##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2004 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.)
 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 (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 an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes o No þ The number of Common Shares outstanding as of November 15, 2004 : Class
    
    Number of Shares OutstandingCommon
    
    7,260,080




---



The Cronos Group TABLE OF CONTENTS PART I  FINANCIAL INFORMATION
    
    
    1Item 1  Financial Statements
    
    
    1Management Representation
    
    
    1Condensed Unaudited Consolidated Statements of Income
    
    
    2Condensed Unaudited Consolidated Balance Sheets
    
    
    3Condensed Unaudited Consolidated Statements of Cash Flows
    
    
    4Consolidated Unaudited Statement of Shareholders Equity
    
    
    5Notes to the Condensed Unaudited Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16General
    
    
    16Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
    
    
    19Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003
    
    
    21Liquidity and Capital Resources
    
    
    24Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4  Controls and Procedures
    
    
    27PART II  OTHER INFORMATION
    
    
    28Item 1  Legal Proceedings
    
    
    28Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3  Defaults Upon Senior Securities
    
    
    29Item 4  Submission of Matters to a Vote of Security Holders
    
    
    29Item 5  Other Information
    
    
    29Item 6  Exhibits and Reports on Form 8-K
    
    
    29EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




---



##### Table of Contents



The Cronos Group 
 PART I  FINANCIAL INFORMATION 
 Item 1  Financial Statements 
 Management Representation Unless the context indicates otherwise, the Company means The Cronos
Group excluding its subsidiaries, and Cronos or the Group means The Cronos
Group including its subsidiaries. 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 any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. 1




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) 
 Condensed Unaudited Consolidated Statements of Income Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
Restated
    
    2004
    
    2003
RestatedGross lease revenue
    
    $
    33,780
    
    
    $
    29,756
    
    
    $
    96,795
    
    
    $
    87,135Equipment trading revenue
    
    
    658
    
    
    
    1,570
    
    
    
    4,032
    
    
    
    3,015Commissions, fees and other income:- Container Equity Programs
    
    
    264
    
    
    
    281
    
    
    
    714
    
    
    
    838- Unrelated parties
    
    
    646
    
    
    
    391
    
    
    
    1,870
    
    
    
    1,982Total revenues
    
    
    35,348
    
    
    
    31,998
    
    
    
    103,411
    
    
    
    92,970Direct operating expenses
    
    
    4,218
    
    
    
    6,034
    
    
    
    16,177
    
    
    
    18,925Payments to Managed Container Programs:- Container Equity Programs
    
    
    8,360
    
    
    
    6,393
    
    
    
    22,595
    
    
    
    16,930- Other Managed Container Programs
    
    
    9,626
    
    
    
    8,195
    
    
    
    26,543
    
    
    
    24,243Equipment trading expenses
    
    
    614
    
    
    
    1,453
    
    
    
    3,413
    
    
    
    2,761Depreciation and amortization
    
    
    4,634
    
    
    
    4,457
    
    
    
    13,599
    
    
    
    13,348Selling, general and administrative expenses
    
    
    5,070
    
    
    
    3,522
    
    
    
    13,648
    
    
    
    11,130Interest expense
    
    
    1,365
    
    
    
    1,250
    
    
    
    3,713
    
    
    
    4,067Total expenses
    
    
    33,887
    
    
    
    31,304
    
    
    
    99,688
    
    
    
    91,404Income before income taxes and equity in earnings of affiliate
    
    
    1,461
    
    
    
    694
    
    
    
    3,723
    
    
    
    1,566Income taxes
    
    
    (276
    )
    
    
    (300
    )
    
    
    (868
    )
    
    
    (766
    )Equity in earnings of affiliate
    
    
    851
    
    
    
    514
    
    
    
    2,040
    
    
    
    1,026Net income
    
    
    2,036
    
    
    
    908
    
    
    
    4,895
    
    
    
    1,826Other comprehensive income:- change in fair value of forward exchange contracts, net of tax
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    -change in fair value of derivatives held by affiliate, net of tax
    
    
    241
    
    
    
    
    
    
    
    72
    
    
    
    Comprehensive income
    
    
    2,277
    
    
    
    908
    
    
    
    5,292
    
    
    
    1,826Basic net income per common share
    
    $
    0.28
    
    
    $
    0.12
    
    
    $
    0.67
    
    
    $
    0.25Diluted net income per common share
    
    $
    0.26
    
    
    $
    0.12
    
    
    $
    0.63
    
    
    $
    0.24
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 2




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) 
 Condensed Unaudited Consolidated Balance Sheets September 30,
    
    
    December 31,2004
    
    
    2003AssetsCash and cash equivalents
    
    $
    9,829
    
    
    $
    8,432Restricted cash
    
    
    1,542
    
    
    
    1,033Amounts due from lessees, net
    
    
    27,173
    
    
    
    22,766Amounts receivable from Managed Container Programs
    
    
    2,728
    
    
    
    3,399New container equipment for resale
    
    
    21,017
    
    
    
    10,816Net investment in direct financing leases
    
    
    7,410
    
    
    
    8,376Investments
    
    
    13,433
    
    
    
    8,570Container equipment, net
    
    
    157,108
    
    
    
    155,504Other equipment, net
    
    
    919
    
    
    
    604Goodwill, net
    
    
    11,038
    
    
    
    11,038Other intangible assets, net
    
    
    581
    
    
    
    721Other assets
    
    
    6,143
    
    
    
    6,778Total assets
    
    $
    258,921
    
    
    $
    238,037Liabilities and shareholders equityAmounts payable to Managed Container Programs
    
    $
    22,006
    
    
    $
    17,643Amounts payable to container manufacturers
    
    
    23,222
    
    
    
    17,312Direct operating expense payables and accruals
    
    
    3,936
    
    
    
    5,269Other amounts payable and accrued expenses
    
    
    8,689
    
    
    
    8,489Debt and capital lease obligations
    
    
    125,535
    
    
    
    119,205Current and deferred income taxes
    
    
    3,019
    
    
    
    2,981Deferred income and unamortized acquisition fees
    
    
    5,684
    
    
    
    5,105Total liabilities
    
    
    192,091
    
    
    
    176,004Shareholders equityCommon shares issued and outstanding (7,372,080 shares)
    
    
    14,744
    
    
    
    14,744Additional paid-in capital
    
    
    46,057
    
    
    
    46,552Common shares held in treasury (112,000 shares)
    
    
    (297
    )
    
    
    (297
    )Accumulated other comprehensive loss
    
    
    (9
    )
    
    
    (406
    )Restricted retained earnings
    
    
    1,832
    
    
    
    1,832Retained earnings (accumulated deficit)
    
    
    4,503
    
    
    
    (392
    )Total shareholders equity
    
    
    66,830
    
    
    
    62,033Total liabilities and shareholders equity
    
    $
    258,921
    
    
    $
    238,037
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 3




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) 
 Condensed Unaudited Consolidated Statements of Cash Flows Nine Months EndedSeptember 30,2004
    
    2003RestatedNet cash provided by operating activities
    
    $
    18,369
    
    
    $
    18,389Cash flows from investing activitiesPurchase of container and other equipment
    
    
    (25,819
    )
    
    
    (13,787
    )Investment in unconsolidated affiliate
    
    
    (2,822
    )
    
    
    (1,675
    )Investment in equipment acquired for direct financing lease
    
    
    (57
    )
    
    
    (82
    )Proceeds from sales of container and other equipment
    
    
    11,233
    
    
    
    8,722Net cash used in investing activities
    
    
    (17,465
    )
    
    
    (6,822
    )Cash flows from financing activitiesProceeds from issuance of term debt
    
    
    23,864
    
    
    
    15,024Repayments of term debt and capital lease obligations
    
    
    (22,354
    )
    
    
    (27,280
    )Dividend paid
    
    
    (508
    )
    
    
    (441
    )Shares repurchased
    
    
    
    
    
    
    (260
    )Restricted cash
    
    
    (509
    )
    
    
    41Net cash provided by (used in) financing activities
    
    
    493
    
    
    
    (12,916
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,397
    
    
    
    (1,349
    )Cash and cash equivalents at beginning of period
    
    
    8,432
    
    
    
    5,626Cash and cash equivalents at end of period
    
    $
    9,829
    
    
    $
    4,277Supplementary disclosure of cash flow information:Cash paid during the period for:- interest
    
    $
    3,026
    
    
    $
    3,747- income taxes
    
    
    894
    
    
    
    953Cash received during the period for:- interest
    
    
    25
    
    
    
    220- income taxes
    
    
    
    
    
    
    60Non-cash activities:- container equipment acquired under capital lease
    
    
    4,820
    
    
    
    1,626- direct finance lease equipment acquired under capital lease
    
    
    
    
    
    
    567- equity contribution to Joint Venture Program
    
    
    
    
    
    
    999
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 4




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) 
 Consolidated Unaudited Statement of Shareholders Equity Nine months ended September 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,895
    
    
    
    4,895Amortization of
employee
share grant
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Declaration of dividend
    
    
    
    
    
    
    (503
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (503
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397
    
    
    
    
    
    
    
    
    
    
    
    397Balance,
September 30, 2004
    
    $
    14,744
    
    
    $
    46,057
    
    
    $
    (297
    )
    
    $
    (9
    )
    
    $
    1,832
    
    
    $
    4,503
    
    
    $
    66,830
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 5




---



##### Table of Contents



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 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. September 30, 2003Three
    
    Ninemonths
    
    monthsended
    
    endedFinancial data for the period ended September 30, 2003Total revenues as previously reported
    
    $
    32,509
    
    
    $
    93,991- adjustment for effect of change in accounting principle / reclassification
    
    
    (511
    )
    
    
    (1,021
    )Total revenues restated
    
    $
    31,998
    
    
    $
    92,970Net income as previously reported
    
    $
    876
    
    
    $
    1,854- adjustment for effect of change in accounting principle
    
    
    32
    
    
    
    (28
    )Net income restated
    
    $
    908
    
    
    $
    1,826Basic net income per common share as previously reported
    
    $
    0.12
    
    
    $
    0.25- adjustment for effect of change in accounting principle
    
    
    
    
    
    
    Basic net income per common share restated
    
    $
    0.12
    
    
    $
    0.25Diluted net income per common share as previously reported
    
    $
    0.12
    
    
    $
    0.25- adjustment for effect of change in accounting principle
    
    
    
    
    
    $
    (0.01
    )Diluted net income per common share restated
    
    $
    0.12
    
    
    $
    0.24
 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




---



##### Table of Contents



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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    RestatedNet income:- as reported
    
    $
    2,036
    
    
    $
    908
    
    
    $
    4,895
    
    
    $
    1,826- add stock-based compensation expense included in
reported
net income, net of related tax effects
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    9- deduct stock-based compensation expense computed in
accordance with SFAS 123, net of tax effects
    
    
    (3
    )
    
    
    (19
    )
    
    
    (21
    )
    
    
    (109
    )- pro forma
    
    $
    2,034
    
    
    $
    892
    
    
    $
    4,877
    
    
    $
    1,726Basic net income per share:- as reported
    
    $
    0.28
    
    
    $
    0.12
    
    
    $
    0.67
    
    
    $
    0.25- pro forma
    
    $
    0.28
    
    
    $
    0.12
    
    
    $
    0.67
    
    
    $
    0.24Diluted net income per share:- as reported
    
    $
    0.26
    
    
    $
    0.12
    
    
    $
    0.63
    
    
    $
    0.24- pro forma
    
    $
    0.26
    
    
    $
    0.12
    
    
    $
    0.63
    
    
    $
    0.23
 7




---



##### Table of Contents



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 September 30, 2004- gross lease revenue
    
    $
    11,208
    
    
    $
    12,046
    
    
    $
    10,526
    
    
    $
    33,780- direct operating expenses
    
    
    (1,283
    )
    
    
    (1,711
    )
    
    
    (1,224
    )
    
    
    (4,218
    )- net lease revenue
    
    
    9,925
    
    
    
    10,335
    
    
    
    9,302
    
    
    
    29,562- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    369- payments to Managed Container Programs
    
    
    (8,360
    )
    
    
    (9,626
    )
    
    
    
    
    
    
    (17,986
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,507
    )
    
    
    (4,507
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,344
    )
    
    
    (1,344
    )Segment profit
    
    $
    1,565
    
    
    $
    709
    
    
    $
    3,820
    
    
    $
    6,094Segment assets at end of period
    
    $
    26,434
    
    
    $
    14,827
    
    
    $
    217,660
    
    
    $
    258,921Three months ended September 30, 2003,
restated- gross lease revenue
    
    $
    9,114
    
    
    $
    11,259
    
    
    $
    9,383
    
    
    $
    29,756- direct operating expenses
    
    
    (1,824
    )
    
    
    (2,545
    )
    
    
    (1,665
    )
    
    
    (6,034
    )- net lease revenue
    
    
    7,290
    
    
    
    8,714
    
    
    
    7,718
    
    
    
    23,722- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    390- payments to Managed Container Programs
    
    
    (6,393
    )
    
    
    (8,195
    )
    
    
    
    
    
    
    (14,588
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,356
    )
    
    
    (4,356
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,235
    )
    
    
    (1,235
    )Segment profit
    
    $
    897
    
    
    $
    519
    
    
    $
    2,517
    
    
    $
    3,933Segment assets at end of period
    
    $
    19,772
    
    
    $
    11,354
    
    
    $
    202,680
    
    
    $
    233,806Nine months ended September 30, 2004- gross lease revenue
    
    $
    31,474
    
    
    $
    35,145
    
    
    $
    30,176
    
    
    $
    96,795- direct operating expenses
    
    
    (4,903
    )
    
    
    (6,749
    )
    
    
    (4,525
    )
    
    
    (16,177
    )- net lease revenue
    
    
    26,571
    
    
    
    28,396
    
    
    
    25,651
    
    
    
    80,618- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    1,143- payments to Managed Container Programs
    
    
    (22,595
    )
    
    
    (26,543
    )
    
    
    
    
    
    
    (49,138
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (13,220
    )
    
    
    (13,220
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (3,636
    )
    
    
    (3,636
    )Segment profit
    
    $
    3,976
    
    
    $
    1,853
    
    
    $
    9,938
    
    
    $
    15,767Segment assets at end of period
    
    $
    26,434
    
    
    $
    14,827
    
    
    $
    217,660
    
    
    $
    258,921
 8




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) OtherContainer
    
    
    ManagedEquity
    
    
    Container
    
    
    OwnedPrograms
    
    
    Programs
    
    
    Containers
    
    
    TotalNine months ended September 30, 2003, restated- gross lease revenue
    
    $
    25,677
    
    
    $
    33,630
    
    
    $
    27,828
    
    
    $
    87,135- direct operating expenses
    
    
    (5,759
    )
    
    
    (8,173
    )
    
    
    (4,993
    )
    
    
    (18,925
    )- net lease revenue
    
    
    19,918
    
    
    
    25,457
    
    
    
    22,835
    
    
    
    68,210- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    1,096
    
    
    
    1,096- payments to Managed Container Programs
    
    
    (16,930
    )
    
    
    (24,243
    )
    
    
    
    
    
    
    (41,173
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (13,045
    )
    
    
    (13,045
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (4,045
    )
    
    
    (4,045
    )Segment profit
    
    $
    2,988
    
    
    $
    1,214
    
    
    $
    6,841
    
    
    $
    11,043Segment assets at end of period
    
    $
    19,772
    
    
    $
    11,354
    
    
    $
    202,680
    
    
    $
    233,806
 Reconciliation of profit for reportable segments to income before income taxes
and equity in earnings of affiliate: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    RestatedSegment profit
    
    $
    6,094
    
    
    $
    3,933
    
    
    $
    15,767
    
    
    $
    11,043Equipment trading revenue
    
    
    658
    
    
    
    1,570
    
    
    
    4,032
    
    
    
    3,015Unallocated commissions, fees and other income
    
    
    541
    
    
    
    282
    
    
    
    1,441
    
    
    
    1,724Equipment trading expenses
    
    
    (614
    )
    
    
    (1,453
    )
    
    
    (3,413
    )
    
    
    (2,761
    )Amortization of intangible assets
    
    
    (47
    )
    
    
    (47
    )
    
    
    (141
    )
    
    
    (141
    )Non container depreciation
    
    
    (80
    )
    
    
    (54
    )
    
    
    (238
    )
    
    
    (162
    )Selling, general and administrative expenses
    
    
    (5,070
    )
    
    
    (3,522
    )
    
    
    (13,648
    )
    
    
    (11,130
    )Non container interest expense
    
    
    (21
    )
    
    
    (15
    )
    
    
    (77
    )
    
    
    (22
    )Income before income taxes and equity in
earnings in affiliate
    
    $
    1,461
    
    
    $
    694
    
    
    $
    3,723
    
    
    $
    1,566
 9




---



##### Table of Contents



The Cronos Group (US dollar amounts in thousands, except per share amounts) 5. Earnings per common share The components of basic and diluted net income per share were as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    RestatedNet income available for common shareholders
    
    $
    2,036
    
    
    $
    908
    
    
    $
    4,895
    
    
    $
    1,826Average outstanding shares of common stock
    
    
    7,260,080
    
    
    
    7,307,392
    
    
    
    7,260,080
    
    
    
    7,342,517Dilutive effect of:- 1998 stock option
    
    
    133,145
    
    
    
    
    
    
    
    99,285
    
    
    
    - warrants
    
    
    87,873
    
    
    
    
    
    
    
    65,120
    
    
    
    - 1999 stock option plan
    
    
    175,109
    
    
    
    
    
    
    
    132,993
    
    
    
    - non-employee directors equity plan
    
    
    177,241
    
    
    
    154,494
    
    
    
    157,268
    
    
    
    118,730Common stock and common stock equivalents
    
    
    7,833,448
    
    
    
    7,461,886
    
    
    
    7,714,746
    
    
    
    7,461,247Basic net income per share
    
    $
    0.28
    
    
    $
    0.12
    
    
    $
    0.67
    
    
    $
    0.25Diluted net income per share
    
    $
    0.26
    
    
    $
    0.12
    
    
    $
    0.63
    
    
    $
    0.24
 As at September 30, 2003, options to acquire 1,120,000 shares were
outstanding with a weighted average exercise price of $4.71 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. At September 30, 2004, all of the common stock equivalents were
included in the computation of diluted net income per share as the average
market price of Cronos common shares exceeded the exercise price of each stock
plan. 10




---



##### Table of Contents



The Cronos Group 6. Amounts receivable from Managed Container Programs Amounts receivable from Managed Container Programs include amounts due
from related parties of $2.7 million and $3.4 million at September 30, 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 nine US limited partnership programs (the US
Limited Partnership Programs). In accordance with FIN 46R, the Company has
determined that the nine 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. The partnerships are all California limited partnerships managed by Cronos
Capital Corp., an indirect subsidiary of the Company. Since 1979, seventeen
public limited partnerships raised over $480 million from over 37,000
investors. Eight of the original seventeen partnerships have now been
dissolved. These general partner investments are accounted for using the
equity method. 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 realize the residual value of the container equipment at the
end of its useful economic life or upon the dissolution of a partnership. At
September 30, 2004, the US Limited Partnership Programs had total assets of
$112.5 million and total liabilities of $3.4 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 limited partnerships, the limited partners may not be assessed
for additional capital contributions, and it is possible that the general
partner could be liable if the assets of the partnerships are not sufficient to
pay their liabilities. However, the Group considers that the risk of any such
loss is not material. Therefore, the maximum exposure for Cronos to losses as
a result of its involvement with the US Limited Partnership Programs at
September 30, 2004, and December 31, 2003, was $2.6 million and $3.4 million,
respectively, representing the total amount due for management fees and other
items from the partnerships. 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 objective of
the program is to generate income for distribution to the equity holders or for
reinvestment in additional equipment and to realize the residual value of the
container equipment at the end of its useful economic life. 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 September 30, 2004, the Joint Venture Program had total assets of $112.9
million and total liabilities of $86.1 million. For the nine months ended
September 30, 2004, the Joint Venture Program reported total revenues of $11.8
million and net income of $4.1 million. The maximum exposure for Cronos to
losses as a result of its involvement with the Joint Venture Program at
September 30, 2004, and December 31, 2003, was $13.6 million and $8.7 million,
respectively, representing the total of its equity investment in the Joint
Venture Program and the management fees due to Cronos from the program. 11




---



##### Table of Contents



The Cronos Group 8. Container equipment Container equipment is net of accumulated depreciation of $118.2 million
and $115.5 million at September 30, 2004, and December 31, 2003, respectively. The Group reviews the carrying value of 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 judgment 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 sales transactions that are denominated in non US dollar
currencies will be affected by adverse exchange rate movements between the US
dollar and the sales transaction currency. During 2003, Cronos entered into
foreign currency forward contracts to reduce exposure to exchange rate risks
associated with a Euro denominated sales agreement. Each forward contract was
designated a fully effective cash flow hedge as the critical terms of each
contract matched those of the hedged item. The changes in the fair value of
the hedges were reported as a component of other comprehensive income and were
reclassified into earnings as equipment trading revenue on the contracted
performance dates of the sales agreement. The estimate of fair value was based
on the estimated replacement cost of each hedge. The final forward contract
expired in June 2004. During the nine months ended September 30, 2004, $0.3
million was reclassified from other comprehensive income to equipment trading
revenue on the contracted sales agreement performance dates. 10. Amounts payable to Managed Container Programs Amounts payable to Managed Container Programs include amounts payable to
related parties of $11.2 million and $9.3 million at September 30, 2004, and
December 31, 2003, respectively. 11. Debt and capital lease obligations Debt and capital lease obligations are secured by container equipment and
included amounts due within twelve months of $15.4 million and $12.8 million at
September 30, 2004, and December 31, 2003, respectively. Interest rates under
these facilities range from 3.6% to 4.5%, and they extend to various dates
through to 2014. 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 $59.8 million of the outstanding debt
and capital facilities 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 September 2004 interest rates, the maximum potential amount
of future payments for the guaranteed debt and capital lease facilities is
$68.4 million. At September 30, 2004, the fair value of the facilities
approximated the carrying value. The estimate of fair value was based on
borrowing rates currently available to the Group for debt with similar terms
and average maturities. The debt and capital lease facilities are secured by
container equipment. The Group receives free and clear title to the
collateralized container equipment once all payments due under a facility have
been made. In the event that the Group cannot make the payments due under a
debt or capital lease obligation facility, the financial institutions are
entitled to recover the collateralized equipment and either use the related
cash flows or sell the equipment and take the sale proceeds to discharge
outstanding obligations of 12




---



##### Table of Contents



The Cronos Group the Company. The Company considers that the cash
flows and / or sales proceeds generated by the collateralized equipment should
be sufficient to cover outstanding obligations. 13




---



##### 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 September 30, 2004, the Group had outstanding orders to purchase $18.5
million of container equipment. ii. 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 rentals
collected 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 a lease or if a lessee 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 September 30, 2004, was $4.8
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 $4.8 million payable at September 2004, the Company estimates that the
maximum amount of future payments would be $86.7 million. The fair value of
the estimated amount of maximum future payments is $71.2 million. iii. 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 $34.3 million of minimum future
lease payments outstanding under these agreements at September 30, 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 September 30, 2004, the future
minimum annual lease payments under non-cancellable operating leases were: US dollar amounts in thousands2004
    
    $
    3,8232005
    
    
    7,7072006
    
    
    5,1932007
    
    
    2,5572008
    
    
    2,5572009 and thereafter
    
    
    12,502Total
    
    $
    34,339
   14




---



##### Table of Contents



The Cronos Group    iv. Agreements with Other Managed Container Programs  early termination options Approximately 60% (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 September 30, 2004, approximately 42% (based
on original equipment cost) of total agreements with Other Managed Container
Programs were eligible for early termination. Cronos believes that early
termination of these agreements by the Other Managed Container Programs is
unlikely. v. Agreements with Other Managed Container Programs  change of control provisions Approximately 64% (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, 36% 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 28% of total agreements can elect for
the Group to purchase the equipment 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. vi. 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 defended three lawsuits brought by
Contrin, one in Luxembourg and two in the United Kingdom. On November 17,
2003, the Group entered into a settlement (the Settlement Agreement) with
Contrin. 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
has made installment payments aggregating $0.550 million to Contrin ($0.3
million in November 2003 and $0.250 million in February 2004). 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. See Part II, Item 1  Legal Proceedings for a full discussion of the
Settlement Agreement and the status of the Groups legal proceedings against
its former chairman, Stefan M. Palatin. 15




---



##### Table of Contents



The Cronos Group  vii. TOEMT Since the 1980s, the Group has managed containers for Transocean Equipment
Manufacturing and Trading Limited (TOEMT), a United Kingdom corporation. A
separate company by the same name was registered in the Isle of Man. Both
TOEMTs are in liquidation, represented by the same liquidator. When the Group
learned of the insolvency proceeding commenced on behalf of the first 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
to the distributions. 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. As of September 30, 2004, only 11 containers
remained in the portfolio of containers managed by the Group for TOEMT. The
Group has held discussions with the liquidator of the two TOEMTs with a view to
winding up the Groups management of containers for TOEMT and resolving certain
claims made by the liquidator with respect to the turnover of $1.3 million and
the Groups management of containers for TOEMT. The Group estimates that the
maximum losses that may arise on claims made by the liquidator total $0.2
million. These discussions are ongoing, but the Group is unable to predict at
this time whether they will be successful. The liquidator has stated that TOEMT may have additional claims to make
against Cronos. The Group has requested details of any such additional claims
but, to date, no claims have been specified or filed, and the Group does not
know of any basis for the assertion of additional claims. 16




---



##### 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 nine months
of 2004, 90% 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 10% 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 herein. Market Overview During 2004, container leasing companies have experienced high levels of
demand for new and existing containers. The pace of growth in the volume of
trade between China and other countries has been the catalyst to this growth.
China has reported significant increases in both its volumes of imports and
exports in the past two years. The increased volume of trade has resulted in
shortages of both containership and container capacity. The following table summarizes the combined utilization of the Cronos
container fleet at each of the dates indicated (based on approximate original
equipment cost). September 30,
    
    December 31,
    
    September 30,2004
    
    2003
    
    2003Utilization
    
    
    95
    %
    
    
    89
    %
    
    
    87
    %
 Shipping lines report that freight rates have increased in line with
strong demand on major trade routes, in particular on the Asia to US and Asia
to Europe routes. However, the strong increase in volumes has led to
increasing port and railroad congestion in certain locations, particularly in
the US and Europe. This has increased the turnaround time for containerships
and containers and further reduced the amount of available capacity. In order to meet the continuing demand, shipping lines have embarked on a
major program of new ship building. The total world order book is at record
levels for new containerships that will be delivered between 2004 and 2006. Container manufacturers stepped up production in 2004 in order to meet the
increased container demand. The price of a new twenty-foot dry cargo container
has increased to over $2,000. This reflects the combined effect of the
increased demand together with increased costs for materials such as steel and
wood. This compares to a price of $1,350 in the latter part of 2003. The high
level of demand for new container equipment means that there is unlikely to be
a major reduction in the price of new containers in the near future and that
prices could potentially increase. The major container manufacturers report
full order books until the end of 2004 and for the first calendar quarter of
2005. Cronos has booked space with the container manufacturers for all of its
production requirements over this period. 17




---



##### Table of Contents



The Cronos Group  Per-diem rates for new containers have increased in line with the increase
in new container costs thereby eliminating any adverse impact on profitability
caused by the increase in costs. Per diems rates for older containers increased slightly and Cronos expects
to maintain existing rates or achieve slight increases over the next twelve
months. Off-hire inventories of containers have declined throughout the world, as
shipping lines have employed more leased containers to meet the growth in
containerised trade. This decline in inventories has resulted in substantial
decreases in storage expenses. Declining inventories have also contributed to
an increase in proceeds realized on the sale of used containers, as fewer
containers were available to meet the demand of buyers. Cronos will consider
the disposal of off-hire inventories in locations where sales prices equal or
exceed internal economic targets. The Group did not undertake any major repositioning moves in the second
and third quarters of 2004, due primarily to the shortage of containership
capacity. If suitable carriers can be sourced, the Group will reposition
off-hire equipment from the US east coast over the remaining part of 2004 and
in the first half of 2005 in order to take advantage of the strong demand for
containers in the Asian trade routes. The objective of each move is to improve
future liquidity, as savings in storage expense and increased future lease
revenues should exceed the once-off cost of repositioning the containers. Container equipment has been added to the Cronos fleet throughout the
course of 2004 that is anticipated to generate earnings in future years. Also,
Cronos has funding available for additional equipment acquisitions and plans to
utilize these funds and to generate and use additional funding to increase the
size of its container fleet. Accordingly, based on the current market for
leased containers and predictions from industry analysts that demand will
remain strong until the end of 2005, Cronos expects to generate earnings growth
in 2005. Although favorable market conditions currently exist for container
lessors, the current market conditions may negatively impact the shipping
lines. The combination of sharply rising oil prices, increased charter rates
for ships and higher prices for steel and new containers have created a concern
for both the shipping lines and therefore, the leasing companies. Although the
majority of the top twenty shipping lines have experienced strong profit growth
during the last twelve months, other shipping lines are facing increased
financial pressures, especially those that rely on operating their
containerships via short-term charters. Current conditions appear to favor the
larger more established shipping lines, which have witnessed increases in
freight rates due to the strong demand experienced in their respective trade
routes. However, some regional intra-Asia shipping lines have cut back
services in some routes in an attempt to reduce their exposure to rising costs
including the increased charter rate for ships. The Group remains cautious,
and continues to monitor the aging of lease receivables, collections and the
credit exposure to various existing and new customers. The financial impact of
potential losses from these shipping lines could eventually influence the
demand for leased containers, if shipping lines experience financial
difficulties, consolidate, or become insolvent. Industry analysts are expressing concern that the current program of new
ship building may create over-capacity in the industry once the new
containerships that are on order have been delivered. Any over-capacity could
result in a reduction in profitability for shipping lines which in turn could
have implications for container leasing companies. Lastly, wide-ranging concerns remain regarding the worlds major
economies, including the price of oil and its impact on economic growth and
containerized trade volumes, the future performance of the Chinese economy, US
trade and budget deficits, the performance of global stock markets,
geopolitical concerns arising from uncertainties within the Middle East and
Asia, threats of major terrorist attacks, as well as new container production
levels, all of which may have an impact on the current demand for leased
containers. 18




---



##### Table of Contents



The Cronos Group  Review of Cronos Operations Container Fleet During the first nine months of 2004, Cronos added $86 million of new
container equipment to its fleet of which $56 million was acquired for
Container Equity Programs, $19 million was acquired for Owned Container
operations and $11 million was acquired for Other Managed Container Programs. Dry cargo containers represented 64% of new container investment with
refrigerated containers, tanks and dry freight specials accounting for 12%
each. 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. Cronos Fleet (in TEU thousands) at,September 30,
    
    December 31,
    
    September 30,2004
    
    2003
    
    2003RestatedContainer Equity Programs
    
    
    147.8
    
    
    
    131.2
    
    
    
    125.6Other Managed Container Programs
    
    
    163.7
    
    
    
    163.3
    
    
    
    164.3Owned Containers
    
    
    120.2
    
    
    
    111.3
    
    
    
    109.5Total Fleet
    
    
    431.7
    
    
    
    405.8
    
    
    
    399.4
 The size of the total fleet grew by 6% in the first nine months of 2004.
The Owned Container fleet grew by 8% 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 13% which was primarily due to the
addition of new equipment to the Joint Venture Program. The Other Managed
Container Programs fleet increased slightly as the addition of $11 million of
new equipment was almost offset by the disposal of older equipment in this
segment. The Group operates a diversified fleet of containers. Specialized
containers, comprising refrigerated containers, tanks and dry freight specials,
accounted for 45% of the Cronos owned fleet (based on original equipment cost)
at September 30, 2004. Cronos believes that product diversification provides 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 September 30, 2004, by reportable segment based on original
equipment cost. Other ManagedContainer Equity
    
    Container
    
    Owned
    
    TotalPrograms
    
    Programs
    
    Containers
    
    FleetDry Cargo
    
    
    74
    %
    
    
    84
    %
    
    
    55
    %
    
    
    72
    %Refrigerated
    
    
    17
    %
    
    
    5
    %
    
    
    23
    %
    
    
    15
    %Tank
    
    
    7
    %
    
    
    8
    %
    
    
    7
    %
    
    
    7
    %Dry Freight Specials:CPCs
    
    
    2
    %
    
    
    
    
    
    
    9
    %
    
    
    3
    %Rolltrailer
    
    
    
    
    
    
    1
    %
    
    
    4
    %
    
    
    2
    %Other Dry Freight Specials
    
    
    
    
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 19




---



##### Table of Contents



The Cronos Group  Overview Cronos reported net income of $4.9 million in the first nine months of
2004 compared to $1.8 million in the corresponding period of 2003. The
increase in profitability can be attributed primarily to:  
    
    Strong demand for leased equipment reflecting the growth in global container trade.
    
    Expansion of the container fleet.
    
    Equipment trading transactions. Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003 Analysis & Discussion Gross lease revenue (GLR)of $33.8 million for the quarter ended
September 30, 2004, was $4 million, or 14%, higher than for the same period in
2003. Of the increase, $2.7 million was due to the combined effect of the
changes in utilization and per diem rates and $1.3 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 $4.2 million in the third quarter of 2004,
a decline of $1.8 million, or 30%, compared to the corresponding period in
2003. This was primarily due to reductions of $0.9 million in storage expense,
reflecting lower inventories of off-hire equipment, $0.5 million in
repositioning expense (see discussion in Market Overview above) and $0.4
million in activity-related costs, as the level of repairs and handling
declined in line with the reduction in container redeliveries. Operating segment information Other(in thousands)
    
    Container
    
    ManagedEquity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    Containers
    
    TotalThree months ended September 30, 2004- gross lease revenue
    
    $
    11,208
    
    
    $
    12,046
    
    
    $
    10,526
    
    
    $
    33,780- direct operating expenses
    
    
    (1,283
    )
    
    
    (1,711
    )
    
    
    (1,224
    )
    
    
    (4,218
    )- net lease revenue
    
    
    9,925
    
    
    
    10,335
    
    
    
    9,302
    
    
    
    29,562- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    369- payments to Managed Container Programs
    
    
    (8,360
    )
    
    
    (9,626
    )
    
    
    
    
    
    
    (17,986
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,507
    )
    
    
    (4,507
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,344
    )
    
    
    (1,344
    )Segment profit
    
    $
    1,565
    
    
    $
    709
    
    
    $
    3,820
    
    
    $
    6,094
 20




---



##### Table of Contents



The Cronos Group  Container Equity Programs:segment profit increased to $1.6 million in the
three months ended September 30, 2004, when compared to $0.9 million for the
same period of 2003.  
    
    Net lease revenueincreased by $2.6 million over the corresponding
period in 2003. This is primarily due to the increase in GLR as the
additional investment in equipment for the Joint Venture Program
together 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 $2 million
compared to 2003 reflecting the increase in net lease revenue. Other Managed Container Programs:segment profit of $0.7 million for the
quarter ended September 30, 2004, was $0.2 million higher than in the same
period of 2003.  
    
    Net lease revenueincreased by $1.6 million when compared to the
same period in 2003. GLR increased by $0.8 million as the effect of
the increase in fleet utilization more than offset the effect of the
disposal of older equipment. Direct operating expenses declined by
$0.8 million, reflecting the reduction in inventory-related costs.
    
    Payments to Other Managed Container Programsincreased in line with
the change in net lease revenue. Owned Containers:segment profit increased by $1.3 million to $3.8 million
in the third quarter of 2004.  
    
    Net lease revenueincreased by $1.6 million due to the combined
effect of the increase in the size of the owned fleet, the improvement
in fleet utilization and the decline in the level of inventory-related
direct operating expenses.
    
    Container depreciationof $4.5 million in the three months ended
September 30, 2004, increased by $0.2 million from the corresponding
period in 2003 as the increase in depreciation attributable to new
container additions was greater than the reduction attributable to the
disposal of equipment at the end of its economic life.
    
    Container interest expenseof $1.3 million in the third quarter of
2004, was $0.1 million, or 9%, higher than in the same period of 2003.
The main changes in interest expense were attributable to:  
    
    An increase in the total level of debt and capital
lease obligations when compared to the third quarter of 2003.
    
    These increases were partly offset by a saving of $0.1
million as a result of the refinancing of approximately $9
million of fixed rate debt with variable rate debt in December
2003.
    
    An increase in interest rates for the third quarter of
2004 when compared to the corresponding period of 2003. Equipment trading revenueof $0.7 million in the three months ended
September 30, 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 revenue
varies in accordance with the quantity, size and price of each transaction
undertaken. In the third quarter of 2004, equipment trading revenue was $0.9
million lower than in the corresponding period of 2003 due primarily to a
decline in the quantity and size of the transactions undertaken. Equipment
trading expenses represented equipment and related costs for this activity. Commissions, fees and other incomeof $0.9 million in the three months
ended September 30, 2004, were $0.2 million higher than in the corresponding
period of 2003. This is primarily due to a $0.1 million increase in each of
design and consultancy fee income and fees earned on the disposal of equipment
owned by Managed Container Programs. 21




---



##### Table of Contents



The Cronos Group  Selling, general and administrative expenseswere $5.1 million in the
three months ended September 30, 2004, an increase of $1.5 million when
compared to the third quarter of 2003. Of the total increase, $0.2 million can
be attributed to the overall decline in the value of the US dollar against
other major currencies. The balance of the increase was primarily due to:  
    
    A $0.5 million increase in the expense recognized for a stock
appreciation rights plan reflecting a larger increase in the Group
share price in the third quarter of 2004 than in the corresponding
period of 2003.
    
    $0.3 million of expenses incurred in connection with the launch of
a new US Limited Partnership Program. The program made its first
acquisition of new container equipment in the third quarter of 2004.
These fees may be recovered in later periods if the proceeds raised by
the program exceed certain thresholds.
    
    A $0.2 million increase in professional services costs reflecting
an increase in the level of corporate governance and compliance work
undertaken.
    
    A $0.3 million increase in manpower costs due in part to the
recruitment of additional employees to support both the growth in the
business and the additional corporate governance and compliance
workload. Income Taxesof $0.3 million for the three months ended September 30,
2004, were slightly lower than in the corresponding period of 2003. The
reduction in the effective taxation rate, from 43% in the third quarter of 2003
to 19% in the same period of 2004, was due primarily to the fact that the
increased profit reported in 2004 was earned in jurisdictions with relatively
low tax rates. In addition, the Group recorded a $0.1 million tax benefit in
one of its European entities which arose as a result of a transaction involving
the transfer of container equipment. Equity in earnings of affiliatewas $0.9 million in the third quarter of
2004 compared to $0.5 million for the same period in 2003. The earnings of the
Joint Venture Program have increased as a result of its investment in new
equipment. See additional discussion herein. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 Gross lease revenue (GLR)of $96.8 million for the first nine months of
2004 was $9.7 million, or 11%, higher than for the same period in 2003. Of the
increase, $6.4 million was due to the combined effect of the changes in fleet
utilization and per diem rates and $3.3 million was due to the increase in
fleet size. Direct operating expenseswere $16.2 million in the first nine months of
2004, a decrease of $2.7 million, or 15%, compared to the corresponding period
in 2003. This decrease was due primarily to a $1.6 million reduction in
storage costs, reflecting the lower inventory levels, and a $1.1 million
decline in the level of repositioning moves undertaken (see discussion in
Market Overview above). 22




---



##### Table of Contents



The Cronos Group  Operating segment information Other(in thousands)
    
    Container
    
    ManagedEquity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    Containers
    
    TotalNine months ended September 30, 2004- gross lease revenue
    
    $
    31,474
    
    
    $
    35,145
    
    
    $
    30,176
    
    
    $
    96,795- direct operating expenses
    
    
    (4,903
    )
    
    
    (6,749
    )
    
    
    (4,525
    )
    
    
    (16,177
    )- net lease revenue
    
    
    26,571
    
    
    
    28,396
    
    
    
    25,651
    
    
    
    80,618- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    1,143- payments to Managed Container Programs
    
    
    (22,595
    )
    
    
    (26,543
    )
    
    
    
    
    
    
    (49,138
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (13,220
    )
    
    
    (13,220
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (3,636
    )
    
    
    (3,636
    )Segment profit
    
    $
    3,976
    
    
    $
    1,853
    
    
    $
    9,938
    
    
    $
    15,767
 Container Equity Programs:segment profit of $4 million for the first nine
months of 2004, was $1 million higher than for the same period of 2003.  
    
    Net lease revenueof $26.6 million was $6.7 million higher than in
the same period of 2003. This was primarily due to the increase in GLR
for the Joint Venture Program, reflecting the additional investment in
new container equipment, and a $1 million decline in direct operating
expenses for the US Limited Partnership Programs due to the decline in
inventory-related costs.
    
    Payments to Container Equity Programsincreased by $5.7 million,
which was in line with the increase in net lease revenue.
    
    The ratio of segment profit to net lease revenue was unchanged at
15%. The Group earns a lower management fee from the Joint Venture
Program than it earns from the US Limited Partnership Programs.
Accordingly, the Group expects the ratio of segment profit to net lease
revenue to decline for this reportable segment as a higher proportion
of net lease revenue will be generated by the Joint Venture Program
based on its current equipment acquisition plans. Other Managed Container Programs:segment profit of $1.9 million in the
nine months ended September 30, 2004, was $0.6 million higher than for the same
period in 2003.  
    
    Net lease revenueincreased by $2.9 million when compared to the
same period in 2003. GLR increased by $1.5 million as the effect of
the improvement in fleet utilization and the addition of new equipment
more than offset the impact of the disposal of equipment at the end of
its economic life. Direct operating expenses declined by $1.4 million
reflecting the reduction in storage and repositioning expense.
    
    Payments to Other Managed Container Programsincreased in line with
the increase in net lease revenue for those agreements that did not
have fixed payment terms. As a result, the ratio of segment profit to
net lease revenue increased to 7% in the first nine months of 2004 from
5% in the corresponding period of 2003, as the level of payments to
Other Managed Container Programs with fixed payment terms did not
increase. Owned Containers:segment profit increased by $3.1 million to $9.9 million
in the first nine months of 2004.  
    
    Net lease revenueincreased by $2.8 million due primarily to the
increase in the size of the owned fleet and the improvement in fleet
utilization. 23




---



##### Table of Contents



The Cronos Group   
    
    Container depreciationof $13.2 million in the nine months ended
September 2004 was $0.2 million higher than in the corresponding period
in 2003. The increase in depreciation attributable to new container
additions more than offset the effect of the transfer of $5.6 million
of equipment to the Joint Venture Program in the second quarter of 2003
and the disposal of equipment at the end of its economic life.
    
    Container interest expenseof $3.6 million in the first nine months
of 2004, was $0.4 million, or 10%, lower than in the same period of
2003. The main changes in interest expense were attributable to:  
    
    A reduction in the average level of debt and capital
lease obligations when compared to the first nine months of 2003
as the total amount of scheduled principal repayments more than
offset new drawdowns.
    
    A saving of $0.3 million resulting from the
refinancing of approximately $9 million of fixed rate debt with
variable rate debt in December 2003.
    
    These reductions were partly offset by a slight
increase in the average interest rate over the first nine months
of 2004 when compared to the same period of 2003. Equipment trading revenueof $4 million in the nine months ended September
30, 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 $0.6 million from equipment
trading activity during the first nine months of 2004, compared with $0.3
million for the same period in 2003. This reflects improved margins and an
increase in the quantity and size of the transactions undertaken. Commissions, fees and other incomeof $2.6 million in the first nine
months of 2004 were $0.2 million, or 8%, lower than in the corresponding period
of 2003. The decrease was primarily due to a reduction of $0.2 million in
amortized acquisition fee income reflecting a maturing portfolio of US Limited
Partnership Programs. Selling, general and administrative expensesof $13.6 million for the
first nine months of 2004 were $2.5 million higher than in the corresponding
period of 2003. Of the total increase, $0.7 million can be attributed to the
overall decline in the value of the US dollar against other major currencies as
non US dollar denominated overheads become relatively more expensive. In the
first nine months of 2004, approximately 53% of selling, general and
administrative expenses were incurred in non US dollar currencies. The balance
of the increase was primarily due to:  
    
    A $0.9 million increase in the expense recognized for a stock
appreciation rights plan reflecting a larger increase in the Group
share price in the first nine months of 2004 than in the corresponding
period of 2003.
    
    A $0.3 million increase in legal and other professional expenses
reflecting an increase in the level of corporate governance work
undertaken in 2004.
    
    $0.3 million of expenses incurred in connection with the launch of
a new US Limited Partnership Program. The program made its first
acquisition of new container equipment in the third quarter of 2004.
These fees may be recovered in later periods if the proceeds raised by
the program exceed certain thresholds.
    
    A $0.3 million increase in manpower costs due in part to the
recruitment of additional employees to support both the growth in the
business and the additional corporate governance and compliance
workload. Income Taxesof $0.9 million for the nine months ended September 30, 2004,
were $0.1 million higher than for the corresponding period of 2003. The
reduction in the effective taxation rate, from 49% in the first nine months of
2003 compared to 23% in the same period of 2004, was due primarily to the fact
that the increased profit reported in 2004 has been earned in jurisdictions
with relatively low tax rates. In addition, the Group recorded a $0.2 million
tax benefit in one of its European entities that arose as a result of
transactions involving the transfer of container equipment. The effective tax
rate for the first nine months of 2004 is based on the best estimate by the
Group of the expected tax rate to be applicable for the 2004 fiscal year. 24




---



##### Table of Contents



The Cronos Group  Equity in earnings of affiliateincreased to $2 million in the first nine
months of 2004 compared to $1 million for the same period in 2003. The
increase is due to the expansion of the Joint Venture Program fleet. See
additional discussion herein. 25




---



##### Table of Contents



The Cronos Group 
 Liquidity and Capital Resources The primary sources of cash generated by operating activities are gross
lease revenue provided by the Groups container fleet, fee revenues from its
Managed Container Programs and other parties and income earned on equipment
trading transactions. Cash 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 Owned Container 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. Gross lease revenue is largely dependent upon the timely collections of
lease revenues from shipping lines. At September 30, 2004, the amounts due
from lessees was $27.2 million representing an increase of $4.4 million from
the position at December 31, 2003. This increase is entirely due to the
increase in the amounts billed for gross lease revenue and disposal proceeds in
2004. 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 always 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. At September 30, 2004, the Group held $21 million of
container equipment for resale to Managed Container Programs, including the
Joint Venture Program. This represented a $10.2 million increase over the
position at December 31, 2003, and was due to the strong demand for leased
containers, an increase in the number of Managed Container Programs seeking to
invest in container equipment and an increase in the level of funding available
to programs such as the Joint Venture Program. 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 surplus cash balances to make short-term debt
repayments and thereby reduce interest expense. Such amounts may be redrawn at
a later date for operating activities and other purposes. Traditionally, Cronos has utilized funding from each of its reportable
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 provide flexible financing
structures 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 September 30, 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 for the
preceding twelve month period and to maintain the current portion of borrowings
within financial covenant limits. The breach of a covenant constitutes an
event of default. Under the
terms of certain loan facilities, the Group is required to hold
minimum balances on deposit in restricted cash accounts. The calculation of
the minimum balance is based on projected future interest payments and the
balance required will usually increase in line with the loan balances. The
accounts would be utilized in the event that adequate funds were not available
to meet the scheduled debt service payments. 26




---



##### Table of Contents



The Cronos Group At September 30, 2004, the Group had $132.8 million of available container
borrowing facilities under which $125.5 million was outstanding. In addition,
the Group had $2 million of unutilized credit facilities which are available,
if required, for operating activities. 27




---



##### Table of Contents



The Cronos Group 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. In September 2004, the Revolving Credit
Facility was amended to the effect that the revolving credit period was
extended to September 23, 2005, and unless the revolving credit period is
extended on that date, the balance outstanding as of September 23, 2005, will
be repaid over five years. The maximum commitment of the lenders under the
Revolving Credit Facility is $70 million. At September 30, 2004, the balance
outstanding under the Revolving Credit Facility was $67.8 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 the revolving credit period is not renewed on an
annual basis or if the Group cannot provide the 20% cash required for new
container acquisitions. The Group makes monthly repayments under the Revolving
Credit Facility and, from time to time, may sell equipment that has been
financed by the facility to Managed Container Programs. Any such reductions to
the facility may be redrawn to fund the acquisition of new equipment subject to
the satisfaction of certain conditions relating to the maintenance of minimum
collateral levels. Container Equity Programs: The Joint Venture Program has been a major
source of Managed Container Program funding since its inception in 2002. In
June 2004, the lenders to the Joint Venture Program increased their maximum
debt commitment from $80 million to $150 million. The Joint Venture Program
was established in September 2002 and is 50% owned by a subsidiary of the Group
and 50% owned by a major international financial services provider. The
purpose of the program is to acquire and lease marine cargo containers to
third-party lessees with the lenders providing up to 80% of the cost of
acquiring the containers and the joint venture partners each providing one-half
of the equity to fund the balance of the capital requirements of the program.
In the first nine months of 2004, the balance of the Cronos investment in the
Joint Venture Program increased from $8.6 million to $13.4 million representing
additional equity contributions totalling $2.8 million and equity in earnings
of the program of $2 million. At September 30, 2004, the Joint Venture Program
had capacity for an additional $80 million of new equipment. Additional debt
and equity funding is subject to annual review and 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. In the third quarter of 2004, a new US Limited Partnership Program
acquired $2.3 million of new container equipment from the Group. The program
is designed to raise a maximum of $25 million of proceeds from limited partners
and may also seek to augment the size of its container fleet by financing the
purchase of additional equipment under loan facilities secured from commercial
lenders. Other Managed Container Programs: In the first nine months of 2004, the
Group sold $11 million of equipment to container owners in this reportable
segment. 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. In November 2004, the Group amended the terms of a fixed payment term
agreement with an Other Managed Container Owner which accounted for
approximately $4 million of the minimum annual lease payments detailed in Note
12 in the notes to the consolidated unaudited financial statements herein. The
amended agreement, which is effective from October 2004, will be accounted for
as a capital lease obligation, for which Cronos has provided a parent company
guarantee, and accordingly the Group will record an adjustment to container
equipment and capital lease obligations for an amount of approximately $3.2
million in the fourth quarter of 2004. 28




---



##### Table of Contents



The Cronos Group Cash Flow Statements for the Nine Months ended September 30, 2004 and 2003 Operating Activities:Net cash provided by operating activities of $18.4
million for the nine months ended September 30, 2004, was unchanged when
compared to the corresponding period of 2003. An increase in the amount
collected from lessees in the first nine months of 2004 was partially offset by
the related increase in payments to Managed Container Programs and increased
expenditure for selling, general and administrative expenses. The increased
expenditure for selling, general and administrative expenses included a $0.6
million total increase in payments for manpower and audit costs that were
accrued in the prior year. In addition, the cash provided by operating
activities for the nine months ended September 30, 2003, included the receipt
of $0.7 million from a customer under an equipment trading transaction that was
held until the manufacturer payment date in the fourth quarter of 2003. In the
first nine months of 2004, proceeds realized on the transfer of equipment for
resale to Managed Container Programs were utilized to make the related payments
to container manufacturers. Net cash provided by operating activities during
the nine month period ended September 30, 2003, included cash generated on the
sale of $8.9 million of container equipment purchased for resale to Managed
Container Owners. The proceeds were utilized to pay the related liability to
container manufacturers. Investing Activities:Net cash used in investing activities in the nine
months ended September 30, 2004, was $17.5 million. The Group paid $25.8
million for new equipment of which $5 million was sold to a Managed Container
Program during the first quarter of 2004. The Group realized a further $6.2
million on the disposal of equipment at the end of its economic life, the
proceeds of which were utilized primarily to repay related outstanding balances
on debt and capital lease obligation facilities. The Group made $2.8 million
of contributions to the Joint Venture Program in the first nine months of 2004.
Net cash used in investing activities for the same period in 2003 was $6.8
million. Proceeds from the sale of fixed assets of $8.7 million, which
included the sale of $4.6 million of refrigerated equipment to the Joint
Venture Program, were more than offset by equipment acquisitions of $13.8
million and an equity investment of $1.7 million in the Joint Venture Program. Financing Activities:Net cash provided by financing activities was $0.5
million in the nine months ended September 30, 2004. During this period, the
Group utilized $23.9 million of debt and capital lease obligation facilities to
fund equipment acquisitions. The Group made $22.4 million of principal
repayments, comprising a paydown of approximately $5 million from funds
received on the equipment sale to the Managed Container Program in the first
quarter of 2004, $7.8 million of scheduled repayments and a further $9.6
million of payments, including short-term prepayments of debt using surplus
cash balances to reduce interest expense. The Group also made dividend
payments totalling $0.5 during this period. Net cash used in financing
activities was $12.9 million during the nine months ended September 30, 2003.
During this period, the Group utilized $15 million of additional borrowings to
finance the acquisition of new container equipment. However, this was more
than offset by debt and capital lease repayments of $27.3 million. The debt
repayments included $13 million of paydowns resulting from the reduction of a
revolving credit loan facility with both surplus cash balances and from cash
realized on container equipment sales. In addition, the Group made dividend
payments of $0.4 million and repurchased $0.3 million of shares. 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 September 30, 2004, the Group
owed container manufacturers $23.2 million for equipment. The Group intends to
fund $2.6 million of this equipment utilizing new and existing debt and capital
lease facilities, $18.7 million from sales to Container Equity Programs and
$1.9 million will be sold to Other Managed Container Programs. In addition, the Group had outstanding orders to purchase container
equipment of $18.5 million at September 30, 2004. Of this amount, the Group
has an agreement to sell $14.4 million to the Joint Venture Program and $1.2
million to a third-party under an equipment trading transaction. The remaining
$2.9 million will be financed by the Group using existing container funding
facilities and cash. 29




---



##### Table of Contents



The Cronos Group On November 11, 2004, the board of directors of the Company declared a
dividend of 10 cents per common share, payable 5 cents per common share on
January 10, 2005, for the fourth quarter of 2004 to shareholders of record as
of the close of business on December 22, 2004, and 5 cents per common share on
April 15, 2005, for the first quarter of 2005 to shareholders of record as of
the close of business on March 24, 2005. 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 judgments
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. 
 Item 3  Quantitative and Qualitative Disclosures about Market Risk Interest rate risk:Outstanding borrowings are subject to interest rate
risk. Almost 100% of total borrowings had floating interest rates at September
30, 2004. The Group conducted an analysis of borrowings outstanding at
September 30, 2004, and found that if a 10% increase were applied to variable
interest rates, the effect would be to reduce annual cash flows by $0.3
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 and
incurred in various denominations and thus are not suitable for cost effective
hedging. By reference to the non US dollar costs incurred in 2003, the Company
estimated that every 10% decline in the value of the US dollar against various
foreign currencies, would reduce annual cash flows by $0.9 million. 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 30




---



##### Table of Contents



The Cronos Group 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. 31




---



##### Table of Contents



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 defended 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 the Settlement Agreement. The Group has secured two judgments against Stefan M. Palatin, a former
chairman of the Company, from the UK courts aggregating approximately $2.3
million, and 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 first charging order secured by Cronos was in respect of the remaining
balance, and related interest, owed under a loan note by Mr. Palatin for which
the Group has provided against in full in prior years. The second charging
order was secured in respect of additional amounts owed by Mr. Palatin for
which the Group has not recorded a receivable. 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 for the Amersham Estate to satisfy the judgments secured against Mr.
Palatin. On June 25, 2004, the High Court of Justice, London, entered its
order, upon the application of the Group, granting the Group possession of the
Amersham Estate, and directing that the Estate be sold and the net proceeds of
sale applied in satisfaction of the Cronos Charging Orders, aggregating $2.3
million. The Court also awarded the Group interest on this sum from July 8,
2003, and costs of approximately $0.1 million. The Group is currently
marketing the Amersham Estate for sale. The Group will not recognize a gain in respect of the foreclosure sale of
the Amersham Estate until such time as the sale has been consumated and all
contingencies requisite to the distribution of funds to the Group have been
settled. Under the Settlement Agreement, Contrin agreed to file a civil action
against Mr. Palatin to recover $2.6 million, plus interest and costs, for
monies diverted by Mr. Palatin from Contrin in 1994. Contrin filed its civil
action against Mr. Palatin in Austria for recovery of these sums on November
28, 2003. On June 23, 2004, Contrin secured a freezing injunction from the
High Court of Justice, London, in aid of a parallel action Contrin has filed in
the UK courts seeking a judgment against Mr. Palatin for recovery of the $2.6
million, plus interest and costs, from the Amersham Estate. The effect of the
freezing injunction is to place a lien on proceeds from the foreclosure and
sale of the Amersham Estate in excess of those amounts necessary to satisfy the
Cronos Charging Orders. Under the Settlement Agreement between the Group and Contrin, the parties
agree that the first $4.85 million of net foreclosure proceeds (the Net
Foreclosure Proceeds) from the sale of the Amersham Estate and attributable to
the Cronos Charging Orders and any lien secured by Contrin against the Amersham
Estate be allocated and paid to Contrin (not the Group), with the balance of
the Net Foreclosure Proceeds allocated and paid to the Group provided that the
total payments to the Group may not exceed the total amount of the Cronos
Charging Orders, the related interest and costs. Under the Settlement Agreement, the Group has made installment payments to
Contrin of $0.550 million. The next installment payment of $0.450 million is
due on or before January 3, 2005. These payments reduce the amounts otherwise
payable to Contrin under the Settlement Agreement. However, pursuant to the
Settlement Agreement, if the Net Foreclosure Proceeds of the sale of the
Amersham Estate in satisfaction of the Cronos Charging Orders and any lien
secured by Contrin against the Amersham Estate total less than $3.5 million,
then the Group is required to make up the difference between the $3.5 million
and the sum of amounts received by Contrin from the sale of the Amersham Estate
and the installment payments previously made by the Group to Contrin by the
third anniversary of the effective date of the settlement (December 17, 2006). 32




---



##### Table of Contents



The Cronos Group 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
valued the Amersham Estate within the range of 3 million British pounds to
4 million British pounds (at September 30, 2004 exchange rates, the
equivalent of approximately $5.4 million to $7.2 million). There can be no
assurance that the sales price the Group will realize from its sale of the
Amersham Estate will exceed (or equal) the valuation of the estate within the
range of 3 million British pounds to 4 million British pounds. 
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds Not applicable 
 Item 3  Defaults Upon Senior Securities Not applicable 
 Item 4  Submission of Matters to a Vote of Security Holders Not applicable 
 Item 5  Other Information Not applicable 
 Item 6  Exhibits and Reports on Form 8-K (a)
    
    ExhibitsNumber
    
    Exhibit10.1
    
    Amendment No. 1, dated as of September 23, 2004, to the Second
Amended and Restated Loan Agreement, dated as of September 23,
2003, by and between Cronos Finance (Bermuda) Limited, Fortis Bank
(Nederland) N.V., Hollandsche Bank-Unie N.V. and NIB Capital Bank
N.V.31.1
    
    Rule 13a-14 Certification31.2
    
    Rule 13a-14 Certification32.1
    
    Section 1350 Certifications.(b)
    
    Reports on Form 8-KNone
 33




---



##### Table of Contents



The Cronos Group 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
      Peter J. Younger
    
    Director, Chief Operating Officer,
Chief Financial Officer and
Chief Accounting Officer
(Principal Financial and Accounting Officer)
    
    November 15, 2004
 34




---



##### Table of Contents



The Cronos Group Exhibit Index Number
    
    Exhibit
    
    Page10.1
    
    Amendment No. 1, dated as of September 23, 2004, to the
Second Amended and Restated Loan Agreement, dated as of
September 23, 2003, by and between Cronos Finance
(Bermuda) Limited, Fortis Bank (Nederland) N.V.,
Hollandsche Bank-Unie N.V. and NIB Capital Bank N.V.
    
    E131.1
    
    Rule 13a-14 Certification
    
    E831.2
    
    Rule 13a-14 Certification
    
    E932.1
    
    Certification pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. *
    
    E10
    35