##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2004 OR  [  ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from: ______________ to _______________ Commission file number:       0-24464 THE CRONOS GROUP  LUXEMBOURG
    
    NOT APPLICABLE(State or other Jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 16, ALLÉE MARCONI, BOÎTE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices)(zip code) Registrants telephone number, including area codes:
(352) 453145   Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [   ] No
[X] Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X]      NO [   ] The number of Common Shares outstanding as of August 13, 2004 : Class
    
    Number of Shares OutstandingCommon
    
    
    7,260,080




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##### Table of Contents



THE CRONOS GROUP TABLE OF CONTENTS PART I  FINANCIAL INFORMATION
    
    
    1Item 1  Financial Statements
    
    
    1Management Representation
    
    
    1Condensed Unaudited Consolidated Statements of Income
    
    
    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
    
    
    15General
    
    
    15Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
    
    
    20Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
    
    
    20Liquidity and Capital Resources
    
    
    25Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4  Controls and Procedures
    
    
    30PART II  OTHER INFORMATION
    
    
    31Item 1  Legal Proceedings
    
    
    31Item 2  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    32Item 3  Defaults Upon Senior Securities
    
    
    32Item 4  Submission of Matters to a Vote of Security Holders
    
    
    33Item 5  Other Information
    
    
    36Item 6  Exhibits and Reports on Form 8-K
    
    
    36Exhibit Index
    
    
    37EXHIBIT 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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




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THE CRONOS GROUP (US dollar amounts in thousands, except
per share amounts) 
 Condensed Unaudited Consolidated Statements of Income Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    RestatedGross lease revenue
    
    $
    32,112
    
    
    $
    28,626
    
    
    $
    63,015
    
    
    $
    57,379Equipment trading revenue
    
    
    798
    
    
    
    790
    
    
    
    3,374
    
    
    
    1,445Commissions, fees and other income:- Container Equity Programs
    
    
    227
    
    
    
    276
    
    
    
    450
    
    
    
    557- Unrelated parties
    
    
    890
    
    
    
    818
    
    
    
    1,224
    
    
    
    1,591Total revenues
    
    
    34,027
    
    
    
    30,510
    
    
    
    68,063
    
    
    
    60,972Direct operating expenses
    
    
    4,951
    
    
    
    7,206
    
    
    
    11,959
    
    
    
    12,891Payments to Managed Container Programs:- Container Equity Programs
    
    
    7,745
    
    
    
    5,072
    
    
    
    14,235
    
    
    
    10,537- Other Managed Container Programs
    
    
    8,965
    
    
    
    7,622
    
    
    
    16,917
    
    
    
    16,048Equipment trading expenses
    
    
    503
    
    
    
    738
    
    
    
    2,799
    
    
    
    1,308Depreciation and amortization
    
    
    4,671
    
    
    
    4,353
    
    
    
    8,965
    
    
    
    8,891Selling, general and administrative expenses
    
    
    4,336
    
    
    
    3,777
    
    
    
    8,578
    
    
    
    7,608Interest expense
    
    
    1,194
    
    
    
    1,324
    
    
    
    2,348
    
    
    
    2,817Total expenses
    
    
    32,365
    
    
    
    30,092
    
    
    
    65,801
    
    
    
    60,100Income before income taxes and equity in earnings of affiliate
    
    
    1,662
    
    
    
    418
    
    
    
    2,262
    
    
    
    872Income taxes
    
    
    (249
    )
    
    
    (295
    )
    
    
    (592
    )
    
    
    (466
    )Equity in earnings of unconsolidated affiliate
    
    
    657
    
    
    
    296
    
    
    
    1,189
    
    
    
    512Net income
    
    
    2,070
    
    
    
    419
    
    
    
    2,859
    
    
    
    918Other comprehensive income (loss):- change in fair value of forward exchange contracts, net of tax
    
    
    54
    
    
    
    
    
    
    
    325
    
    
    
    - change in fair value of derivatives held by affiliate, net of tax
    
    
    68
    
    
    
    
    
    
    
    (169
    )
    
    
    Comprehensive income
    
    $
    2,192
    
    
    $
    419
    
    
    $
    3,015
    
    
    $
    918Basic net income per common share
    
    $
    0.29
    
    
    $
    0.06
    
    
    $
    0.39
    
    
    $
    0.13Diluted net income per common share
    
    $
    0.27
    
    
    $
    0.06
    
    
    $
    0.37
    
    
    $
    0.12
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 2




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THE CRONOS GROUP (US dollar amounts in thousands, except
per share amounts) 
 Condensed Unaudited Consolidated Balance Sheets June 30,
    
    December 31,2004
    
    2003AssetsCash and cash equivalents
    
    $
    8,781
    
    
    $
    8,432Restricted cash
    
    
    1,407
    
    
    
    1,033Amounts due from lessees, net
    
    
    24,939
    
    
    
    22,766Amounts receivable from Managed Container Programs
    
    
    2,738
    
    
    
    3,399New container equipment for resale
    
    
    25,594
    
    
    
    10,816Net investment in direct financing leases
    
    
    7,608
    
    
    
    8,376Investments
    
    
    10,649
    
    
    
    8,570Container equipment, net
    
    
    160,325
    
    
    
    155,504Other equipment, net
    
    
    700
    
    
    
    604Goodwill, net
    
    
    11,038
    
    
    
    11,038Other intangible assets, net
    
    
    627
    
    
    
    721Other assets
    
    
    6,147
    
    
    
    6,778Total assets
    
    $
    260,553
    
    
    $
    238,037Liabilities and shareholders equityAmounts payable to Managed Container Programs
    
    $
    19,444
    
    
    $
    17,643Amounts payable to container manufacturers
    
    
    35,218
    
    
    
    17,312Direct operating expense payables and accruals
    
    
    4,058
    
    
    
    5,269Other amounts payable and accrued expenses
    
    
    7,642
    
    
    
    8,489Debt and capital lease obligations
    
    
    121,170
    
    
    
    119,205Current and deferred income taxes
    
    
    2,934
    
    
    
    2,981Deferred income and unamortized acquisition fees
    
    
    5,250
    
    
    
    5,105Total liabilities
    
    
    195,716
    
    
    
    176,004Shareholders equityCommon shares issued and outstanding (7,372,080 shares)
    
    
    14,744
    
    
    
    14,744Additional paid-in capital
    
    
    46,341
    
    
    
    46,552Common shares held in treasury (112,000 shares)
    
    
    (297
    )
    
    
    (297
    )Accumulated other comprehensive loss
    
    
    (250
    )
    
    
    (406
    )Restricted retained earnings
    
    
    1,832
    
    
    
    1,832Retained earnings (accumulated deficit)
    
    
    2,467
    
    
    
    (392
    )Total shareholders equity
    
    
    64,837
    
    
    
    62,033Total liabilities and shareholders equity
    
    $
    260,553
    
    
    $
    238,037
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 3




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THE CRONOS GROUP (US dollar amounts in thousands, except
per share amounts) 
 Condensed Unaudited Consolidated Statements of Cash Flows Six Months EndedJune 30,2004
    
    2003RestatedNet cash provided by operating activities
    
    $
    11,539
    
    
    $
    11,378Cash flows from investing activitiesPurchase of container and other equipment
    
    
    (19,068
    )
    
    
    (7,807
    )Investment in unconsolidated affiliate
    
    
    (890
    )
    
    
    (475
    )Investment in equipment acquired for direct financing lease
    
    
    (373
    )
    
    
    (283
    )Proceeds from sales of container and other equipment
    
    
    8,757
    
    
    
    7,714Net cash used in investing activities
    
    
    (11,574
    )
    
    
    (851
    )Cash flows from financing activitiesProceeds from issuance of term debt
    
    
    18,962
    
    
    
    8,636Repayments of term debt and capital lease obligations
    
    
    (17,914
    )
    
    
    (19,141
    )Dividend paid
    
    
    (290
    )
    
    
    (294
    )Restricted cash
    
    
    (374
    )
    
    
    41Net cash provided by (used in) financing activities
    
    
    384
    
    
    
    (10,758
    )Net increase (decrease) in cash and cash equivalents
    
    
    349
    
    
    
    (231
    )Cash and cash equivalents at beginning of period
    
    
    8,432
    
    
    
    5,626Cash and cash equivalents at end of period
    
    $
    8,781
    
    
    $
    5,395Supplementary disclosure of cash flow information:Cash paid during the period for:- interest
    
    $
    1,955
    
    
    $
    2,375- income taxes
    
    
    799
    
    
    
    756Cash received during the period for:- interest
    
    
    10
    
    
    
    146- income taxes
    
    
    
    
    
    
    60Non-cash activities:- container equipment acquired under capital lease
    
    
    917
    
    
    
    - 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




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THE CRONOS GROUP (US dollar amounts in thousands, except
per share amounts) 
 Consolidated Unaudited Statement of Shareholders Equity Six months ended June 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,859
    
    
    
    2,859Amortization of
employee
share grant
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Declaration of dividend
    
    
    
    
    
    
    (215
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (215
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    156Balance,
June 30, 2004
    
    $
    14,744
    
    
    $
    46,341
    
    
    $
    (297
    )
    
    $
    (250
    )
    
    $
    1,832
    
    
    $
    2,467
    
    
    $
    64,837
 The accompanying notes are an integral part of these condensed unaudited
consolidated financial statements. 5




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THE CRONOS GROUP (US dollar amounts in thousands, except per share amounts) 
 Notes to the Condensed Unaudited Consolidated Financial Statements 1. The condensed unaudited consolidated financial statements include the
accounts of The Cronos Group and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. Investments in
which the Group does not own a majority interest or otherwise control or have
the ability to assert significant influence over the investee have been
accounted for under the equity method of accounting. 2. Restatement of previously issued condensed unaudited consolidated
financial statements 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. June 30, 2003Three
    
    Sixmonths
    
    monthsended
    
    endedFinancial data for the period ended June 30, 2003Total revenues as previously reported
    
    $
    30,804
    
    
    $
    61,482- adjustment for effect of change in accounting principle / reclassification
    
    
    (294
    )
    
    
    (510
    )Total revenues restated
    
    $
    30,510
    
    
    $
    60,972Net income as previously reported
    
    $
    509
    
    
    $
    978- adjustment for effect of change in accounting principle
    
    
    (90
    )
    
    
    (60
    )Net income restated
    
    $
    419
    
    
    $
    918Basic and diluted net income per common share as previously reported
    
    $
    0.06
    
    
    $
    0.13- adjustment for effect of change in accounting principle
    
    
    
    
    
    
    Basic and diluted net income per common share restated
    
    $
    0.06
    
    
    $
    0.12
 3. Stock-Based Compensation The Group has adopted disclosure requirements under Statement of Financial
Accounting Standards (SFAS) No. 123  Accounting for Stock-Based
Compensation (SFAS 123) and SFAS No. 148  Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS 148), but continues to
account for stock-based compensation under Accounting Principles Board Opinion
(APB) No. 25  Accounting for Stock Issued to Employees (APB 25). Under
APB 25, compensation expense is measured as the amount by which the quoted
market price of the stock at the date of the grant or award exceeds the
exercise price, if any, to be paid by an employee and is recognized as expense
over the period in which the related services are performed. In accordance
with SFAS 123, the Company discloses the fair value of its stock options, which
is calculated based on the Black Scholes option-pricing model. 6




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THE CRONOS GROUP (US dollar amounts in thousands, except per share amounts) If the stock options had been accounted for under a fair value based
method of accounting, the impact on the Groups net income and net income per
share would have been as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    RestatedNet income:- as reported
    
    $
    2,070
    
    
    $
    419
    
    
    $
    2,859
    
    
    $
    918- add stock-based compensation expense included in
reported
net income, net of related tax effects
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    6- deduct stock-based compensation expense computed in
accordance with SFAS 123, net of tax effects
    
    
    (6
    )
    
    
    (32
    )
    
    
    (18
    )
    
    
    (90
    )- pro forma
    
    $
    2,065
    
    
    $
    390
    
    
    $
    2,842
    
    
    $
    834Basic net income per share:- as reported
    
    $
    0.29
    
    
    $
    0.06
    
    
    $
    0.39
    
    
    $
    0.13- pro forma
    
    $
    0.28
    
    
    $
    0.05
    
    
    $
    0.39
    
    
    $
    0.11Diluted net income per share:- as reported
    
    $
    0.27
    
    
    $
    0.06
    
    
    $
    0.37
    
    
    $
    0.12- pro forma
    
    $
    0.27
    
    
    $
    0.05
    
    
    $
    0.37
    
    
    $
    0.11
 7




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THE CRONOS GROUP (US dollar amounts in thousands, except per share amounts) 4. Operating segment data Segment information is provided in the tables below: OtherContainer
    
    ManagedEquity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    Containers
    
    TotalThree months ended June 30, 2004- gross lease revenue
    
    $
    10,455
    
    
    $
    11,767
    
    
    $
    9,890
    
    
    $
    32,112- direct operating expenses
    
    
    (1,489
    )
    
    
    (1,978
    )
    
    
    (1,484
    )
    
    
    (4,951
    )- net lease revenue
    
    
    8,966
    
    
    
    9,789
    
    
    
    8,406
    
    
    
    27,161- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    392- payments to Managed Container Programs
    
    
    (7,745
    )
    
    
    (8,965
    )
    
    
    
    
    
    
    (16,710
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,517
    )
    
    
    (4,517
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,168
    )
    
    
    (1,168
    )Segment profit
    
    $
    1,221
    
    
    $
    824
    
    
    $
    3,113
    
    
    $
    5,158Segment assets at end of period
    
    $
    22,972
    
    
    $
    13,743
    
    
    $
    223,838
    
    
    $
    260,553Three months ended June 30, 2003, restated- gross lease revenue
    
    $
    8,505
    
    
    $
    11,031
    
    
    $
    9,090
    
    
    $
    28,626- direct operating expenses
    
    
    (2,265
    )
    
    
    (3,053
    )
    
    
    (1,888
    )
    
    
    (7,206
    )- net lease revenue
    
    
    6,240
    
    
    
    7,978
    
    
    
    7,202
    
    
    
    21,420- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    354- payments to Managed Container Programs
    
    
    (5,072
    )
    
    
    (7,622
    )
    
    
    
    
    
    
    (12,694
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,247
    )
    
    
    (4,247
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,324
    )
    
    
    (1,324
    )Segment profit
    
    $
    1,168
    
    
    $
    356
    
    
    $
    1,985
    
    
    $
    3,509Segment assets at end of period
    
    $
    18,230
    
    
    $
    11,436
    
    
    $
    210,036
    
    
    $
    239,702Six months ended June 30, 2004- gross lease revenue
    
    $
    20,266
    
    
    $
    23,099
    
    
    $
    19,650
    
    
    $
    63,015- direct operating expenses
    
    
    (3,620
    )
    
    
    (5,038
    )
    
    
    (3,301
    )
    
    
    (11,959
    )- net lease revenue
    
    
    16,646
    
    
    
    18,061
    
    
    
    16,349
    
    
    
    51,056- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    774
    
    
    
    774- payments to Managed Container Programs
    
    
    (14,235
    )
    
    
    (16,917
    )
    
    
    
    
    
    
    (31,152
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (8,711
    )
    
    
    (8,711
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (2,292
    )
    
    
    (2,292
    )Segment profit
    
    $
    2,411
    
    
    $
    1,144
    
    
    $
    6,120
    
    
    $
    9,675Segment assets at end of period
    
    $
    22,972
    
    
    $
    13,743
    
    
    $
    223,838
    
    
    $
    260,553
 8




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##### Table of Contents



THE CRONOS GROUP (US dollar amounts in thousands, except per share amounts) OtherContainer
    
    ManagedEquity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    Containers
    
    TotalSix months ended June 30, 2003, restated- gross lease revenue
    
    $
    16,563
    
    
    $
    22,371
    
    
    $
    18,445
    
    
    $
    57,379- direct operating expenses
    
    
    (3,935
    )
    
    
    (5,628
    )
    
    
    (3,328
    )
    
    
    (12,891
    )- net lease revenue
    
    
    12,628
    
    
    
    16,743
    
    
    
    15,117
    
    
    
    44,488- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    706
    
    
    
    706- payments to Managed Container Programs
    
    
    (10,537
    )
    
    
    (16,048
    )
    
    
    
    
    
    
    (26,585
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (8,689
    )
    
    
    (8,689
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (2,810
    )
    
    
    (2,810
    )Segment profit
    
    $
    2,091
    
    
    $
    695
    
    
    $
    4,324
    
    
    $
    7,110Segment assets at end of period
    
    $
    18,230
    
    
    $
    11,436
    
    
    $
    210,036
    
    
    $
    239,702
 Reconciliation of profit for reportable segments to income before income taxes
and equity in earnings of affiliate: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    
    
    RestatedSegment profit
    
    $
    5,158
    
    
    $
    3,509
    
    
    $
    9,675
    
    
    $
    7,110Equipment trading revenue
    
    
    798
    
    
    
    790
    
    
    
    3,374
    
    
    
    1,445Unallocated commissions, fees and other income
    
    
    725
    
    
    
    740
    
    
    
    900
    
    
    
    1,442Equipment trading expenses
    
    
    (503
    )
    
    
    (738
    )
    
    
    (2,799
    )
    
    
    (1,308
    )Amortization of intangible assets
    
    
    (47
    )
    
    
    (47
    )
    
    
    (94
    )
    
    
    (94
    )Non container depreciation
    
    
    (107
    )
    
    
    (59
    )
    
    
    (160
    )
    
    
    (108
    )Selling, general and administrative expenses
    
    
    (4,336
    )
    
    
    (3,777
    )
    
    
    (8,578
    )
    
    
    (7,608
    )Non container interest expense
    
    
    (26
    )
    
    
    
    
    
    
    (56
    )
    
    
    (7
    )Income before income taxes and equity in
earnings in affiliate
    
    $
    1,662
    
    
    $
    418
    
    
    $
    2,262
    
    
    $
    872
 9




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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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Restated
    
    
    
    
    
    RestatedNet income available for common shareholders
    
    $
    2,070
    
    
    $
    419
    
    
    $
    2,859
    
    
    $
    918Average outstanding shares of common stock
    
    
    7,260,080
    
    
    
    7,360,080
    
    
    
    7,260,080
    
    
    
    7,360,080Dilutive effect of:- 1998 stock option plan
    
    
    95,488
    
    
    
    
    
    
    
    82,354
    
    
    
    - warrants
    
    
    62,568
    
    
    
    
    
    
    
    53,742
    
    
    
    - 1999 stock option plan
    
    
    101,786
    
    
    
    
    
    
    
    111,660
    
    
    
    - non-Employee Directors Equity Plan
    
    
    154,956
    
    
    
    94,494
    
    
    
    147,625
    
    
    
    94,494Common stock and common stock equivalents
    
    
    7,674,878
    
    
    
    7,454,574
    
    
    
    7,655,461
    
    
    
    7,454,574Basic net income per share
    
    $
    0.29
    
    
    $
    0.06
    
    
    $
    0.39
    
    
    $
    0.13Diluted net income per share
    
    $
    0.27
    
    
    $
    0.06
    
    
    $
    0.37
    
    
    $
    0.12
 As at June 30, 2003, options to acquire 1,180,504 shares were outstanding
with a weighted average exercise price of $4.68 each but were not included in
the computation of diluted net income per share because the options exercise
price was greater than the average market price of the common shares. At June
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




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THE CRONOS GROUP 6. Amounts receivable from Managed Container Programs Amounts receivable from Managed Container Programs include amounts due
from related parties of $2.7 million and $3.4 million at June 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 eight US limited partnership programs (the
US Limited Partnership Programs). In accordance with FIN 46R, the Company
has determined that the eight limited partnerships qualify as variable interest
entities. In each case, the Company has concluded that neither the Company,
nor any of its subsidiaries, is the primary beneficiary of any US Limited
Partnership Program. The partnerships are all California limited partnerships managed by Cronos
Capital Corp., a subsidiary of the Company. Between 1979 and 1997, sixteen
public limited partnerships raised over $478 million from over 37,000
investors. Eight of the original sixteen partnerships have now been dissolved.
These general partner investments are accounted for using the equity method. The 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 the individual
partnerships. At June 30, 2004, the US Limited Partnership Programs had total
assets of $115.7 million and total liabilities of $4.2 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 for any additional
contributions required. 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 June 30, 2004, and December 31, 2003, was
$2.7 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 June 30, 2004, the Joint Venture Program had total assets of $92.2 million
and total liabilities of $71 million. For the six months ended June 30, 2004,
the Joint Venture Program reported total revenues of $7.1 million and net
income of $2.4 million. The maximum exposure for Cronos to losses as a result
of its involvement with the Joint Venture Program at June 30,
2004, and December 31, 2003, was $10.8
million and $8.7 million respectively, representing the total of its equity investment in the Joint Venture
Program and the management fees due from the program. 11




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THE CRONOS GROUP 8. Container equipment Container equipment is net of accumulated depreciation of $117.5 million
and $115.5 million at June 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 six months ended June 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 $10.4 million and $9.3 million at June 30, 2004, and
December 31, 2003, respectively. 11. Debt and capital lease obligations Debt and capital lease obligations are secured by container equipment and
include amounts due within twelve months of $12.1 million and $12.8 million at
June 30, 2004, and December 31, 2003, respectively. Interest rates under these
facilities range from 3.4% to 4%, 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 $56.9 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 June 2004 interest rates, the maximum potential amount of
future payments for the guaranteed debt and capital lease facilities is $61.1
million. At June 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
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. 12




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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 June 30, 2004, the Group had outstanding orders to purchase $22.3
million of container equipment. ii. Guarantee to US Limited Partnership During 2000, the Group provided a guarantee under a $5 million third-party
loan note (the Note) with a 2006 maturity date, to a US Limited Partnership
Program. Under the terms of the guarantee, the Group may be liable for any
principal and interest outstanding under the terms of the Note in the event of
a default by the US Limited Partnership Program. At June 30, 2004, the balance
outstanding under the Note was $1.7 million, the maximum potential amount of
future payments was $1.8 million and the fair value of the Note was $1.7
million. The Group has not recorded a liability for its obligation under the
guarantee. iii. Parent Guarantee under Agreements with Other Managed Container Programs The Company has provided parent guarantees for certain agreements between
wholly owned subsidiaries of the Company and Managed Container Programs. The
agreements are in the form of a master lease and provide that the subsidiary
companies make payments to the Managed Container Programs based on 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 June 30, 2004, was $4.5 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 $4.5 million payable at June 2004, the Company estimates that the
maximum amount of future payments would be $82.7 million. The fair value of
the estimated amount of maximum future payments is $67.7 million. 13




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THE CRONOS GROUP iv. Guarantees under fixed non-cancellable operating leases Certain subsidiaries of the Group have fixed operating lease agreements
for container equipment with Other Managed Container Programs. The Company has
provided parent company guarantees for the $36 million of minimum future lease
payments outstanding under these agreements at June 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 June 30, 2004, the future minimum annual lease payments
under these non-cancellable operating leases were: US dollar amounts in thousands2004
    
    $
    8,0022005
    
    
    9,0702006
    
    
    2,5572007
    
    
    2,5572008
    
    
    2,5572009 and thereafter
    
    
    11,225Total
    
    $
    35,968
 v. 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 June 30, 2004, approximately 44% (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. vi. Agreements with Other Managed Container Programs  change of control
provisions Approximately 65% (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 29% of container owners 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. 14




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THE CRONOS GROUP vii. Contrin Settlement Since 1983, the Group has managed containers for Austrian investment
entities collectively known as Contrin. As the Group has previously
reported, since August 2000 the Group has 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 legal proceedings against its former
chairman, Stefan M. Palatin. viii. 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 June 30, 2004, only 20 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.
The Group expects to wind up its involvement with the two TOEMTs without
material cost to the Group, but is unable to predict at this time whether its
discussions with the liquidator will be successful. 
 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 half of
2004, 89% 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 11% of payments to Managed Container Programs represented
agreements under which there were 15




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THE CRONOS GROUP 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. 16




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##### Table of Contents



THE CRONOS GROUP Market Overview The general increase in trade volumes that emerged during the three-month
period ending March 31, 2004, continued during the three-month period ending
June 30, 2004, contributing to stronger container leasing market conditions and
higher levels of demand for new and existing containers. Industry analysts
predict that demand for leased containers will remain strong for the remainder
of 2004. Cronos does not expect any substantial reduction in its fleet
utilization level over this period. The following table summarizes the combined utilization of the Cronos
container fleet at each of the dates indicated (based on approximate original
equipment cost). June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003Utilization
    
    
    92
    %
    
    
    89
    %
    
    
    85
    %
 The six-month period ending June 30, 2004 experienced substantial growth
in container trade volumes, especially within Asia-Europe and intra-Asian trade
routes. Chinas import and export markets were a catalyst to this growth.
These increases in trade volumes created port congestion in certain areas
thereby increasing the turnaround time for containers. 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. Although container manufacturers stepped up production in the first half
of 2004 in order to meet the increased container demand by shipping lines,
production of new containers was hampered somewhat by steel shortages earlier
in the year, contributing to stronger market conditions for leased containers.
As steel prices increased, the price of a new twenty-foot dry cargo container
also increased to as high as $2,000 in the first and second quarters of 2004,
compared to $1,350 in the latter part of 2003. Steel prices have fallen in recent months in response to the
implementation of a number of new policies by the Chinese government including
credit tightening measures. Container manufacturers report that the steel
supply pressures that were experienced in the first quarter of 2004 have begun
to ease. However, the high level of demand for new container equipment means
that there is unlikely to be a major change in the price of new containers in
the near future. The major container manufacturers report full order books
until the end of September 2004. Cronos has booked space with the container
manufacturers for all of its production requirements until the end of the third
quarter. Per-diem rates for new containers have increased in line with the increase
in new container costs thereby eliminating any adverse impact on profitability. Per diems for older containers remained relatively unchanged, as the lease
market for older containers remains competitive, and therefore, subject to
pricing pressures. Cronos expects to maintain or slightly increase the
existing per diem rates for older containers. Off-hire inventories of older containers throughout the world have
declined, as shipping lines employed more leased containers to meet their
container requirements. 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 of existing
containers. Cronos will consider the disposal of off-hire inventories in
locations where sales prices equal or exceed internal economic targets. 17




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THE CRONOS GROUP The Group did not undertake any major repositioning moves in the second
quarter 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 in the second half of 2004 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. Although favorable market conditions currently exist for container
lessors, the current market conditions may negatively impact the shipping
lines. Sharply rising charter rates for ships, combined with the rise in steel
prices and the related increase in new container prices, have created a concern
for both the shipping lines and therefore, the leasing companies. Although some
shipping lines have experienced an increase in freight rates in line with the
strong demand on major trade routes, some shipping lines are facing increased
financial pressures, especially those shipping lines that rely on operating
their containerships via short-term charters. Current conditions appear to
favor the larger more established shipping lines, which have witnessed strong
recoveries in their performance over the last few quarters. Some regional
intra-Asia shipping lines have cut back services in some routes in an attempt
to reduce their rising costs. 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 have been ordered for 2005 and 2006 are delivered. Any
over-capacity may influence future demand for leased containers and therefore
have an adverse impact on future liquidity. Lastly, wide-ranging concerns remain regarding recovery of the worlds
major economies, including the price of oil, burgeoning inflation and its
impact on interest rates, US trade and budget deficits, Chinas efforts to cool
its economy, performance of global stock markets, geopolitical concerns arising
from uncertainties within the Middle East and Asia, threats of another major
terrorist attack, as well as new container production levels, all of which may
have an impact on the current demand for leased containers. 18




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THE CRONOS GROUP Review of Cronos Operations Container Fleet During the first six months of 2004, Cronos added $59.1 million of new
container equipment to its fleet of which $36.1 million was acquired for the
Joint Venture Program, $17 million was acquired for Owned Container operations
and $6 million was acquired for Other Managed Container Programs. Dry cargo
containers represented 67% of new container investment with refrigerated
containers, tanks and dry freight specials accounting for 11% 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,June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003RestatedContainer Equity Programs
    
    
    149.3
    
    
    
    131.2
    
    
    
    117.5Other Managed Container Programs
    
    
    163.1
    
    
    
    163.3
    
    
    
    178.6Owned Containers
    
    
    114.9
    
    
    
    111.3
    
    
    
    112.4Total Fleet
    
    
    427.3
    
    
    
    405.8
    
    
    
    408.5
 The size of the total fleet grew by 5% in the first six months of 2004.
The Owned Container fleet grew by 3% 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 14% reflecting the addition of new
equipment to the Joint Venture Program. The Other Managed Container Programs
fleet declined slightly as an investment of approximately $5 million in new dry
cargo equipment by a Managed Container Program was more than 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 44% of the Cronos owned fleet (based on original equipment cost)
at June 30, 2004. Cronos believes that product diversification provides it
with a better spread of market risk and market returns. Due to their
specialized nature, demand for certain of these containers is less likely to be
affected by global economic downturns. The following table summarizes the
composition of the total fleet at June 30, 2004, by reportable segment based on
original equipment cost. Other ManagedContainer Equity
    
    Container
    
    OwnedPrograms
    
    Programs
    
    ContainersDry Cargo
    
    
    73
    %
    
    
    84
    %
    
    
    56
    %Refrigerated
    
    
    18
    %
    
    
    5
    %
    
    
    24
    %Tank
    
    
    7
    %
    
    
    7
    %
    
    
    6
    %Dry Freight Specials:CPCs
    
    
    2
    %
    
    
    
    
    
    
    8
    %Rolltrailer
    
    
    
    
    
    
    1
    %
    
    
    4
    %Other Dry Freight Specials
    
    
    
    
    
    
    3
    %
    
    
    2
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 19




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THE CRONOS GROUP Overview Cronos reported net income of $2.9 million in the first half of 2004
compared to $0.9 million in the corresponding period of 2003. The increase in
profitability can be attributed primarily to:  
    
    Strong demand for leased equipment reflecting the continuing growth in global container trade.
    
    Expansion of container fleet.
    
    Lower cost of financing.
    
    Equipment trading transactions. The positive impact of these items was offset to some extent by the effect
of the devaluation of the US dollar against other major currencies which
resulted in higher levels of costs in certain locations. 
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30,
2003 Analysis & Discussion Gross lease revenue (GLR)of $32.1 million for the quarter ended June
30, 2004, was $3.5 million, or 12%, higher than for the same period in 2003.
Of the increase, $2.3 million was due to the improvement in utilization and
$1.1 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 $5 million in the second quarter of 2004, a
decline of $2.3 million, or 31%, compared to the corresponding period 2003.
This was primarily due to a decline of $0.6 million in storage expense
reflecting lower inventories of off-hire equipment and a reduction of $1.7
million in repositioning expense (see discussion in Market Overview above). In
the second quarter of 2003, the Group transported equipment from low demand
areas to market locations of higher demand, primarily from the US east coast to
Asia. Operating segment information OtherContainer
    
    ManagedEquity
    
    Container
    
    Owned(in thousands)
    
    Programs
    
    Programs
    
    Containers
    
    TotalThree months ended June 30, 2004- gross lease revenue
    
    $
    10,455
    
    
    $
    11,767
    
    
    $
    9,890
    
    
    $
    32,112- direct operating expenses
    
    
    (1,489
    )
    
    
    (1,978
    )
    
    
    (1,484
    )
    
    
    (4,951
    )- net lease revenue
    
    
    8,966
    
    
    
    9,789
    
    
    
    8,406
    
    
    
    27,161- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    392- payments to Managed Container Programs
    
    
    (7,745
    )
    
    
    (8,965
    )
    
    
    
    
    
    
    (16,710
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (4,517
    )
    
    
    (4,517
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (1,168
    )
    
    
    (1,168
    )Segment profit
    
    $
    1,221
    
    
    $
    824
    
    
    $
    3,113
    
    
    $
    5,158
 20




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THE CRONOS GROUP Container Equity Programs:segment profit increased slightly to $1.2
million in the three months ended June 30, 2004, when compared to the same
period of 2003.  
    
    Net lease revenuefor this segment increased by $2.7 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 in line with net
lease revenue. Other Managed Container Programs:segment profit of $0.8 million for the
quarter ended June 30, 2004, was $0.5 million higher than in the same period of
2003.  
    
    Net lease revenueincreased by $1.8 million when compared to the
same period in 2003. GLR increased by $0.7 million as the effect of
the increased fleet utilization more than offset the effect of the
disposal of older equipment. Direct operating expenses declined by
$1.1 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 $1.1 million to $3.1 million
in the second quarter of 2004.  
    
    Net lease revenueincreased by $1.2 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
June 30, 2004, increased by $0.3 million from the corresponding period
in 2003 as the increase in depreciation attributable to new container
additions more than offset the reduction attributable to the disposal
of equipment at the end of its economic life.
    
    Container interest expenseof $1.2 million in the second quarter of
2004, was $0.2 million, or 12%, lower than in the same period of 2003.
The main changes in interest expense were attributable to:  
    
    A reduction of the total level of debt and capital
lease obligations when compared to the second quarter of 2003, as
the total amount of scheduled principal repayments have more than
offset new drawdowns.
    
    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. Equipment trading revenueof $0.8 million in the three months ended June
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 $0.3 million from equipment
trading activity during the second quarter of 2004, compared to $0.1 million
for the same period in 2003. 21




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THE CRONOS GROUP Commissions, fees and other incomeof $1.1 million in the three months
ended June 30, 2004, were almost unchanged when compared to the corresponding
period of 2003. An increase of $0.1 million in CPC licence fee income was
offset by a reduction of $0.1 million in amortized acquisition fee income,
reflecting a maturing portfolio of US Limited Partnership Programs. Selling, general and administrative expenseswere $4.3 million in the
three months ended June 30, 2004, an increase of $0.6 million, when compared to
the second 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 $0.2
million increase in legal and other professional costs reflecting an increase
in the level of corporate governance and compliance work undertaken. Income Taxesof $0.3 million for the three months ended June 30, 2004,
were essentially unchanged from the corresponding period of 2003. The
reduction in the effective taxation rate, from 70% in the first quarter of 2003
to 15% 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 tax benefit in one of its
European entities in the second quarter of 2004 which arose as a result of a
transaction involving the transfer of container equipment. Equity in earnings of affiliatewas $0.7 million in the second quarter of
2004 compared to $0.3 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. 
 Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Gross lease revenue (GLR)of $63 million for the first half of 2004 was
$5.6 million, or 10%, higher than for the same period in 2003. Of the
increase, $3.4 million was due to the effect of the higher fleet utilization
and $2 million was due to the increase in fleet size. Direct operating expenseswere $12 million in the first six months of
2004, a decrease of $0.9 million, or 7%, compared to the corresponding period
in 2003, due primarily to the reduction in storage costs resulting from the
increase in fleet utilization. Operating segment information OtherContainer
    
    ManagedEquity
    
    Container
    
    Owned(in thousands)
    
    Programs
    
    Programs
    
    Containers
    
    TotalSix months ended June 30, 2004- gross lease revenue
    
    $
    20,266
    
    
    $
    23,099
    
    
    $
    19,650
    
    
    $
    63,015- direct operating expenses
    
    
    (3,620
    )
    
    
    (5,038
    )
    
    
    (3,301
    )
    
    
    (11,959
    )- net lease revenue
    
    
    16,646
    
    
    
    18,061
    
    
    
    16,349
    
    
    
    51,056- direct financing lease income
    
    
    
    
    
    
    
    
    
    
    774
    
    
    
    774- payments to Managed Container Programs
    
    
    (14,235
    )
    
    
    (16,917
    )
    
    
    
    
    
    
    (31,152
    )- container depreciation
    
    
    
    
    
    
    
    
    
    
    (8,711
    )
    
    
    (8,711
    )- container interest expense
    
    
    
    
    
    
    
    
    
    
    (2,292
    )
    
    
    (2,292
    )Segment profit
    
    $
    2,411
    
    
    $
    1,144
    
    
    $
    6,120
    
    
    $
    9,675
 Container Equity Programs:segment profit of $2.4 million for the first
six months of 2004, was $0.3 million higher than for the same period of 2003. 22




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THE CRONOS GROUP  
    
    Net lease revenueof $16.6 million was $4 million higher than in
the same period of 2003. This was primarily due to the increase in GLR
for the Joint Venture Program and reflects the additional investment in
new container equipment. The increase in net lease revenue for the US
Limited Partnership Programs attributable to the improvement in fleet
utilization was almost offset by the effect of the disposal of older
equipment.
    
    Payments to Container Equity Programsincreased by $3.7 million,
which reflects the increased amount of net lease revenue due to the
Joint Venture Program after deducting the Cronos management fee.
    
    The ratio of segment profit to net lease revenue declined from 17%
for the first six months of 2003 to 14% for the same period in 2004.
This is due to the fact that the Joint Venture Program, from which the
Group earns a lower management fee than it earns from the US Limited
Partnership Programs, accounted for a higher proportion of net lease
lease revenue for the Container Equity Program segment in the six
months ended June 30, 2004. The Group expects this trend to continue
based on current plans for the Joint Venture Program to invest in new
container equipment. Other Managed Container Programs:segment profit of $1.1 million in the
six months ended June 30, 2004, was $0.4 million higher than for the same
period in 2003.  
    
    Net lease revenueincreased by $1.3 million when compared to the
same period in 2003. GLR increased by $0.7 million as the effect of
the improvement in fleet utilization was partially offset by the impact
of the disposal of equipment at the end of its economic life. Direct
operating expenses declined by $0.6 million reflecting the reduction in
storage expense.
    
    Payments to Other Managed Container Programsincreased in line with
the increase in net lease revenue, and as a result, the ratio of
segment profit to net lease revenue increased to 6% in the first half
of 2004 from 4% in the corresponding period of 2003, as the agreements
with fixed payment terms accounted for a smaller proportion of total
payments to Other Managed Container Programs. Owned Containers:segment profit increased by $1.8 million to $6.1 million
in the first half of 2004.  
    
    Net lease revenueincreased by $1.2 million due primarily to the
increase in the size of the owned fleet and the improvement in fleet
utilization.
    
    Container depreciationof $8.7 million in the six months to June
2004 was almost unchanged from the corresponding period in 2003 as the
increase in depreciation attributable to new container additions was
offset by the effect of the transfer of $5.6 million of equipment to
the Joint Venture Program in the second quarter of 2003 and by disposal
of equipment at the end of its economic life.
    
    Container interest expenseof $2.3 million in the first half of
2004, was $0.5 million, or 18%, lower than in the same period of 2003.
The main changes in interest expense were attributable to:  
    
    A reduction of the total level of debt and capital
lease obligations when compared to the first half of 2003 as the
total amount of scheduled principal repayments have more than
offset new drawdowns.
    
    A saving of $0.2 million resulting from the
refinancing of approximately $9 million of fixed rate debt with
variable rate debt in December 2003.
    
    Lower interest rates in the first half of 2004 when
compared to the corresponding period of 2003. Equipment trading revenueof $3.4 million in the six months ended June 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 half of 2004, compared with $0.1 million for
the same period in 2003. Commissions, fees and other incomeof $1.7 million in the first six months
of 2004 were $0.5 million, or 22%, lower than in the corresponding period of
2003. The decrease was primarily due to: 23




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THE CRONOS GROUP  
    
    $0.2 million of unrealized exchange losses recorded in the first
six months of 2004, on Euro denominated direct finance lease
receivables, due primarily to the decline in the value of the US dollar
in relation to the Euro between December 31, 2003 and June 30, 2004.
An unrealized exchange gain of $0.2 million was recorded in the
corresponding period of 2003.
    
    A reduction of $0.1 million in amortized acquisition fee income
reflecting a maturing portfolio of US Limited Partnership Programs. 24




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THE CRONOS GROUP Selling, general and administrative expenseswere $8.6 million in the six
months ended June 30, 2004, an increase of $1 million, when compared to the
same period in 2003. Of the total increase, $0.5 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 half of 2004, approximately 56% of selling, general
and administrative expenses were incurred in non US dollar currencies. The
balance of the increase was due to:  
    
    A $0.3 million increase in the expense recognized for a stock
appreciation rights plan reflecting a larger increase in the Group
share price in the first half of 2004 than in the corresponding period
of 2003.
    
    A $0.2 million increase in legal and other professional expenses
reflecting an increase in the level of corporate governance work
undertaken in 2004. Income Taxesof $0.6 million for the six months ended June 30, 2004, were
$0.1 million higher than for the corresponding period of 2003. The reduction
in the effective taxation rate, from 53% in the first half of 2003 compared to
26% 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. Equity in earnings of affiliateincreased by $0.7 million to $1.2 million
in the first half of 2004, compared to $0.5 million for the same period in
2003. The increase is due to the expansion of the Joint Venture Program fleet.
See additional discussion herein. 
 Liquidity and Capital Resources The primary sources of operating cash inflows are gross lease revenue
generated 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. Operating cash flow is largely dependent upon the timely collections of
lease revenues from shipping lines. Based on loss experience for the last
twelve years, bad debts have approximated 1% of lease revenues. The Group
monitors the aging of lease receivables, collections and the credit status of
existing and potential customers. There is 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. 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 cash flow and other purposes. Traditionally, Cronos has utilized funding from each of its operating
segments to grow its container fleet and recognizes that its ability to secure
funding from third-parties in order to expand its container fleet is crucial to
its future growth and profitability. In more recent years, growth has been
generated by the Owned Container segment through debt and capital leases and by
the Container Equity Programs segment through the addition of equipment to the
Joint Venture Program. Each of these sources provide flexible financing
structures with competitive pricing. 25




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THE CRONOS GROUP 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 June 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 and to
maintain the current portion of borrowings within financial covenant limits.
The breach of a covenant constitutes an event of default. At June 30, 2004, the Group had $126.8 million of available container
borrowing facilities under which $121.2 million was outstanding. In addition,
the Group had $1.7 million of unutilized credit facilities which are available,
if required, for operating cash flow purposes. The primary source of debt funding available to the Group is its revolving
credit facility (the Revolving Credit Facility) which the Group has utilized
to fund the acquisition of new equipment and to refinance existing debt and
capital lease obligation facilities. New equipment is funded 80% by debt and
20% by cash provided by the Group. The maximum commitment of the lenders under
the Revolving Credit Facility is $70 million and the revolving credit agreement
provides that, unless the revolving credit period is extended, the balance
outstanding as of September 18, 2004, will be repaid over five years. At June
30, 2004, the balance outstanding under the Revolving Credit Facility was $65.4
million. The balance of funds available under the Revolving Credit Facility
will be utilized to purchase new equipment during 2004. The Revolving Credit
Facility is subject to annual review and the ability of the Group to expand its
owned container fleet may be constrained if increased funding is not approved
on an annual basis or if the Group cannot provide the 20% cash required for new
container acquisitions. 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.
At June 30, 2004, the Joint Venture Program had capacity for an additional $100
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 July 2004, a new US Limited Partnership Program made its first
acquisition of new container equipment that cost approximately $1 million. 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 March 2004, the Group sold $5 million
of equipment to a Managed Container Program. This was the first significant
investment from this segment since 2001. There are indications that the growth
experienced in global container trade in recent years may attract additional
new capital to this segment. Cash Flow Statements for the Six Months ended June 30, 2004 and 2003 Operating Activities:Net cash provided by operating activities of $11.6
million for the first six months of 2004 was $0.2 million higher than for the
corresponding period of 2003. An increase in the amount collected from lessees
in the first half of 2004 was partially offset by increased payments for direct
operating expenses, increased payments
to Managed Container Programs in line with the increase in net lease revenue
for each of these reportable segments, increased expenditure for selling,
general and administrative expenses, and a decline in the level
of commissions, fees and other income. The increased expenditure for
direct operating expenses reflected payments for repositioning moves
undertaken in the first quarter of 2004 and the last quarter of 2003.
The increased expenditure for selling, general and administrative
expenses included a $0.8 million total increase in payments for
manpower and audit costs that were accrued in the prior year. The net proceeds of $14.8 million
realized on the transfer of equipment for resale to Managed Container Programs
were utilized to make the related payments to container manufacturers. During
the first six months of 2003, the Company undertook $2 million of 26




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##### Table of Contents



THE CRONOS GROUP repositioning
moves for which a large proportion of the related payments to the shipping
lines were made in the third quarter of 2003. Investing Activities:Net cash used in investing activities in the first
half of 2004 was $11.6 million. The Group paid $19.4 million for new equipment
of which $5 million was sold to a Managed Container Program.
The Group realized a further $3.8 million on the disposal of equipment at
the end of its economic life, the proceeds of which will be utilized primarily
to repay related outstanding balances on debt and capital lease obligation
facilities. Net cash used in investing activities was $0.9 million in the
first six months of 2003. Proceeds generated on the sale of fixed assets were
$7.7 million and included the sale of $4.6 million of refrigerated equipment to
the Joint Venture Program. These proceeds were more than offset by equipment
acquisitions totalling $8.1 million and a $0.5 million equity investment in the
Joint Venture Program. 27




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##### Table of Contents



THE CRONOS GROUP Financing Activities:Net cash provided by financing activities was $0.4
million in the first six months of 2004. During this period, the Group
utilized $19 million of debt and capital lease obligation facilities to fund
equipment acquisitions. The Group made $17.9 million of principal repayments,
comprising a paydown of approximately $5 million from funds received on the
equipment sale to the Managed Container Program, $5.4 million of scheduled
repayments and a further $7.5 million of payments, including short-term
prepayments of debt using surplus cash balances to reduce interest expense.
The Group made a dividend payment of $0.3 million during the first half of
2004. Net cash used in financing activities was $10.8 million during the
first six months of 2003 as $8.6 million of additional debt funding, utilized
to finance the acquisition of new container equipment, was more than offset by
debt and capital lease repayments of $19.1 million. The repayments included
$4.6 million received on the sale of equipment to the Joint Venture Program.
In addition, the Group paid a dividend of $0.3 million in the first half of
2003. 28




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##### Table of Contents



THE CRONOS GROUP 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 June 30, 2004, the Group owed
container manufacturers $35.2 million for equipment. The Group intends to fund
$8 million of this equipment utilizing new and existing debt and capital lease
facilities, $20.3 million from sales to Container Equity Programs, $5.1 million
will be sold to Other Managed Container Programs and the remaining $1.8 million
from sales to third-parties under equipment trading transactions. In addition, the Group had outstanding orders to purchase container
equipment of $22.3 million at June 30, 2004. Of this amount, $17.7 million
will be sold to the Joint Venture Program, $3 million will be financed by the
Group using existing container funding facilities and $1.6 million will be sold
to a third-party under an equipment trading transaction. In August 2004, the board of directors of the Company declared a dividend
of 4 cents per common share for the third quarter of 2004, payable in October
2004. The Group believes that it has sufficient capital resources to support its
operating and investing activities for the next twelve months. Critical Accounting Policies and Estimates Critical accounting policies are those that reflect significant 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 June 30,
2004. The Group conducted an analysis of borrowings with variable interest
rates to determine their sensitivity to interest rate changes. In this
analysis, the same change was applied to the current balance outstanding,
leaving all other factors constant. It was found that if a 10% increase were
applied to variable interest rates, the effect would be to reduce annual cash
flows by $0.1 million. Exchange rate risk:Substantially all of the Groups revenues are billed
and paid in US dollars. For non US dollar denominated revenues, the Group may
enter into foreign currency forward contracts to reduce exposure to exchange
rate risks. A significant portion of costs are billed and paid in US dollars.
Of the remaining operating costs, the majority are individually small and
incurred in various denominations and thus are not suitable for cost effective
hedging. By reference to 2003, it is estimated that for every 10% incremental
decline in the value of the US dollar against various foreign currencies, the
effect would be to reduce annual cash flows by $0.9 million in any given year. As exchange rates are outside of the control of the Group, there can be no
assurance that such fluctuations will not adversely effect its results of
operations and financial condition. 29




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##### Table of Contents



THE CRONOS GROUP 
 Item 4  Controls and Procedures The principal executive and principal financial officers of the Company
have evaluated the disclosure controls and procedures of the Group as of the
end of the period covered by this report. As used herein, the term disclosure
controls and procedures has the meaning given to the term by Rule 13a-15 under
the Securities Exchange Act of 1934, as amended (Exchange Act), and includes
the controls and other procedures of the Group that are designed to ensure that
information required to be disclosed by the Company in the reports that it
files with the SEC under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms.
Based upon their evaluation, the principal executive and financial officers of
the Company have concluded that the Groups disclosure controls and procedures
were effective such that the information required to be disclosed by the
Company in this report is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms applicable to the
preparation of this report and is accumulated and communicated to management of
the Group, including the principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosures. There have been no significant changes in the Groups internal controls or
in other factors that could significantly affect the Groups internal controls
subsequent to the evaluation described above conducted by the Companys
principal executive and financial officers. 30




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THE CRONOS GROUP 
 PART II  OTHER INFORMATION 
 Item 1  Legal Proceedings The Contrin Settlement The Group manages containers for investment entities collectively known as
Contrin in its Other Managed Container Programs. Approximately 1% (measured by
TEUs) of the Groups fleet of containers is owned by Contrin. As previously
reported by Cronos, since August 2000 the Group has 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 Mr. Palatin, 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 of 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 has retained an
estate agent to market the Amersham Estate for sale. The Group will not recognize a gain in respect of the grant of possession
of the Amersham Estate until such time as all contingencies 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 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 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. If sale of the Amersham Estate occurs before
January 3, 2005, then the Groups obligation to make the remaining scheduled
installment of $0.450 million is excused (subject to the Groups obligation,
described below, to pay Contrin the shortfall if the net proceeds from sale of
the Amersham Estate, allocable to the Group and Contrin, do not equal $3.5
million). 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 31




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THE CRONOS GROUP 4
million British pounds (at June 30, 2004 exchange rates, the equivalent of
approximately $5.4 million to $7.3 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. Should the net 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
agrees, by the third anniversary of the effective date of the settlement (or by
December 17, 2006) to make up the difference between $3.5 million and the
amounts received by Contrin from the sale of Amersham together with the
installment payments previously made by the Group to Contrin. 
 Item 2  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities Not applicable 
 Item 3  Defaults Upon Senior Securities Not applicable 32




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THE CRONOS GROUP 
 Item 4  Submission of Matters to a Vote of Security Holders The Company held its 2004 annual meeting of shareholders on June 3, 2004,
in Luxembourg. The record date of the meeting was fixed by the Board of
Directors of the Company at April 6, 2004. As of the record date, the Company
had outstanding 7,260,080 common shares. The holders of 6,353,537 common
shares of the Company were represented at the 2004 annual meeting of
shareholders in person or by proxy, thus constituting a quorum of the
shareholders for the meeting. The following sets forth the proposals submitted to the shareholders and
the results of the shareholder voting on the matters at the annual meeting. The
election of the two nominees for director required the approval, in person or
by proxy, of the holders of a majority of the issued and outstanding common
shares of the Company; the balance of the proposals submitted to the
shareholders required the approval of the holders of a majority of the shares
present in person or represented by proxy, and voting, at the meeting.
Abstentions and broker non-votes were each excluded in the determination of the
number of shares present and voting. Proposal No. 1 The election of two directors, Dennis J. Tietz and Peter J. Younger, to
serve three-year terms expiring in 2007. Nominee
    
    Vote
    
    CountDennis J. Tietz
    
    For
    
    
    6,351,537Authority Withheld
    
    
    2,000Peter J. Younger
    
    For
    
    
    6,351,537Authority Withheld
    
    
    2,000
 Each of managements two nominees for director was elected to the Board to
serve three-year terms expiring at the conclusion of the annual shareholders
meeting held for 2007. Proposal No. 2 The approval of an extension, from December 3, 2004, to December 2, 2005,
of the grant of authority to the Board of Directors to implement a common share
repurchase program. Vote
    
    CountFor
    
    
    3,161,026Against
    
    
    4,100Abstain
    
    
    0Broker Non-Votes
    
    
    3,188,411
 Proposal No. 2 was approved. 33




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##### Table of Contents



THE CRONOS GROUP Proposal No. 3 The approval of the declaration of a dividend of three (3) cents per
common share for the second calendar quarter of 2004, payable July 15, 2004, to
shareholders of record as of the close of business on June 25, 2004. Vote
    
    CountFor
    
    
    6,351,387Against
    
    
    2,000Abstain
    
    
    150Broker Non-Votes
    
    
    0
 Proposal No. 3 was approved. Proposal No. 4 The approval of the Companys appointment of Deloitte S.A. as the
Companys independent auditors for the year ending December 31, 2004, for both
the consolidated and unconsolidated accounts and the grant of authorization to
the Board to fix the compensation of the independent auditors. Vote
    
    CountFor
    
    
    6,349,297Against
    
    
    2,750Abstain
    
    
    1,490Broker Non-Votes
    
    
    0
 Proposal No. 4 was approved. Proposal No. 5 The approval of the consolidated and unconsolidated financial statements
of the Company for the year ended December 31, 2003, and the reports of the
Companys Board and of the independent auditors thereon. Vote
    
    CountFor
    
    
    6,347,587Against
    
    
    2,000Abstain
    
    
    3,950Broker Non-Votes
    
    
    0
 Proposal No. 5 was approved. 34




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##### Table of Contents



THE CRONOS GROUP Proposal No. 6 The discharge of Dennis J. Tietz, Peter J. Younger, Maurice Taylor,
Charles Tharp, S. Nicholas Walker, and Robert M. Melzer, pursuant to Article 74
of the Luxembourg Companies Law, from the execution of their mandate as
directors of the Company for the year ended December 31, 2003. Vote
    
    CountFor
    
    
    6,342,962Against
    
    
    4,825Abstain
    
    
    5,750Broker Non-Votes
    
    
    0
 Proposal No. 6 was approved. Proposal No. 7 The approval of the allocation of the profit/loss reported by the Company
for the year ended December 31, 2003. Vote
    
    CountFor
    
    
    6,346,862Against
    
    
    2,600Abstain
    
    
    4,075Broker Non-Votes
    
    
    0
 Proposal No. 7 was approved. 35




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##### Table of Contents



THE CRONOS GROUP 
 Item 5  Other Information Not applicable 
 Item 6  Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Number
    
    Exhibit10.1
    
    Amended and restated, Management Agreement, dated as of June 15,
2004, by and between the CF Leasing Limited and Cronos Containers
(Cayman) Limited.31.1
    
    Rule 13a-14 Certification31.2
    
    Rule 13a-14 Certification32.1
    
    Section 1350 Certifications.
  (b)
    
    Reports on Form 8-KOn March 30, 2004, a Current report on Form 8-K was filed by the
Company announcing, subject to shareholder approval at the 2004 annual
meeting of shareholders, a dividend of three cents per common share for
the second calendar quarter of 2004, payable July 15, 2004 to
shareholders of record as of the close of business on June 25, 2004 . Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. THE CRONOS GROUP SIGNATURE
    
    TITLE
    
    DATEBy
    
    /s/ PETER J. YOUNGER
    
    Director, Chief Operating Officer,
    
    August 13, 2004Peter J. Younger
    
    Chief Financial Officer andChief Accounting Officer(Principal Financial and Accounting Officer)
 36




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THE CRONOS GROUP 
 Exhibit Index Number
    
    Exhibit
    
    Page10.1
    
    Amended and restated Management Agreement, dated as of
June 15, 2004, by and between the CF Leasing Limited and
Cronos Containers (Cayman) Limited.
    
    E131.1
    
    Rule 13a-14 Certification
    
    E4931.2
    
    Rule 13a-14 Certification
    
    E5032.1
    
    Certification pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. *
    
    E51
 37