly financial data for the three months ended March 31, 2003: Total revenues as previously reported
    
    $
    30,678- adjustment for effect of change in accounting principle / reclassification
    
    
    (216
    )Total revenues restated
    
    $
    30,462Net income as previously reported
    
    $
    469- adjustment for effect of change in accounting principle
    
    
    30Net income restated
    
    $
    499Basic and diluted net income per common share as previously reported
    
    $
    0.06- adjustment for effect of change in accounting principle
    
    
    Basic and diluted net income per common share restated
    
    $
    0.06
 3. Stock-Based Compensation The Group has adopted disclosure requirements under Statement of Financial
Accounting Standards (SFAS) No. 123  Accounting for Stock-Based
Compensation (SFAS 123) and SFAS No. 148  Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS 148), but continues to
account for stock-based compensation under Accounting Principles Board Opinion
(APB) No. 25  Accounting for Stock Issued to Employees (APB 25). Under
APB 25, compensation expense is measured as the amount by which the quoted
market price of the stock at the date of the grant or award exceeds the
exercise price, if any, to be paid by an employee and is recognized as expense
over the period in which the related services are performed. In accordance
with SFAS 123, the Company discloses the fair value of its stock options, which
is calculated based on the Black Scholes option-pricing model. 6




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) If the stock options had been accounted for under a fair value based
method of accounting, the impact on the Groups net income and net income per
share would have been as follows: Three Months EndedMarch 31,2004
    
    2003RestatedNet income:- as reported
    
    $
    789
    
    
    $
    499- pro forma
    
    $
    778
    
    
    $
    431Basic net income per share:- as reported
    
    $
    0.11
    
    
    $
    0.06- pro forma
    
    $
    0.11
    
    
    $
    0.06Diluted net income per share:- as reported
    
    $
    0.10
    
    
    $
    0.06- pro forma
    
    $
    0.10
    
    
    $
    0.06
 7




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) 4. Operating segment data Segment information is provided in the tables below: OtherContainer
    
    ManagedEquity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    Containers
    
    TotalThree months ended March 31, 2004- gross lease revenue
    
    $
    9,811
    
    
    $
    11,332
    
    
    $
    9,760
    
    
    $
    30,903- direct operating expenses
    
    
    (2,131
    )
    
    
    (3,060
    )
    
    
    (1,817
    )
    
    
    (7,008
    )- net lease revenue
    
    
    7,680
    
    
    
    8,272
    
    
    
    7,943
    
    
    
    23,895- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    382- payments to Managed Container Programs
    
    
    (6,490
    )
    
    
    (7,952
    )
    
    
    
    
    
    
    (14,442
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,194
    )
    
    
    (4,194
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,124
    )
    
    
    (1,124
    )Segment profit
    
    $
    1,190
    
    
    $
    320
    
    
    $
    3,007
    
    
    $
    4,517Segment assets at end of period
    
    $
    22,291
    
    
    $
    13,645
    
    
    $
    207,199
    
    
    $
    243,135Three months ended March 31, 2003,
restated- gross lease revenue
    
    $
    8,058
    
    
    $
    11,340
    
    
    $
    9,355
    
    
    $
    28,753- direct operating expenses
    
    
    (1,670
    )
    
    
    (2,575
    )
    
    
    (1,440
    )
    
    
    (5,685
    )- net lease revenue
    
    
    6,388
    
    
    
    8,765
    
    
    
    7,915
    
    
    
    23,068- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    352
    
    
    
    352- payments to Managed Container Programs
    
    
    (5,465
    )
    
    
    (8,426
    )
    
    
    
    
    
    
    (13,891
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,442
    )
    
    
    (4,442
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,486
    )
    
    
    (1,486
    )Segment profit
    
    $
    923
    
    
    $
    339
    
    
    $
    2,339
    
    
    $
    3,601Segment assets at end of period
    
    $
    15,940
    
    
    $
    11,493
    
    
    $
    210,072
    
    
    $
    237,505
 8




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The Cronos Group (US dollar amounts in
thousands, except per share amounts) Reconciliation of profit for reportable segments to income before income taxes
and equity in earnings of affiliate: Three Months EndedMarch 31,2004
    
    2003RestatedSegment profit
    
    $
    4,517
    
    
    $
    3,601Equipment trading revenue
    
    
    2,576
    
    
    
    655Unallocated commissions, fees and other income
    
    
    175
    
    
    
    702Equipment trading expenses
    
    
    (2,296
    )
    
    
    (570
    )Amortization of intangible assets
    
    
    (47
    )
    
    
    (47
    )Non container depreciation
    
    
    (53
    )
    
    
    (49
    )Selling, general and administrative expenses
    
    
    (4,242
    )
    
    
    (3,831
    )Non container interest expense
    
    
    (30
    )
    
    
    (7
    )Income before income taxes and equity in earnings in affiliate
    
    $
    600
    
    
    $
    454
 5. Earnings per common share The components of basic and diluted net income per share were as follows: Three Months EndedMarch 31,2004
    

    2003RestatedNet income available for common shareholders
    
    $
    789
    
    
    $
    499Average outstanding shares of common stock
    
    
    7,260,080
    
    
    
    7,360,080Dilutive effect of:- 1998 stock option plan
    
    
    69,221
    
    
    
    - warrants
    
    
    44,916
    
    
    
    - 1999 stock option plan
    
    
    50,640
    
    
    
    - non-Employee Directors Equity Plan
    
    
    139,603
    
    
    
    109,869Common stock and common stock equivalents
    
    
    7,564,460
    
    
    
    7,469,949Basic net income per share
    
    $
    0.11
    
    
    $
    0.06Diluted net income per share
    
    $
    0.10
    
    
    $
    0.06
 As at March 31, 2003, options to acquire 1,180,000 shares were outstanding
with a weighted average exercise price of $4.68 each but were not included in
the computation of diluted net income per share because the options exercise
price was greater than the average market price of the common shares. 9




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The Cronos Group 6. Amounts receivable from Managed Container Programs Amounts receivable from Managed Container Programs include amounts due
from related parties of $3.5 million and $3.4 million at March 31, 2004, and
December 31, 2003, respectively. 7. Investments Investments comprise investments in Container Equity Programs and take two
forms: Under the first form, the investments comprise the Groups equity
interests as a general partner in eight US Limited Partnership Programs. In
accordance with FIN 46R, the Company has determined that the eight limited
partnerships qualify as variable interest entities. In each case, the Company
has concluded that neither the Company, nor any of its subsidiaries, is the
primary beneficiary of any US Limited Partnership Program. Cronos raised capital through investment syndication activities from 1979
to 1997 by organizing and sponsoring public limited partnership offerings and
originally sponsored sixteen public limited partnerships, raising over $478
million from over 37,000 investors; eight of the original sixteen partnerships
have now been dissolved. These general partner investments are accounted for
using the equity method. The partnerships are all California limited partnerships managed by Cronos
Capital Corp., a subsidiary of the Company. The objectives of the partnerships
are to invest in marine cargo containers to generate a continuing income for
distribution to the limited partners, and to realise the residual value of the

container equipment at the end of its useful economic life or upon the
dissolution of the individual partnerships. At March 31, 2004, the US Limited
Partnership Programs had total assets of $120.4 million and total liabilities
of $4.7 million. The general partner is indemnified by the partnerships for
any liabilities suffered by it arising out of its activities as general
partner, except in the case of misconduct or negligence. As a limited
liability partnership, the limited partners may not be assessed for additional
capital contributions and therefore it is possible that the general partner
could be liable for any additional contributions required. Under the second form, the Group has a 50% equity investment in an entity
known as the Joint Venture Program or CF Leasing Ltd. The Joint Venture
Program is a container purchase entity that was established in 2002 to acquire
and lease marine cargo containers to third parties. It is a bankruptcy-remote,
special purpose entity organized under the laws of Bermuda. The Joint Venture
Program is accounted for using the equity method. The Group has determined
that the joint venture is not a variable interest entity as defined by FIN 46R.
At March 31, 2004, the Joint Venture Program had total assets of $78.7 million
and total liabilities of $60.2 million. For the three months ended March 31,
2004, the Joint Venture Program reported total revenues of $3.3 million and net
income of $1.1 million. The maximum exposure of Cronos to losses as a result
of its involvement with the Joint Venture Program is limited to the level of
its equity investment in the Joint Venture Program at any point in time. 10




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The Cronos Group 8. Container equipment Container equipment is net of accumulated depreciation of $117 million and
$115.5 million at March 31, 2004, and December 31, 2003, respectively. The Group reviews its Owned Container equipment when changes in
circumstances require consideration as to whether the carrying value of the
equipment may have become impaired, pursuant to SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Management considers assets
to be impaired if the carrying value of the asset exceeds the future projected
cash flows from use and eventual disposition (undiscounted and without interest
charges). When impairment is deemed to exist, the assets are written down to
fair value. The Group periodically evaluates future cash flows and potential
impairment of its fleet by container type rather than for each individual
container. Therefore, future losses could result for individual container
dispositions due to various factors including age, condition, suitability for
continued leasing, as well as geographic location of the containers where
disposed. In addition, subjective management judgement is required in
estimating future cash flows from container operations. Accordingly, the
estimates may not be indicative of the amounts that may be realized in future
periods. 9. Hedging transactions and derivative financial instruments The purpose of Cronos foreign currency hedging activities is to reduce
the risk that non US dollar denominated sales transactions will be adversely
affected by exchange rate movements between the sales transaction currency and
the US dollar. During 2003, Cronos entered into foreign currency forward
contracts to reduce exposure to exchange rate risks associated with a Euro
denominated sales agreement. The hedge has been designated a fully effective
cash flow hedge as the critical terms of the forward contracts match those of
the hedged item. The changes in the fair value of the hedge are reported as a
component of other comprehensive income and are reclassified into earnings as
equipment trading revenue on the contracted performance dates of the sales
agreement. For the quarter ended March 31, 2004, $0.1 million after taxes was
credited to other comprehensive income representing the increase in the fair
value of the forward contracts. In addition, $0.2 million was reclassified
from other comprehensive income to equipment trading revenue during the quarter
on the related contracted sales agreement performance dates. The remaining
forward contracts expire in the second calendar quarter of 2004. 10. Amounts payable to Managed Container Programs Amounts payable to Managed Container Programs include amounts payable to
related parties of $8.8 million and $9.3 million at March 31, 2004, and
December 31, 2003, respectively. 11. Debt and capital lease obligations Debt and capital lease obligations are secured by container equipment and
include amounts due within twelve months of $13.9 million and $12.8 million at
March 31, 2004, and December 31, 2003, respectively. Interest rates under
these facilities range from 2.6% to 3.4% and they extend to various dates
through 2013. All of the debt and capital lease facilities involve agreements between
subsidiaries of the Company and financial institutions. The Company has
provided parent company guarantees for the $120.9 million outstanding which
provide that, in the event of a default by the subsidiary, the Company will pay
all amounts due under the agreements as they fall due. Based on March 2004
interest rates, the maximum potential amount of future payments for the
guaranteed debt and capital lease facilities is $129.9 million. At March 31,
2004, the fair value of the facilities approximated the carrying value. The
debt and capital lease facilities are secured by container equipment. The
Group receives free and clear title to the collateralised container equipment
once all payments due under a facility have been made. In the event that the
Group cannot make the guaranteed payments, the financial institutions are
entitled to recover the collateralised equipment and either use the related
cash flows or sell the equipment and take the sale proceeds to discharge
outstanding obligations of the Company. The Company considers that the cash
flows and / or sales proceeds generated by the collateralised equipment should
be sufficient to cover outstanding obligations. 11




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##### Table of Contents



The Cronos Group 12. Commitments and contingencies (to be read in conjunction with Note 15 to
the Companys 2003 consolidated financial statements on Form 10-K) i. Commitments At March 31, 2004, the Group had outstanding orders to purchase $17.9
million of container equipment. ii. Guarantee to US Limited Partnership During 2000, the Group provided a guarantee under a $5 million third-party
loan note (the Note) with a 2006 maturity date, to a US Limited Partnership
Program. Under the terms of the guarantee, the Group may be liable for any
principal and interest outstanding under the terms of the Note in the event of
a default by the US Limited Partnership Program. At March 31, 2004, the
balance outstanding under the Note was $1.9 million, the maximum potential
amount of future payments was $2 million and the fair value of the Note was
$1.9 million. The Group has not recorded a liability for its obligation under
the guarantee. iii. Parent Guarantee under Agreements with Other Managed Container Programs The Company has provided parent guarantees for certain agreements between
wholly owned subsidiaries of the Company and Managed Container Programs. The
agreements are in the form of a master lease and provide that the subsidiary
companies make payments to the Managed Container Programs based on the rentals
collected from ocean carriers after deducting direct operating expenses and the
income earned by the subsidiary company for managing the containers. The
subsidiary company is not liable to make payments to the Managed Container
Program if the containers are not placed on lease to an ocean carrier or if the
ocean carrier fails to pay the lease rentals. At each financial statement date, the amounts due under each agreement are
recorded as a liability and disclosed under amounts payable to Managed
Container Programs. The amount payable at March 31, 2004, was $3.8 million.
The terms of the guarantees generally obligate the Company to ensure payments
and other obligations of the subsidiary companies are performed on a timely
basis and in accordance with the terms of the agreement. The agreements with the Managed Container Programs expire between 2004 and
2012. Should a default occur, the Company would be required to make the
contracted payments on behalf of the subsidiary companies over the remaining
term of the agreements or until such time as the default was remedied. Based
on the $3.8 million payable at March 2004, the Company estimates that the
maximum amount of future payments would be $70.2 million. The fair value of
the estimated amount of maximum future payments is $57.4 million. iv. Guarantees under fixed non-cancellable operating leases Certain subsidiaries of the Group have fixed operating lease agreements
for container equipment with Other Managed Container Programs. The Company has
provided parent company guarantees for the $37.6 million of minimum future
lease payments outstanding under these agreements at March 31, 2004. The
agreements provide that, in the event of a default by the subsidiary, the
Company will pay all amounts due under the agreements as they fall due. The
agreements contain purchase options which allow the Group to acquire the
containers after a period of ten years. As of March 31, 2004, the future
minimum annual lease payments under these non-cancellable operating leases
were: US dollar amounts in thousands2004
    
    $
    7,0702005
    
    
    7,7072006
    
    
    5,1932007
    
    
    2,5572008
    
    
    2,5572009 and thereafter
    
    
    12,503Total
    
    $
    37,587
 12




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##### Table of Contents



The Cronos Group v. Agreements with Other Managed Container Programs  early termination
options Approximately 59% (based on original equipment cost) of the agreements
with Other Managed Container Programs contain early termination options,
whereby the container owner may terminate the agreement if certain performance
thresholds are not achieved. At March 31, 2004, approximately 44% (based on
original equipment cost) of total agreements were eligible for early
termination. Cronos believes that early termination of these agreements by the
Other Managed Container Programs is unlikely. vi. Agreements with Other Managed Container Programs  change of control
provisions Approximately 66% (based on original equipment cost) of agreements with
Other Managed Container Programs provide that a change in ownership of the
Group, without the prior consent of the container owner, may constitute an
event of default under the agreement. In substantially all of these
agreements, the consent of the container owners may not be unreasonably
withheld. In the event that consent is not obtained, 37% of total agreements
may require the Group to transfer possession of the equipment to another
equipment manager. Such transfer of possession may result in the Group
incurring certain costs. The remaining 29% of total agreements may require the
Group to purchase the equipment from the container owners pursuant to the terms
of their respective agreements, generally a stipulated percentage (determined
by age of the equipment) of the original cost of the equipment. vii. Contrin Settlement Since 1983, the Group has managed containers for Austrian investment
entities collectively known as Contrin. As the Group has previously
reported, since August 2000 the Group has been defending three lawsuits brought
by Contrin, one in Luxembourg and two in the United Kingdom. On November 17,
2003, the Group entered into a settlement with Contrin, as more fully described
under Part II, Item 1  Legal Proceedings. The terms of the settlement agreement detailed the payment dates for
amounts totalling $3.5 million to Contrin. Cronos calculated that the present
value of the total $3.5 million future cash payments under the settlement
agreement, discounted using an appropriate risk-free interest rate, was $3.3
million. In accordance with the terms of the settlement agreement, the Group made the first payment of $0.3 million in
November 2003. In addition, the Group had previously recorded a reserve of
approximately $3 million against the Contrin claims. Interest will be charged
to the Companys income statement over the period for performance of the
settlement agreement using the effective interest rate method. Under
the terms of the settlement agreement, the Group made a further
payment of $0.250 million to Contrin in February 2004. viii. TOEMT Since the 1980s, the Group has managed containers for Transocean Equipment
Manufacturing and Trading Limited (TOEMT), a United Kingdom corporation. In
late 1998 the Group learned that TOEMT had been separately registered by the
same name in the United Kingdom and in the Isle of Man. Both the TOEMTs are in
liquidation, represented by the same liquidator. When the Group learned of the
second TOEMT, it set aside the distributions payable with respect to the
containers managed for TOEMT in a separate bank account pending clarification
of the proper claimant of the distributions. Contrin, as a creditor of TOEMT,
has claimed entitlement to all of the distributions attributable to the
containers managed by the Group for TOEMT. After negotiations with the liquidator, the Group turned over the
set-aside distributions (amounting to approximately $1.3 million) to the
liquidator on December 17, 2003. The Group is in discussions with the
liquidator with a view to winding-up the Groups management of containers for
TOEMT. The Group expects to wind up its involvement with the two TOEMTs
without material cost to the Group, but is unable to predict at this time
whether its discussions with the liquidator will be successful. 13




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##### Table of Contents



The Cronos Group 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations 
 General The Group generates revenues by leasing to ocean carriers, marine
containers that are owned either by Managed Container Programs, comprising
Container Equity Programs and Other Managed Container Programs, or by the Group
itself  Owned Containers. These leases, which generate most of the Groups
revenues, are generally operating leases. All containers, whether owned or managed, are operated as part of a single
fleet. The Group has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Groups agreements with the owners of Managed Container Programs contain leases
within the scope of SFAS No. 13  Accounting for Leases (SFAS 13), they are
accounted for in the Groups financial statements as leases under which the
container owners are lessors and the Group is lessee. In the first quarter of
2004, 88% of payments to owners of Managed Container Programs represented
agreements which generally provided that the amounts payable to container
owners were based upon the rentals to ocean carriers after deducting direct
operating expenses and the income earned by Cronos for managing the equipment.
The remaining 12% of payments to Managed Container Programs represented
agreements under which there were fixed payment terms. Minimum lease payments
on the agreements with fixed payment terms are included in Note 12 to the
condensed unaudited consolidated financial statements. Market Overview Container leasing companies experienced high levels of demand for new and
existing equipment throughout the first months of 2004. Industry sources report that the high import volumes of raw materials into
China and exports of goods from China are the primary factors behind the
continued strong growth in global container trade. Investment in
infrastructure and industrial facilities in China has resulted in strong demand
for steel, aluminium, and other raw materials by construction, automotive
manufacturing, railway building and other industries. This has resulted in
increased prices for and a shortage in the supply of steel. The
steel shortage has forced container manufacturers to reduce the level
of planned container production. Container prices have increased,
rising from $1,350 in the fourth quarter of 2003 to $2,000, for
containers that will be delivered in the second quarter of 2004. A
number of major leasing companies and shipping lines, who had planned
major equipment acquisition programs for 2004, have reported that the
combination of rising costs and production shortages means that they
may have to lower their production targets. To date, Cronos has only
experienced minor delays for new production orders and, based on
discussions with container manufacturers, currently does not believe
that the steel shortage will have a material impact on its production
targets for 2004. Shipping lines report that freight rates have increased in line with
strong demand on major trade routes, in particular on the Asia to Europe and
Asia to US routes. However, the strong increase in volumes has led to
increasing port congestion in certain locations thereby increasing the
turnaround time for containers. In order to address the potential shortage of
containers, shipping lines are under pressure to return their equipment to Asia
within increasingly tight timescales. The strong demand for leased containers has resulted in lower off-hire
inventories. As a result, leasing companies have responded by delaying and
cancelling disposal programs for older equipment. The following chart
summarizes the combined utilization of the Cronos container fleet at each of
the dates indicated (based on approximate original equipment cost). 14




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##### Table of Contents



The Cronos Group

March
    
    December
    
    March31, 2004
    
    31, 2003
    
    31, 2003Utilization
    
    
    90
    %
    
    
    89
    %
    
    
    85
    %


If the level of new container production increases or if the price of new
container equipment falls, then the demand for leased containers could decline.

The Cronos Group Cronos
enters into lease agreements with ocean carriers once production
availability has been confirmed by the container manufacturers. In
addition, Cronos is structuring lease rate proposals on new
transactions with sufficient flexibility to increase the per diem
rates in line with any increase in production cost. Per
diem rates on new equipment are rising in line with the increased
container cost. Industry analysts are predicting increased per diem
rates for existing fleets of master lease equipment, at least for the
duration of the steel shortages. The opinion of analysts is divided
on whether the steel shortage will correct in the second half of 2004
or whether it will be longer-term in nature. For Cronos, although the
per diem rates increased for new equipment transactions in the first
quarter of 2004, the combined per diem rate for leases on both
existing and new equipment across all products was virtually
unchanged from the same period in 2003. Cronos believes that the current market conditions favour the larger more
established shipping lines that have witnessed strong recoveries in their
performance over the last few years. The charter rate for ships has risen
sharply in recent months and potentially this could lead to the termination of
some services, particularly smaller intra-regional feeder services. The Group
continues to monitor the aging of lease receivables, collections and the credit
status of existing and potential customers in order to detect any signs of a
deterioration in their credit position. Global container trade is affected by a wide range of issues including the
performance of the worlds major economies, the performance of global stock
markets and geopolitical issues such as those that currently exist in the
Middle East and Asia, all of which can potentially change the level of demand
for leased containers. 15




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##### Table of Contents



The Cronos Group Review of Cronos Operations Container Fleet During the first quarter of 2004, Cronos added $23 million of new
container equipment to its fleet of which $16.6 million was acquired for the
Joint Venture Program, $4.9 million was acquired for Owned Container operations
and $1.5 million was acquired for Other Managed Container Programs. Dry cargo
containers represented 64% of new container investment, refrigerated containers
13%, tanks 14%, CPCs 5% and rolltrailers and other specials accounted for 4%.
The majority of new dry cargo and refrigerated containers were placed on term
lease. This reflects the strong demand from the ocean carriers for this type
of lease together with a Cronos funding base designed to add more term leases
which provide greater revenue stability and a lower operating cost base. Cronos Fleet (in TEU thousands) at,March 31,
    
    December 31,
    
    March 31,2004
    
    2003
    
    2003RestatedContainer Equity Programs
    
    
    133.0
    
    
    
    131.2
    
    
    
    111.1Other Managed Container Programs
    
    
    166.6
    
    
    
    163.3
    
    
    
    179.4Owned Containers
    
    
    115.4
    
    
    
    111.3
    
    
    
    109.1Total Fleet
    
    
    415.0
    
    
    
    405.8
    
    
    
    399.6
 The size of the total fleet grew by 2% in the first three months of 2004.
The Owned Container fleet grew by 4% as Cronos funded the acquisition of new
equipment with its debt and capital lease facilities. The size of the
Container Equity Programs fleet increased by 1% reflecting the addition of new
equipment to the Joint Venture Program. The Other Managed Container Programs
fleet increased by 2% due to an investment of approximately $5 million in new
dry cargo equipment by a Managed Container Program. The Group operates a diversified fleet of containers. Specialized
containers, comprising refrigerated containers, tanks and dry freight specials,
accounted for 44% of the Cronos owned fleet (based on original equipment cost)
at March 31, 2004. Cronos believes that product diversification provides it
with a better spread of market risk and market returns. Due to their
specialized nature, demand for certain of these containers is less likely to be
affected by global economic downturns. The following table summarizes the
composition of the total fleet at March 31, 2004, by reportable segment based
on original equipment cost. Other ManagedContainer Equity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    ContainersDry Cargo
    
    
    73
    %
    
    
    83
    %
    
    
    56
    %Refrigerated
    
    
    19
    %
    
    
    6
    %
    
    
    27
    %Tank
    
    
    7
    %
    
    
    7
    %
    
    
    5
    %Dry freight specials:CPCs
    
    
    1
    %
    
    
    
    
    
    
    7
    %Rolltrailer
    
    
    
    
    
    
    1
    %
    
    
    4
    %Other Dry Freight Specials
    
    
    
    
    
    
    3
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 16




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##### Table of Contents



The Cronos Group 
 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Overview Cronos reported net income of $0.8 million in the first quarter of 2004
compared to $0.5 million in the corresponding period of 2003. The increase in
profitability can be attributed primarily to:  
    
    Continuing growth in global container trade.
    
    Lower cost of financing.
    
    Equipment trading transactions. The positive impact of these items was offset to some extent by the effect
of the devaluation of the US dollar against other major currencies which
resulted in higher levels of costs in certain locations. Analysis & Discussion Gross lease revenue (GLR)of $30.9 million for the quarter ended March
31, 2004, was $2.2 million, or 7%, higher than for the same period in 2003. Of
the increase, $1.4 million was due to the effect of the change in utilization
and $0.8 million was due to the increase in fleet size. GLR increased for
almost all product types, with the exception of refrigerated containers where
GLR declined by $0.1 million due to the disposal of older equipment at the end
of its economic life. Direct operating expenseswere $7 million in the first three months of
2004, an increase of $1.3 million, or 23%, compared to the corresponding period
2003. The was primarily due to an increase of $1.2 million in repositioning
expense for moves undertaken early in the first quarter in order to transport
containers from the US east coast to Asia. The target of each move is to
offset the cost of repositioning the containers by savings in storage expense
and increased future lease revenues. Operating segment information OtherContainer
    
    ManagedEquity
    
    Container
    
    Owned(in thousands)
    
    Programs
    
    Programs
    
    Containers
    
    TotalQuarter ended March 31, 2004- gross lease revenue
    
    $
    9,811
    
    
    $
    11,332
    
    
    $
    9,760
    
    
    $
    30,903- direct operating expenses
    
    
    (2,131
    )
    
    
    (3,060
    )
    
    
    (1,817
    )
    
    
    (7,008
    )- net lease revenue
    
    
    7,680
    
    
    
    8,272
    
    
    
    7,943
    
    
    
    23,895- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    382- payments to Managed Container Programs
    
    
    (6,490
    )
    
    
    (7,952
    )
    
    
    
    
    
    
    (14,442
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,194
    )
    
    
    (4,194
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,124
    )
    
    
    (1,124
    )Segment profit
    
    $
    1,190
    
    
    $
    320
    
    
    $
    3,007
    
    
    $
    4,517
 Container Equity Programs:segment profit increased to $1.2 million in the
first three months of 2004 from $0.9 million in the same period of 2003.  
    
    Net lease revenuefor this segment increased by $1.3 million over
2003. This is primarily due to the increase in GLR as the additional
investment in equipment for the Joint Venture Program together 17




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##### Table of Contents



The Cronos Group  with the
improvement in fleet utilization more than offset the effect of the
disposal of older US Limited Partnership Program equipment.
    
    Payments to Container Equity Programsincreased by $1 million,
which is in line with the increase in net lease revenue for this
segment. Other Managed Container Programs:segment profit of $0.3 million in the
first three months of 2004 was substantially unchanged from the same period of
2003.  
    
    Net lease revenuedeclined by $0.5 million when compared to the
same period in 2003 as direct operating expenses increased by $0.5
million due to the increase in repositioning expense reported for the
quarter.
    
    Payments to Other Managed Container Programsdeclined in line with
the reduction in net lease revenue. In addition, payments to one owner
of a Managed Container Program were $0.2 million lower than in the
first quarter of 2003 as the payment terms for a number of agreements
changed from a fixed to a variable payment over the course of the first
three months of 2003. Under the variable payment basis, the amount
payable to the Managed Container Program is based on the rentals to the
ocean carriers after deducting direct operating expenses and the income
earned by Cronos for managing the equipment. Segment profit on Owned Containersincreased by $0.7 million to $3 million
in the first three months of 2004.  
    
    GLRincreased by $0.4 million due primarily to the increase in the
size of the owned fleet and the improvement in fleet utilization.
    
    Container depreciationof $4.2 million in the first quarter of 2004
declined by $0.2 million from the corresponding period in 2003 as the
increase in depreciation attributable to new container additions was
more than offset by the disposal of refrigerated equipment at the end
of its economic life. In recent years, the unit cost of new container
additions has been lower than the cost of equipment disposed of and
this has contributed to the reduction in depreciation expense.
    
    Container interest expenseof $1.1 million in the first three
months of 2004, was $0.4 million, or 24%, lower than in the same period
of 2003. The main changes in interest expense were attributable to:  -
    
    A reduction of the total level of debt and capital
lease obligations when compared to the first quarter of 2003, as
the total amount of scheduled principal repayments have more
than offset new drawdowns.-
    
    A saving of $0.1 million further to the refinancing
of approximately $9 million of fixed rate debt with variable
rate debt in December 2003.-
    
    A small reduction in interest rates at March 2004
when compared to March 2003. Equipment trading revenueof $2.6 million in 2004 represented transactions
undertaken in Scandinavia and Australia for which the Group used its
relationships with equipment manufacturers to assist third-parties to design
and acquire their own equipment and organize delivery to designated locations.
Equipment trading expenses represented equipment and related costs for this
activity. The Group earned $0.3 million from equipment trading activity during
the first three months of 2004, compared with $0.1 million for the same period
in 2003. 18




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##### Table of Contents



The Cronos Group Commissions, fees and other incomeof $0.6 million in the first three
months of 2004 were $0.5 million, or 47%, lower than in the corresponding
period of 2003. The decrease was primarily due to:  
    
    A $0.2 million decline in the amount of unrealized exchange gains
recorded due primarily to the increase in the value of the US dollar in
relation to the Euro between December 31, 2003 and March 31, 2004.
    
    A reduction of $0.1 million in each of CPC license fee income,
amortized acquisition fee income and income earned on the sublease of a
property. Selling, general and administrative expenseswere $4.2 million in the
first quarter of 2004, an increase of $0.4 million, when compared to 2003. Of
the total increase, $0.3 million can be attributed to the overall decline in
the value of the US dollar against other major currencies over the course of
the last fifteen months. The balance of the increase was due to:  
    
    A $0.3 million increase in the expense recognized for a stock
appreciation rights plan reflecting a higher Group share price at March
2004 when compared to March 2003.
    
    A reduction of $0.2 million in occupancy costs due to an office
relocation in the US. Income Taxesof $0.3 million for the three months ended March 31, 2004,
were $0.1 million higher than for the corresponding period of 2003. In the
first quarter of 2003, the Group received tax rebates totalling $0.1 million in
entities located in the Netherlands and Belgium. Equity in earnings of affiliatewas $0.5 million in the first three months
of 2004 compared to $0.2 million for the same period in 2003. These earnings
represent the recognition of the Cronos share of net income generated by the
Joint Venture Program entity that was set up in September of 2002. See
additional discussion herein. 19




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##### Table of Contents



The Cronos Group 
 Liquidity and Capital Resources The Groups operating cash flow is derived from lease revenues generated
by the Groups container fleet, fee revenues from its Managed Container
Programs and other parties and income earned on equipment trading transactions. Operating cash flow is utilized to meet costs relating to day-to-day fleet
support, payments to Managed Container Programs, selling, general and
administrative expenses, interest expense, servicing the current portion of
long-term borrowings, financing a portion of certain debt funded equipment
acquisitions, providing equity contributions to fund 10% of the capital
requirements of the Joint Venture Program and making payments to container
manufacturers on equipment trading transactions. Operating cash flow is largely dependent upon the timely collections of
lease revenues from shipping lines. Based on loss experience for the last
twelve years, bad debts have approximated 1% of lease revenues. The Group
monitors the aging of lease receivables, collections and the credit status of
existing and potential customers. There is a risk that some shipping lines may
experience financial difficulty. Any resultant material increase in the level
of bad debts could potentially impair the ability of the Group to meet its
operating and other commitments. The Group utilizes the proceeds arising on the transfer of equipment held
for resale to Managed Container Programs to pay the related amount due to
container manufacturers. Proceeds generated by the sale of Owned Containers at
the end of their economic life are utilized to repay the related balance of any
debt or capital lease facility outstanding. The Group utilizes any available cash balances to make short-term debt
repayments and thereby reduce interest expense. Such amounts may be redrawn at
a later date for operating cash flow and other purposes. Traditionally, Cronos has utilized funding from each of its operating
segments to grow its container fleet and recognizes that its ability to secure
funding from third-parties in order to expand its container fleet is crucial to
its future growth and profitability. In more recent years, growth has been
generated by the Owned Container segment through debt and capital leases and by
the Container Equity Programs segment through the addition of equipment to the
Joint Venture Program. Each of these sources provides a flexible financing
structure with competitive pricing. Owned Containers: The primary debt and capital lease facilities include
financial covenants that are tested on a quarterly basis relating to minimum
tangible net worth, maximum level of total liabilities to tangible net worth,
maximum level of debt and capital lease obligations to tangible net worth,
interest expense coverage and debt service coverage. At March 31, 2004, the
Group was in compliance with these covenants. Future compliance with the
covenants will depend on the ability of the Group to report a minimum level of
income before income taxes at the end of each calendar quarter and to maintain
the current portion of borrowings within financial covenant limits. The breach
of a covenant constitutes an event of default. At March 31, 2004, the Group had $127.4 million of available container
borrowing facilities under which $120.9 million was outstanding. In addition,
the Group had $1.7 million of unutilized credit facilities which are available,
if required, for operating cash flow purposes. The primary source of debt funding available to the Group is its revolving
credit facility (the Revolving Credit Facility) which the Group has utilized
to fund the acquisition of new equipment and to refinance existing debt and
capital lease obligation facilities. New equipment is funded 80% by debt and
20% by cash provided by the Group. During 2003, the Revolving Credit Facility
was amended and the maximum commitment of the lenders thereunder increased from
$50 million to $70 million. The amended agreement provides that the balance
outstanding as of September 18, 2004, will be repaid over five years. At March
31, 2004, the balance outstanding under the Revolving Credit Facility was $64.8
million. The balance of funds available under the Revolving Credit Facility will be utilized to
purchase new equipment during 2004. The Revolving Credit Facility is subject
to annual review and the ability of the Group to expand its owned container
fleet may be constrained if increased funding is not approved on an annual
basis or if the Group cannot provide the 20% cash required for new container
acquisitions. 20




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##### Table of Contents



The Cronos Group Container Equity Programs: The Joint Venture Program has been a major
source of Managed Container Program funding since its inception in 2002. At
March 2004, the Joint Venture Program had capacity for an
additional $26 million of new equipment. Additional debt and equity
funding is subject to annual review. Therefore, the future growth of the Joint
Venture Program may be constrained if increased equity and debt funding is not
approved on an annual basis or if the Group cannot provide the 10% cash
required for its equity contribution. Other Managed Container Programs: In March 2004, the Group sold $5
million of equipment to a Managed Container Program. This was the first
significant investment from this segment since 2001. There are indications
that the growth experienced in global container trade in recent years may
attract additional new capital to this segment. Cash Flow Statements for the Three Months ended March 31, 2004 and 2003 Operating Activities:Net cash provided by operating activities of $5.6
million for the first three months of 2004 was $0.4 million lower than for the
corresponding period of 2003. An increase of $3 million in amounts collected
from lessees in the first quarter of 2004 was more than offset by increased
payments for direct operating expenses, reflecting repositioning moves
undertaken in the first quarter of 2004 and in the fourth quarter of 2003,
increased payments to Container Equity Programs in line with the increase in
net lease revenue for this reportable segment, increased expenditure for
selling, general and administrative expenses and a decline in the level of
commissions, fees and other income. Proceeds of $9.5 million realized on the
transfer of containers held for resale to Managed Container Programs during the
first three months of 2004 were utilized to make the related payments to the
container manufacturers. Investing Activities:The Group uses cash from investing activities to
acquire containers for its owned fleet, to purchase other assets related to the
operation of its worldwide office network and to fund other investment activities.
Net cash used in the first quarter of 2004 investing activities was
$5.8 million. The Group paid $11.9 million for new
container equipment of which $5 million was sold to a Managed
Container Program. The Group realized a further $1.2 million on
the disposal of equipment at the end of its economic life, the
proceeds of which will be utilized primarily to repay related
outstanding balances on debt and capital lease obligation facilities.
The Group made a contribution of $0.1 million to the Joint
Venture Program in order to provide additional equity towards the
acquisition of new equipment. Net cash used in investing activities
was $5.1 million in the first three months of 2003, reflecting
the acquisition of $6.7 million of container and other equipment
and $0.7 million of equipment placed on direct financing leases.
This was partly offset by the sale of $1.7 million of container
equipment and $0.6 million of direct financing lease equipment. Financing Activities:The Group uses cash from financing activities to
fund capital acquisitions and the short-term purchases of new container
equipment held for resale. Net cash provided by financing activities was $1.3
million in the first three months of 2004 as the Group utilized $11.9 million of
debt and capital lease obligation facilities to fund equipment acquisitions.
The Group made $10.5 million of principal repayments, comprising
a paydown of approximately $5 million from funds received on the
equipment sale to the Managed Container Program, $2.5 million of
scheduled repayments and a further $3 million of payments,
including short-term prepayments of debt using surplus cash balances to reduce interest expense. The Group made a
dividend payment of $0.1 million in the first quarter of 2004.
Net cash used by financing activities was $0.5 million during
the first three months of 2003. Proceeds from the issuance of new
term debt of $7 million were more than offset by the repayment of
$7.3 million of debt and capital lease obligations. Additionally,
the Company paid a dividend of $0.1 million in the first quarter
of 2003. Capital Resources Capital Expenditures and Commitments The Group purchases new containers for its own account and for resale to
Managed Container Programs and other parties. At March 31, 2004, the Group
owed container manufacturers $20.7 million for equipment. The Group will fund
$5.4 million of this equipment utilising new and existing debt and capital
lease facilities, $13.5 million will be sold to the Joint Venture Program and
the remaining $1.8 million will be sold to a third-party under an equipment
trading transaction. In addition, the Group had outstanding orders to purchase container
equipment of $17.9 million at March 31, 2004. Of this amount, $10.2 million
will be sold to the Joint Venture Program and $6.6 million will be financed by
the Group using existing container funding facilities and $1.1 million will be
sold to a third-party under an equipment trading transaction. On November 4, 2003, a dividend of 4 cents per common share was approved,
of which 2 cents per share was paid on January 8, 2004, to shareholders of
record as of the close of business on December 22, 2003, and 2 cents per share
was paid on April 16, 2004, to shareholders of record as of the close of
business on March 25, 2004. 21




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The Cronos Group In March 2004, the board of directors of the Company declared, subject to
shareholder approval, a dividend of 3 cents per common share, payable on July
15, 2004, for the second quarter of 2004 to shareholders of record as of the
close of business on June 25, 2004. The Group believes that it has sufficient capital resources to support its
operating and investing activities for the next twelve months. Critical Accounting Policies and Estimates Critical accounting policies are those that reflect significant judgements
or uncertainties, and potentially may result in materially different results
under different assumptions and conditions. Management has identified the
following critical accounting policies that should be read in conjunction with
the Groups 2003 consolidated financial statements on Form 10-K.  
    
    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
    
    US Limited Partnership Programs  evaluation of expected losses and
expected residual returns in accordance with FIN 46R. 22




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The Cronos Group 
 Item 3  Quantitative and Qualitative Disclosures about Market Risk Interest rate risk:Outstanding borrowings are subject to interest rate
risk. Approximately 100% of total borrowings had floating interest rates at
March 31, 2004. The Group conducted an analysis of borrowings with variable
interest rates to determine their sensitivity to interest rate changes. In
this analysis, the same change was applied to the current balance outstanding,
leaving all other factors constant. It was found that if a 10% increase were
applied to variable interest rates, the effect would be to reduce annual cash
flows by $0.1 million. Exchange rate risk:Substantially all of the Groups revenues are billed
and paid in US dollars. For non US dollar denominated revenues, the Group may
enter into foreign currency forward contracts to reduce exposure to exchange
rate risks. A significant portion of costs are billed and paid in US dollars.
Of the remaining operating costs, the majority are individually small,
unpredictable and incurred in various denominations and thus are not suitable
for cost effective hedging. By reference to 2003, it is estimated that for
every 10% incremental decline in the value of the US dollar against various
foreign currencies, the effect would be to reduce annual cash flows by $0.9
million in any given year. As exchange rates are outside of the control of the Group, there can be no
assurance that such fluctuations will not adversely effect its results of
operations and financial condition. 
 Item 4  Controls and Procedures The principal executive and principal financial officers of the Company
have evaluated the disclosure controls and procedures of the Group as of the
end of the period covered by this report. As used herein, the term disclosure
controls and procedures has the meaning given to the term by Rule 13a-15 under
the Securities Exchange Act of 1934, as amended (Exchange Act), and includes
the controls and other procedures of the Group that are designed to ensure that
information required to be disclosed by the Company in the reports that it
files with the SEC under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms.
Based upon their evaluation, the principal executive and financial officers of
the Company have concluded that the Groups disclosure controls and procedures
were effective such that the information required to be disclosed by the
Company in this report is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms applicable to the
preparation of this report and is accumulated and communicated to management of
the Group, including the principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosures. There have been no significant changes in the Groups internal controls or
in other factors that could significantly affect the Groups internal controls
subsequent to the evaluation described above conducted by the Companys
principal executive and financial officers. 23




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The Cronos Group 
 PART II  OTHER INFORMATION 
 Item 1  Legal Proceedings The Contrin Settlement The Group manages containers for investment entities collectively known as
Contrin in its Other Managed Container Programs. Approximately 1% (measured
by TEUs) of the Groups fleet of containers is owned by Contrin. As previously
reported by Cronos, since August 2000 the Group has been defending three
lawsuits brought by Contrin, one in Luxembourg and two in the United Kingdom.
On November 17, 2003, the Group and Contrin settled their differences and
entered into a Settlement Agreement (the Settlement Agreement). The Group has secured two judgments against its former chairman, Stefan M.
Palatin, from the UK courts aggregating approximately $2.3 million, and has
secured two charging orders (the Cronos Charging Orders), in the nature of
liens, to enforce the judgments against Mr. Palatins beneficial interest in an
estate located in Amersham, England (the Amersham Estate). The Group has
brought an action (the Foreclosure Action) in the UK courts seeking to
foreclose the Cronos Charging Orders and obtain an order of sale of the
Amersham Estate to satisfy the judgments secured against Mr. Palatin. Under the Settlement Agreement, Contrin agreed to file a civil action
against Mr. Palatin in Austria for recovery of $2.6 million, plus interest and
costs. This civil action follows Mr. Palatins criminal conviction in Austria,
affirmed on appeal, for, among other things, defrauding Contrin of the $2.6
million. Contrin had sought recovery of these monies from the Group in
Contrins Luxembourg lawsuit filed against the Group, now settled as part of
the settlement with Contrin. Contrin agrees, if it secures a final judgment
(the Austrian Judgment) against Mr. Palatin in Austria, to register the
Austrian Judgment in the UK and to assign the Austrian Judgment to the Group
for collection against the Amersham Estate. On or about November 28, 2003,
Contrin filed its civil action against Mr. Palatin in Austria for recovery of
$2.6 million, plus interest and costs. If the Amersham Estate is foreclosed upon in satisfaction of the Cronos
Charging Orders and any Austrian Judgment secured by Contrin against Mr.
Palatin, the parties agree that the first $4.85 million of net foreclosure
proceeds from the sale of the Amersham Estate and attributable to the Cronos
Charging Orders and/or Austrian Judgment will be allocated and paid to Contrin,
with the balance of foreclosure proceeds allocated and paid to Cronos in
satisfaction of the remaining unsatisfied amount, if any, of the Cronos
Charging Orders. The Settlement Agreement provides for Cronos to pay Contrin a total of
$3.5 million if the Group is unable to foreclose the Cronos Charging Orders
against the Amersham Estate by the third anniversary of the effective date of
the settlement (December 17, 2006). In addition if the net proceeds of
foreclosure of the Amersham Estate in satisfaction of the Cronos Charging
Orders and any charging order obtained by the Group to enforce the Austrian
Judgment total less than $3.5 million then the Group agrees to make up the
difference. The Settlement Agreement provides for Cronos to pay Contrin a total of
$2.8 million (not $3.5 million) if the Group forecloses the Cronos Charging
Orders against the Amersham Estate by December 17, 2006, and, by the date of
foreclosure, Contrin has not secured a lien on the Amersham Estate in aid of
its action against Mr. Palatin in Austria or a charging order against the
Amersham Estate to satisfy any Austrian Judgment it secures. In this case,
should the net proceeds of foreclosure of the Amersham Estate in satisfaction
of the Cronos Charging Orders total less than $2.8 million then the Group
agrees to make up the difference. The Settlement Agreement specifies an installment payment plan under which
Cronos paid Contrin $0.3 million in November 2003 and $0.250 million in
February 2004 and requires further payments of $0.450 million on or before
January 3, 2005, $0.250 million on or before April 4, 2005, $0.250 million on
or before July 4, 2005, $0.250 million on or before October 3, 2005 and $0.250
million on or before January 4, 2006. The balance of $1.5 million is due on or
before November 17, 2006. 24




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The Cronos Group Each payment reduces, dollar for dollar, the Companys obligation to pay
Contrin $3.5 million (or $2.8 million, as the case may be), and will count as a
credit (i.e., a reduction) to Contrins entitlement to $4.85 million of net
foreclosure proceeds from the sale of the Amersham Estate. If foreclosure of
the Cronos Charging Orders against the Amersham Estate occurs before any of
these payments is due, then the Groups obligation to make the remaining
payment(s) is excused. 25




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The Cronos Group Under the Settlement Agreement an escrow account will be established with
an independent bank or trust company in London for deposit of the proceeds from
foreclosure of the Amersham Estate as a result of the enforcement of the Cronos
Charging Orders and any charging order obtained to enforce the Austrian
Judgment. The Company shall deposit to the escrow account the proceeds of any
foreclosure of the Amersham Estate in response to the Cronos Charging Orders,
generally aftersubtracting (and, subject to its obligation to pay by the third
anniversary of the settlement, $3.5 million, as described above) therefrom the
amount of any installments made by the Group to Contrin as described in the
preceding two paragraphs. By the terms of the Settlement Agreement, Contrin has agreed to dismiss
the three actions it has brought against the Group and releases the Group from
all claims asserted by Contrin in the three actions. Other than for the
express obligations undertaken by the Group under the Settlement Agreement, the
Group denies all liability to Contrin by reason of the claims asserted by
Contrin in the three actions, and the Settlement Agreement is explicit that
nothing in the Settlement Agreement is to be deemed an admission of, or
evidence of, any wrongdoing or liability on the part of the Group. The Company calculated that the present value of the total $3.5 million
future cash payments under the Settlement Agreement installment payment plan,
discounted using an appropriate risk-free interest rate, was $3.3 million. As
discussed herein, the Group made the first installment payment of $0.3 million
in November 2003. In addition, the Group had previously recorded a reserve of
approximately $3 million against the Contrin claims. Interest will be charged
to the Companys income statement over the period for performance of the
Settlement Agreement using the effective interest rate method. Valuation of the Amersham Estate. In connection with the Foreclosure
Action brought by the Group against Mr. Palatin to foreclose the Cronos
Charging Orders against the Amersham Estate, the Group secured an independent
valuation of the Amersham Estate. The firm that conducted the valuation was
not able to conduct an on-site inspection of the Amersham Estate and therefore
based its valuation upon publicly available information about the Estate and
sales of comparable properties. The firm valued the Amersham Estate within the
range of 3 million British Pounds to 4 million British Pounds (at March 31,
2004, exchange rates, the equivalent of approximately US $5.5 million to US
$7.3 million). The land records of the county in which the Amersham Estate is
located do not disclose any mortgage or other indebtedness encumbering the
Amersham Estate. No assurance can be given that the Group will be successful in foreclosing
the Cronos Charging Orders against the Amersham Estate, that the sales price
achieved from any such foreclosure would exceed (or equal) the valuation of the
Estate of between 3 million British Pounds and 4 million British Pounds, or
that the net proceeds of any such foreclosure would be sufficient to satisfy
the Cronos Charging Orders and/or any Austrian Judgment secured by Contrin
against Mr. Palatin. Palatin Bankruptcy. On or about December 9, 2003, a creditor of Mr.
Palatin initiated a bankruptcy proceeding against him in Austria. The
bankruptcy filing has stayed Contrins prosecution of its civil action against
Mr. Palatin. While the bankruptcy filing requires the Group to serve the
bankruptcy trustee with notice of the Groups Foreclosure Action in the UK, the
Group does not believe that the bankruptcy will effect a stay of prosecution of
the Foreclosure Action. The Group is working cooperatively with Contrin in an
attempt to minimize the impact of the Palatin bankruptcy on the implementation
of the settlement. 
 Item 2  Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Not applicable 
 Item 3  Defaults Upon Senior Securities Not applicable 
 Item 4  Submission of Matters to a Vote of Security Holders Not applicable 26




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The Cronos Group 
 Item 5  Other Information Not applicable 
 Item 6  Exhibits and Reports on Form 8-K (a) Exhibits  31.1
    
    Rule 13a-14 Certification31.2
    
    Rule 13a-14 Certification32.1
    
    Section 1350 Certifications (b) Reports on Form 8-K 
 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. THE CRONOS GROUP SIGNATURE
    
    TITLE
    
    DATEBy
    
    /s/ PETER J YOUNGER
    
    Director, Chief Operating Officer,
    
    May 14, 2004Peter J Younger
    
    Chief Financial Officer andChief Accounting Officer(Principal Financial and Accounting Officer)
 27




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The Cronos Group 
 Exhibit Index Number
    
    Exhibit
    
    Page31.1
    
    Rule 13a-14 Certification
    
    
    2931.2
    
    Rule 13a-14 Certification
    
    
    3032.1
    
    Certification pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. *
    
    
    31
   *
    
    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. 28