Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on February 7, 2007

Registration No. 333-            


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 


CAI International, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   7359   94-3298884
(State of Incorporation)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification No.)

 


One Embarcadero Center

Suite 2101

San Francisco, California 94111

(415) 788-0100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Masaaki (John) Nishibori

President and Chief Executive Officer

CAI International, Inc.

One Embarcadero Center

Suite 2101

San Francisco, California 94111

(415) 788-0100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

 

Edward J. Wes, Jr.

Bruce McNamara

Sonny Allison

Perkins Coie LLP

101 Jefferson Drive

Menlo Park, California 94025

(650) 838-4300

 

Daniel G. Kelly, Jr.

Davis Polk & Wardwell

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

 


Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

 


If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of Securities to Be Registered    Proposed Maximum
Aggregate Offering Price
   Amount of
Registration Fee(1)

Common Stock, par value $.0001

   $ 100,000,000    $ 10,700

(1)

Calculated pursuant to Rule 457(o) under the Securities Act of 1933.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 



Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated February 7, 2007

 

                     Shares

 

 

CAI INTERNATIONAL, INC.   LOGO

Common Stock

$         per share

 


 

 

•   CAI International, Inc. is offering              shares.

 

•   We anticipate that the initial public offering price will be between $             and $             per share.

 

•   This is our initial public offering and no public market currently exists for our shares.

 

•   Proposed trading symbol: Nasdaq Global Market—“CAIU”

 

 


 

This investment involves risk. See “ Risk Factors” beginning on page 9.

 

 


     Per Share        Total    

Public offering price

   $                $    

Underwriting discount

   $                $    

Proceeds, before expenses, to CAI International, Inc.  

   $                $    

 


The underwriters have a 30-day option to purchase up to              additional shares of common stock from the selling stockholders to cover over-allotments, if any. We will not receive any net proceeds from the sale of our shares by the selling stockholders.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Sole Bookrunner

Piper Jaffray

 


 

William Blair & Company

Jefferies & Company

The date of this prospectus is                     , 2007.


Table of Contents

TABLE OF CONTENTS

 

 

     Page

Summary

   1

Risk Factors

   9

Special Note Regarding Forward-Looking Statements

   25

Use of Proceeds

   26

Dividend Policy

   27

Capitalization

   28

Dilution

   30

Selected Historical Consolidated Financial and Operating Data

   31

Unaudited Pro Forma Financial Information

   34

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   39

Industry

   65

Business

   67

Management

   77

Certain Relationships and Related-Party Transactions

   88

Principal and Selling Stockholders

   90

Description of Capital Stock

   91

Shares Eligible for Future Sale

   94

U.S. Federal Tax Consequences for Non-U.S. Holders

   96

Underwriting

   99

Legal Matters

   102

Experts

   102

Where You Can Find More Information

   102

Index to Consolidated Financial Statements

   F-1

 


You should rely only on the information contained in this prospectus and in any free writing prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of when this prospectus is delivered or any sale of our common stock occurs.

 

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SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements, the notes thereto and the matters set forth under “Risk Factors.”

In this prospectus, unless indicated otherwise, references to: (1) “CAI,” “the company,” “we,” “us” and “our” refer to CAI International, Inc., formerly known as Container Applications International, Inc., the issuer of the common stock and its subsidiaries; (2) “Interpool” refers to Interpool, Inc., which owned 50.0% of our common stock until we repurchased such common stock on October 1, 2006; (3) “TEU” refers to a “20' equivalent unit,” which is a measurement used in the container shipping industry to compare shipping containers of various sizes and configurations to a standard 20' dry van container; (4) “our owned fleet” means the containers we own, plus the containers we lease from other companies under operating and finance leases; (5) “our managed fleet” means the containers we manage that are owned by container investors; (6) “our fleet” and “our total fleet” mean our owned fleet plus our managed fleet; and (7) “container investors” means investment entities that purchase portfolios of containers from us. Unless otherwise indicated herein, all share and per share information will be adjusted for the stock split to be effected prior to the completion of this offering.

CAI International, Inc.

We are one of the world’s leading container leasing and management companies. We believe that our share of the worldwide leased container fleet, as measured in TEUs, increased from approximately 4.3% as of mid-1998 to 6.3% as of mid-2006, representing the seventh largest fleet of leased containers in the world. We operate our business through two segments: container leasing and container management. We purchase new containers, lease them to container shipping lines and either retain them as part of our owned fleet or sell them to container investors for whom we then provide management services. In operating our fleet, we lease, re-lease and dispose of containers and contract for the repair, repositioning and storage of containers. As of December 31, 2006, our fleet comprised 669,000 TEUs, 72.2% of which represented our managed fleet and 27.8% of which represented our owned fleet.

We were founded in 1989 by our Executive Chairman, Hiromitsu Ogawa, as a traditional container leasing company that leased containers owned by us to container shipping lines. In 1998, we shifted our strategic focus from leasing containers owned by us to managing containers owned by container investors. Our managed fleet, as measured in TEUs, increased at a compounded annual growth rate of 19.2% from December 31, 1998 to December 31, 2006 as compared to a compounded annual growth rate of 11.3% for our total fleet, as measured in TEUs, during the same period.

The shift in our strategic focus to managing containers for container investors has enabled us to grow our total fleet while reducing our debt and operating lease commitments. This has allowed us to realize a higher return on assets and equity than we believe would have been possible if our fleet had consisted entirely of containers owned by us. We have reduced our debt and operating lease commitments from $169.7 million as of December 31, 2001 to $78.0 million as of September 30, 2006. On October 1, 2006, we repurchased 50.0% of our then-outstanding common stock from Interpool. In connection with this repurchase of our common stock, we incurred $77.5 million of incremental indebtedness. We will use our net proceeds from this offering to repay this incremental indebtedness.

We lease our containers to lessees under long-term leases, short-term leases and finance leases. Long-term leases cover a specified number of containers that will be on lease for a fixed period of time. Short-term

 

 


 

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leases provide lessees with the ability to lease containers either for a fixed term of less than one year or without a fixed term on an as-needed basis, with flexible pick-up and drop-off of containers at depots worldwide. Finance leases are long-term lease contracts that grant the lessee the right to purchase the container at the end of the term for a nominal amount. As of September 30, 2006, 92.6% of our fleet, as measured in TEUs, was on lease, with 63.8% of these containers on long-term leases, 34.3% on short-term leases and 1.9% on finance leases.

We manage containers under management agreements that cover portfolios of containers. Our management agreements typically have terms of eight to 12 years and provide that we receive a management fee based upon the actual rental revenue for each container less the actual operating expenses directly attributable to that container. We also receive fees for selling used containers on behalf of container investors.

Our container leasing segment revenue comprises container rental revenue and finance lease income from our owned fleet, and our container management segment revenue comprises gain on sale of container portfolios and management fee revenue for managing containers for container investors. For the year ended December 31, 2005 and the nine months ended September 30, 2006, our container leasing segment generated revenue of $40.4 million and $26.0 million, respectively, and income before income taxes of $4.7 million and $6.3 million, respectively. For the year ended December 31, 2005 and the nine months ended September 30, 2006, our container management segment generated revenue of $21.1 million and $16.9 million, respectively, and income before income taxes of $13.9 million and $10.4 million, respectively. For the year ended December 31, 2005 and the nine months ended September 30, 2006, we recorded total revenue of $61.6 million and $42.9 million, respectively, EBITDA of $39.4 million and $30.6 million, respectively, and net income of $10.2 million and $10.0 million, respectively.

Industry Overview

We operate in the worldwide intermodal freight container leasing industry. Intermodal freight containers, or containers, are large, standardized steel boxes used to transport cargo by a number of means, including ship, truck and rail. Container shipping lines use containers as the primary means for packaging and transporting freight internationally, principally from export-oriented economies in Asia to North America and Western Europe.

Containerisation International, Market Analysis: Container Leasing Market 2006, estimates that as of mid-2006 transportation companies, including container shipping lines and freight forwarders, owned approximately 57.3% of the total worldwide container fleet and container leasing companies owned approximately 42.7% of the total worldwide container fleet. Given the uncertainty and variability of export volumes and the fact that container shipping lines have difficulty in accurately forecasting their container requirements at different ports, the availability of containers for lease significantly reduces a container shipping line’s need to purchase and maintain excess container inventory.

According to Drewry Shipping Consultants Limited, The Drewry Annual Container Market Review and Forecast 2006/2007, worldwide containerized cargo volume grew each year from 1980 through 2005, attaining a compounded annual growth rate of 9.8% during that period. Drewry estimates that 2006 container cargo volume grew 10.3% over the prior year. Drewry forecasts that cargo volume will continue to grow at approximately 9.0% annually through 2011. We believe that this projected growth is due to several factors, including the continuing shift in global manufacturing capacity to lower labor cost regions such as China and India, the continued integration of developing high-growth economies into global trade patterns, the continued conversion of cargo from bulk shipping into container shipping and the growing liberalization and integration of world trade.

 

 


 

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Our Strengths

We believe our strengths include the following:

 

    Multiple Sources of Revenue.    Our container rental revenue and management fee revenue are structured to provide us with stable revenue over longer periods of time while our gain on sale of container portfolios has historically generated significant incremental revenue and facilitated growth in management fee revenue by increasing the number of containers we manage for container investors. By having multiple sources of revenue, we believe that we have been able to realize a higher return on assets and equity than would have been possible if our fleet had consisted entirely of containers owned by us. We believe it is important to maintain a balance between the size of our owned fleet and our managed fleet to maintain our multiple sources of revenue.

 

    High-Quality Asset Management Services.    We sell portfolios of leased containers to a number of container investors in Europe and Asia through various intermediaries. Following the sale, we manage these portfolios on behalf of the container investors. We believe that container investors view us as one of the highest quality companies providing container management services due to the quality of the container portfolios that we sell and the asset management services that we provide. From January 1, 2003 through September 30, 2006, we sold to European and Asian container investors containers representing 198,000 TEUs for $326.6 million of gross proceeds.

 

    Capital-efficient Third-party Fleet Management Operation.    We have grown our managed fleet by selling portfolios of containers to container investors, most of which are subject to lease at the time of sale. By selling these portfolios to container investors, we are able to free up capital more quickly than if we kept the containers as part of our owned fleet. This enables us to deploy the capital for other uses. Our container management segment provides us with revenue at the time of sale, long-term contractual management fees and a sales fee earned when we sell used containers for container investors, all with very little long-term investment from us.

 

    Long-standing Container Lessee Relationships with Attractive Credit Characteristics.    We currently lease containers to over 250 container lessees, including many of the largest international container shipping lines. As of December 31, 2006, we conducted business with the top 20 lessees of our total fleet, as measured in TEUs, for an average of over 12 years. These top 20 lessees had, as of December 31, 2006, a weighted-average Dynamar credit rating of 2.4 on a rating scale of one through 10, with a one representing the strongest credit rating. Dynamar B.V. provides credit ratings to the container leasing industry.

 

    Experienced Management Team.    We have significant experience in the container leasing industry. Our six key officers have an average of approximately 15 years of experience in the container leasing industry. In addition, our marketing, operations and underwriting personnel have developed long-term relationships with lessees that improve our access to continued opportunities with leading container shipping lines.

 

    Flexibility to Satisfy Changing Market Demands.    Our operating expertise and financial flexibility enable us to meet the evolving requirements of lessees and container investors. We have significant experience in structuring and selling to container investors portfolios of containers that have attractive investment returns. By selling these portfolios to container investors, we have been able to purchase a substantial number of new containers while at the same time maintaining significant borrowing capacity under our senior secured credit facility. This has enabled us to choose when to purchase new containers based upon our

 

 


 

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expectations of near-term market conditions and quickly respond to the changing demands of lessees for short- and long-term leases.

 

    Proprietary, Real-time Information Technology System.    We have developed a proprietary, real-time information technology system to assist us in managing our container fleet. Our proprietary IT system has been essential to providing a high level of customer service and we believe it is scalable to satisfy our future growth without significant capital expenditures.

Risks Affecting Us

In operating our business we have faced and will continue to face significant challenges. Our ability to successfully operate our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors.” For example:

 

    world trade volume and economic growth could decline and other macroeconomic market conditions affecting the container leasing industry could worsen;

 

    demand from container investors to purchase portfolios of leased containers at prices that are attractive to us could decline;

 

    container shipping lines could decide to buy rather than lease a larger percentage of the containers they use;

 

    demand for leased containers by container shipping lines could decrease due to consolidation of container shipping lines or other factors;

 

    per diem rates for leases could decline;

 

    new container prices could change unexpectedly;

 

    shipping may be disrupted by a number of causes, including terrorist attacks and regional economic instability; and

 

    we may lose key members of our senior management.

Any of the above risks could cause our per diem or utilization rates to decline or could otherwise materially and adversely affect our business, financial position and results of operations. An investment in our common stock involves risks. You should read and consider the information set forth in “Risk Factors” and all other information set forth in this prospectus before investing in our common stock.

Corporate Information

We were incorporated under the name Container Applications International, Inc. as a Nevada corporation in 1989 and reincorporated under the name CAI International, Inc. in Delaware in 2007. Our principal executive offices are located at One Embarcadero Center, Suite 2101, San Francisco, California 94111. Our telephone number is (415) 788-0100 and our Web site is located at http://www.capps.com. We expect to make our periodic reports and other information filed with or furnished to the SEC available free of charge through our Web site as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information contained on our Web site or any other Web site is not incorporated by reference into this prospectus, and you should not consider information contained on our Web site or any other Web site to be a part of this prospectus.

 

 


 

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The Offering

 

Common stock offered by CAI International, Inc.

                       shares

Common stock outstanding after this offering

                       shares

Offering price

   $                  per share

Use of proceeds

   To repay a portion of our outstanding indebtedness, including a $37.5 million convertible subordinated note, a $20.0 million senior term loan outstanding under our senior secured credit facility, and a portion of the amount outstanding under the revolving line of credit under our senior secured credit facility. We will not receive any proceeds from the sale of common stock by the selling stockholders if the underwriters exercise their overallotment option. See “Use of Proceeds.”

Proposed Nasdaq Global Market symbol

   CAIU

The number of shares outstanding after this offering is based on 25,200 shares outstanding as of December 31, 2006 and, unless otherwise indicated, excludes:

 

   

the conversion of all outstanding shares of Series A cumulative redeemable convertible preferred stock into 1,726 shares of common stock, which will occur immediately prior to the completion of this offering;

 

   

             shares of common stock issuable upon exercise of options under our 2007 Equity Incentive Plan that were granted after December 31, 2006 with an exercise price equal to the public offering price in this offering; and

 

   

             shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan.

Unless otherwise indicated, this prospectus assumes no exercise of the underwriters’ over-allotment option to purchase up to              shares of common stock from the selling stockholders.

 

 


 

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Summary Historical Consolidated Financial and Operating Data

The summary consolidated financial data presented below under the heading “Statement of Operations Data” for the years ended December 31, 2003, 2004 and 2005 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data presented below under the heading “Statement of Operations Data” for the nine months ended September 30, 2005 and 2006 and under the heading “Balance Sheet Data” as of September 30, 2006 are unaudited, have been derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the unaudited consolidated summary financial data presented below under the headings “Statement of Operations Data” and “Balance Sheet Data” reflect all normal and recurring adjustments necessary to fairly present our financial condition and results of operations as of and for the periods presented. The operating data presented below under “Selected Operating Data” are not audited. Historical results are not necessarily indicative of the results of operations to be expected for future periods. You should read the summary historical consolidated financial and operating data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2003     2004     2005     2005     2006  
     (in thousands, except share and per share data)  
                       (unaudited)  

Statement of Operations Data:

          

Revenue

          

Container rental revenue

   $ 39,729     $ 45,855     $ 39,614     $ 30,387     $ 25,118  

Management fee revenue

     4,872       6,809       11,230       7,900       8,530  

Gain on sale of container portfolios

     3,289       13,420       9,913       5,352       8,364  

Finance lease income

     194       602       829       585       928  
                                        

Total revenue

     48,084       66,686       61,586       44,224       42,940  

Operating expenses

          

Depreciation of container rental equipment

     15,359       15,545       14,764       11,078       9,653  

Impairment of container rental equipment

     989       275       572       639       270  

Gain on disposition of used container equipment

     (319 )     (718 )     (1,166 )     (1,322 )     (804 )

Equipment rental expense

     10,787       10,636       6,875       6,087       1,187  

Storage, handling and other expenses

     9,043       5,653       3,432       3,167       2,232  

Marketing, general and administrative expense

     9,317       11,783       12,551       8,740       9,505  
                                        

Total operating expenses

     45,176       43,174       37,028       28,389       22,043  
                                        

Operating income

     2,908       23,512       24,558       15,835       20,897  

Net interest expense

     7,350       7,623       7,771       5,746       4,146  
                                        

Income (loss) before income taxes

     (4,442 )     15,889       16,787       10,089       16,751  

Income tax expense (benefit)

     (1,230 )     6,353       6,541       3,931       6,725  
                                        

Net income (loss)

     (3,212 )     9,536       10,246       6,158       10,026  

(Accretion) decretion of preferred stock

     (476 )     (641 )     (713 )     (535 )     1,464  
                                        

Net income (loss) available to common stockholders

   $ (3,688 )   $ 8,895     $ 9,533     $ 5,623     $ 11,490  
                                        

Net income (loss) per share available to common stockholders

          

Basic

   $ (73.17 )   $ 176.49     $ 189.15     $ 111.57     $ 227.98  

Diluted

     (73.17 )     176.49       189.15       111.57       193.73  

Weighted-average shares outstanding

          

Basic

     50,400       50,400       50,400       50,400       50,400  

Diluted

     50,400       50,400       50,400       50,400       51,753  

Other Financial Data:

          

EBITDA (unaudited)(1)

   $ 18,395     $ 39,155     $ 39,417     $ 26,974     $ 30,625  

Purchase of containers

     60,699       125,732       127,288       114,175       89,366  

Net proceeds from sale of container portfolios

     37,373       119,224       102,097       58,658       67,912  

footnotes on following page

          

 

 


 

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     As of September 30, 2006  
     Actual     Pro Forma, As
Adjusted(2)(3)
 
     (in thousands)  
     (unaudited)  

Balance Sheet Data:

          

Cash

     $ 4,269        

Container rental equipment, net

       159,418        

Net investment in direct finance leases

       7,371        

Total assets

       208,581        

Long-term debt

       75,917        

Total liabilities

       160,678        

Cumulative redeemable convertible preferred stock

       4,894        

Total stockholders’ equity

       43,009        
     As of December 31,     As of September 30,  
     2003     2004     2005     2005     2006  
     (unaudited)  

Selected Operating Data:

          

Managed fleet in TEUs(4)

   307,056       416,254     456,076     438,967     472,681  

Owned fleet in TEUs(4)

   228,353       171,790     141,653     164,316     172,571  
                                

Total

   535,409       588,044     597,729     603,283     645,252  
                                

Percentage of on-lease fleet on long-term leases

   60.0 %     57.7 %   64.7 %   62.7 %   63.8 %

Percentage of on-lease fleet on short-term leases

   38.7       41.2     33.5     35.9     34.3  

Percentage of on-lease fleet on finance leases

   1.3       1.1     1.8     1.4     1.9  
                                

Total

   100.0 %     100.0 %   100.0 %   100.0 %   100.0 %
                                

 

     Year Ended
December 31,
    Nine Months
Ended September 30,
 
     2003     2004     2005         2005             2006      
     (unaudited)  

Utilization rate(5)

   81.6 %   89.8 %   90.7 %   91.1 %   89.9 %

 


(1) EBITDA is defined as income (loss) before interest, income taxes, depreciation and amortization. We believe EBITDA is helpful in understanding our past financial performance as a supplement to net income (loss) and other performance measures calculated in conformity with accounting principles generally accepted in the United States (“GAAP”). Our management regularly uses EBITDA to understand, manage and evaluate our business and make operating decisions. It can also be useful to investors, as a supplement to GAAP measures, in evaluating our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Some of these limitations are:

 

    EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA does not reflect changes in our working capital needs;

 

    EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

    Although depreciation and amortization are non-cash charges, most of the assets being depreciated will be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

 

    EBITDA is not calculated identically by all companies; therefore, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.

footnotes continued on following page

 

 


 

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The following is a reconciliation of net income (loss) to EBITDA for the periods presented:

 

     Year Ended December 31,    Nine Months
Ended
September 30,
     2003     2004    2005    2005    2006
    

(in thousands)

(unaudited)

Net income (loss)

   $ (3,212 )   $ 9,536    $ 10,246    $ 6,158    $ 10,026

Add:

             

Net interest expense

     7,350       7,623      7,771      5,746      4,146

Depreciation

     15,487       15,643      14,859      11,139      9,728

Income tax expense (benefit)

     (1,230 )     6,353      6,541      3,931      6,725
                                   

EBITDA

   $ 18,395     $ 39,155    $ 39,417    $ 26,974    $ 30,625
                                   

 

(2) The pro forma, as adjusted balance sheet data as of September 30, 2006 give effect to the following events as if they had occurred on September 30, 2006: (a) our repurchase on October 1, 2006 of all our common stock owned by Interpool; (b) the termination of a warrant to purchase our common stock held by Interpool; (c) the issuance by us of a convertible subordinated note to Interpool for a principal amount of $37.5 million; (d) our borrowing of $20.0 million under the term loan portion of our senior secured credit facility and $23.0 million under the revolving line of credit under our senior secured credit facility; (e) the conversion of all outstanding shares of Series A cumulative redeemable convertible preferred stock into 1,726 shares of common stock; (f) the payment of all accrued dividends on all outstanding shares of Series A cumulative redeemable convertible preferred stock; (g) our receipt of the proceeds from the repayment of promissory notes (including all accrued and unpaid interest) issued to certain executive officers in connection with the purchase of shares of Series A cumulative redeemable convertible preferred stock; (h) the sale by us of          shares of common stock in this offering at an assumed initial public offering price of          per share which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus; (i) our receipt of the estimated net proceeds of this offering of $         million after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (j) the application of the net proceeds of this offering to repay certain indebtedness as set forth in “Use of Proceeds.”
(3) Assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed offering price per share would decrease (increase) long-term debt and total liabilities and increase (decrease) stockholders’ equity by $         million.
(4) Reflects the total number of TEUs included in our managed or owned fleet, as applicable, as of the end of the period indicated, including units held for sale and units held at the manufacturer that we have purchased.
(5) Reflects the average number of TEUs in our fleet on lease as a percentage of total TEUs available for lease. In calculating TEUs available for lease, we exclude units held for sale and units held at the manufacturer that we have purchased. The utilization rate for a period is calculated by averaging the utilization rates at the end of each calendar month during the period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the calculation of our utilization rate.

 

 


 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with the other information contained in this prospectus, including our financial statements and the related notes, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, cash flows, results of operations and financial condition. The market price of our common stock could decline and you may lose some or all of your investment if one or more of these risks and uncertainties develop into actual events.

Risks Related to Our Business and the Container Leasing Industry

The demand for leased containers depends on many political, economic and other factors beyond our control.

Substantially all of our revenue comes from activities related to the leasing of containers. Our ability to continue successfully leasing containers to container shipping lines, earning management fees on leased containers and attracting container investors to purchase container portfolios from us depends in part upon the continued demand for leased containers. The demand for containers is affected by numerous factors.

Demand for containers depends largely on the rate of world trade and economic growth, with U.S. consumer demand being the most critical factor affecting this growth. Economic downturns in one or more countries, particularly in the United States and other countries with consumer-oriented economies, could result in a reduction in world trade volume or in demand by container shipping lines for leased containers. Thus, a decrease in the volume of world trade may adversely affect our utilization and per diem rates and lead to reduced revenue, increased operating expenses (such as storage and repositioning costs) and have an adverse effect on our financial performance. We cannot predict whether, or when, such downturns will occur.

Much of our leasing business involves shipments of goods exported from Asia. From time to time, there have been economic disruptions, health scares, such as SARS and avian flu, financial turmoil, natural disasters and political instability in Asia. If these events were to occur in the future, they could adversely affect our container lessees and the general demand for shipping and lead to reduced demand for leased containers or otherwise adversely affect us.

Other general factors affecting demand for leased containers, utilization and per diem rates include the following:

 

    prices of new and used containers;

 

    economic conditions and competitive pressures in the shipping industry;

 

    shifting trends and patterns of cargo traffic;

 

    the availability and terms of container financing;

 

    fluctuations in interest rates and foreign currency values;

 

    overcapacity or undercapacity of the container manufacturers;

 

    the lead times required to purchase containers;

 

    the number of containers purchased by competitors and container lessees;

 

    container ship fleet overcapacity or undercapacity;

 

    increased repositioning by container shipping lines of their own empty containers to higher-demand locations in lieu of leasing containers from us;

 

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consolidation or withdrawal of individual container lessees in the container shipping industry;

 

   

import/export tariffs and restrictions;

 

   

customs procedures, foreign exchange controls and other governmental regulations;

 

   

natural disasters that are severe enough to affect local and global economies; and

 

   

political and economic factors.

All of these factors are inherently unpredictable and beyond our control. These factors will vary over time, often quickly and unpredictably, and any change in one or more of these factors may have a material adverse effect on our business and results of operations. Many of these factors also influence the decision by container shipping lines to lease or buy containers. Should one or more of these factors influence container shipping lines to buy a larger percentage of the containers they operate, our utilization rate would decrease, resulting in decreased revenue and increased storage and repositioning costs.

Our operating results have fluctuated significantly in the past and may fluctuate significantly in the future.

Our revenue comes primarily from the leasing of containers owned by us, management fees earned on containers owned by container investors and gain on sale of container portfolios to container investors. Historically, our annual and quarterly total revenues, net income and cash flows have fluctuated significantly as a result of fluctuations in our gain on sale of container portfolios. Selling containers to container investors has very little associated incremental expense, which means that our quarterly results may fluctuate significantly depending upon the amount of gain on sale of container portfolios, if any, we realize in a quarter. Due to seasonal increased demand for containers in the several months leading up to the holiday season in the United States and Europe and higher demand for purchasing containers by container investors toward the end of the calendar year, a higher proportion of our container sales to investors has typically occurred in the second half of each calendar year. Although by comparison our container rental revenue and management fee revenue have historically fluctuated much less than our gain on sale of container portfolios, container rental revenue and management revenue may also fluctuate significantly in future periods based upon the level of demand by container shipping lines for leased containers, our ability to maintain a high utilization rate of containers in our total fleet, changes in per diem rates for leases and fluctuations in operating expenses.

A large part of our revenue comes from gain on sale of container portfolios and our container sale activities in the future may result in lower gains or losses on sales of containers.

Our revenue from gain on sale of container portfolios depends on our ability to make a profit on containers that we purchase and then resell to container investors. We typically enter into firm purchase orders for containers before we begin finding lessees for the containers, and the time necessary to lease these containers may be much longer than we anticipate. The price that a container investor is willing to pay for a portfolio of containers depends on a number of factors, including the historical and future expected cash flows from the portfolio to the container investor, the credit ratings of the lessees, the mix of short-term and long-term leases, the number of TEUs in the portfolio, the timing of the sale and alternative investment opportunities available to the container investor. If any of these factors changes unexpectedly during the period between the date of our purchase order to the date a container investor purchases the container from us, we may recognize a lower gain on sale of the containers to investors, sell them to container investors at a loss or retain them as part of our owned fleet.

 

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The container investors that purchase containers from us are located in four countries and a change in the conditions and laws in any of these countries could significantly reduce demand by container investors to purchase containers.

The container investors that have historically purchased containers from us are located in Germany, Switzerland, Austria and Japan. The willingness of these investors to continue to purchase containers from us will depend upon a number of factors outside of our control, including the laws in the countries in which they are domiciled, the tax treatment of an investment and restrictions on foreign investments. If a change in tax laws or other conditions makes investments in containers less attractive, we will need to identify new container investors. The process of identifying new container investors and selling containers to them could be lengthy and we cannot assure you that we will be able to find new container investors in these circumstances, which would result in a substantial reduction in the amount of gain on sale of container portfolios and cash flow.

We derive a substantial portion of our revenue for each of our container management and container leasing segments from a limited number of container investors and container lessees, respectively, and the loss of, or reduction in business by, any of these container investors or container lessees could result in a significant loss of revenue and cash flow.

We have derived, and believe that we will continue to derive, a significant portion of our revenue and cash flow from a limited number of container investors and container lessees. Our business comprises two reportable segments for financial statement reporting purposes: container management and container leasing. Revenue for our container management segment comes primarily from container investors that purchase portfolios of containers and then pay us to manage the containers for them. Revenue for our container leasing segment comes primarily from container lessees that lease containers from our owned fleet.

Revenue from our seven largest container lessees represented 51.1% of the revenue from our container leasing segment for the nine months ended September 30, 2006, with revenue from our single largest container lessee accounting for 14.4%, or $3.8 million, of revenue from our container leasing segment during such period. This $3.8 million of revenue represented 8.8% of our total revenue for the nine months ended September 30, 2006. In addition, four container investors accounted for 94.5% of the revenue from our container management segment for the nine months ended September 30, 2006, with the single largest container investor accounting for 31.5%, or $5.3 million, of revenue from our container management segment during such period. This $5.3 million of revenue represented 12.4% of our total revenue for the nine months ended September 30, 2006.

We do not distinguish between our owned fleet and our managed fleet when we enter into leases with container shipping lines. Accordingly, the largest lessees of our owned fleet are typically among the largest lessees of our managed fleet, and our management fee revenue is based in part on the number of managed containers on lease to container lessees. As a result, the loss of, or default by, any of our largest container lessees could have a material adverse effect on the revenue for both our container management segment and our container leasing segment, and the loss of any of our four largest container investors as management services customers could have a material adverse effect on the revenue for our container management segment.

Consolidation and concentration in the container shipping industry could decrease the demand for leased containers.

We primarily lease containers to container shipping lines. We believe container shipping lines require two TEUs of available containers for every TEU of capacity on their container ships. The container shipping lines have historically relied on a large number of leased containers to satisfy their needs. Consolidation of major container shipping lines could create efficiencies and decrease the demand that container

 

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shipping lines have for leased containers because they may be able to fulfill a larger portion of their needs through their owned container fleets. It could also create concentration of credit risk if the number of our container lessees decreases due to consolidation. Additionally, large container shipping lines with significant resources could choose to manufacture their own containers, which would decrease their demand for leased containers and could have an adverse impact on our business.

Per diem rates for our leased containers may decrease, which would have a negative effect on our business and results of operations.

Per diem rates for our leased containers depend on a large number of factors, including the following:

 

   

the type and length of the lease;

 

   

embedded residual assumptions;

 

   

the type and age of the container;

 

   

the number of new containers available for lease by our competitors;

 

   

the location of the container being leased; and

 

   

the price of new containers.

Because steel is the major component used in the construction of new containers, the price of new containers is highly correlated with the price of raw steel. Container prices and leasing rates increased from 2003 to 2004, and again in the second half of 2006, partially due to an increase in worldwide steel prices, while in the late 1990s, new container prices and per diem rates declined, because of, among other factors, a drop in worldwide steel prices and a shift in container manufacturing from Taiwan and Korea to areas in mainland China with lower labor costs. We cannot assure you that container prices and per diem rates will not fall again.

In addition, per diem rates may be negatively impacted by the entrance of new leasing companies, overproduction of new containers by manufacturers and over-buying of containers by container shipping lines and leasing competitors. For example, during 2001 and again in 2005, overproduction of new containers, coupled with a build-up of container inventories in Asia by leasing companies and container shipping lines, led to decreasing per diem rates and utilization rates. In the event that the container shipping industry were to be characterized by overcapacity in the future, or if available supply of containers were to increase significantly as a result of, among other factors, new companies entering the business of leasing and selling containers, both utilization and per diem rates may decrease, adversely affecting our revenue and operating results. We cannot assure you that such imbalances will not occur.

A reduction in the willingness of container investors to have us manage their containers could adversely affect our business, results of operations and financial condition.

A significant percentage of our revenue is attributable to management fees earned on services related to the leasing of containers owned by container investors. This revenue has very low direct operating costs associated with it. Accordingly, fluctuations in our management fee revenue in any period will have a significant impact on our profitability in that period. If we fail to meet performance requirements contained in our management agreements, container investors may seek to terminate these agreements. Moreover, our ability to continue to attract new management contracts depends upon a number of factors, including our ability to lease containers on attractive lease terms and to efficiently manage the repositioning and disposition of containers. In the event container investors perceive another container leasing company as better able to provide them with a stable and attractive rate of return, existing contracts may not be renewed, and we may lose management contract opportunities in the future, which could affect our business, results of operations and financial condition.

 

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As we increase the number of containers in our owned fleet, we will be subject to significantly greater ownership risks.

The number of containers in our owned fleet fluctuates over time as we purchase new containers and sell containers to container investors or into the secondary resale market. As part of our strategy, we plan to increase both the number of owned containers as well as the number of managed containers in our fleet. We believe we will be able to find container investors to purchase the desired portion of the new containers that we purchase and lease. If we are unable to locate container investors to purchase these containers, we will operate the containers as part of our owned fleet. Ownership of containers entails greater risk than management of containers for container investors, meaning that as we increase the number of containers in our owned fleet, we will be subject to an increased level of risk from loss or damage to equipment, financing costs, changes in per diem rates, re-leasing risk, changes in utilization rates, lessee defaults, repositioning costs, storage expenses, impairment charges and changes in sales price upon disposition of containers.

As we increase the number of containers in our owned fleet we will have significantly more capital at risk and may not be able to satisfy the future capital requirements of our container management business.

As we increase the number of containers in our owned fleet, either as a result of planned growth in our owned fleet or as a result of our inability to sell containers to container investors, we may need to maintain higher debt balances which may adversely affect our return on equity and reduce our capital resources, including our ability to borrow money to continue expanding our managed fleet. We cannot assure you that future borrowings will be available under our senior secured credit facility or that we will be able to refinance the facility, if necessary, on commercially reasonable terms or at all. We may need to raise additional debt or equity capital in order to fund our business, expand our sales activities and/or respond to competitive pressures. We cannot assure you that we will have access to the capital resources we desire or need to fund our business. These effects, among others, may reduce our profitability and adversely affect our plans to continue the expansion of the container management portion of our business.

Our container lessees prefer newer containers, so to stay competitive we must continually add new containers to our fleet. If we are unable to make necessary capital expenditures, our fleet of containers may be less attractive to our container lessees and our profitability could suffer.

Gains and losses associated with the disposition of used equipment may fluctuate and adversely affect our results of operations.

We regularly sell used, older containers upon lease expiration. The residual values of these containers therefore affect our profitability. The volatility of the residual values of such containers may be significant. These values depend upon, among other factors, raw steel prices, applicable maintenance standards, refurbishment needs, comparable new container costs, used container availability, inflation rates, market conditions, materials and labor costs and equipment obsolescence. Most of these factors are outside of our control.

Containers are typically sold if it is in the best interest of the owner to do so after taking into consideration earnings prospects, book value, remaining useful life, repair condition, suitability for leasing or other uses and the prevailing local sales price for containers. Gains or losses on the disposition of used container equipment and the sales fees earned on the disposition of managed containers will also fluctuate and may be significant if we sell large quantities of used containers.

We may incur significant costs to reposition containers.

When lessees return containers to locations where supply exceeds demand, we routinely reposition containers to higher demand areas. Repositioning expenses vary depending on geographic location,

 

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distance, freight rates and other factors, and may not be fully covered by drop-off charges collected from the last lessee of the containers or pick-up charges paid by the new lessee. We seek to limit the number of containers that can be returned and impose surcharges on containers returned to areas where demand for such containers is not expected to be strong. We cannot assure you, however, that market conditions will enable us to continue such practices. In addition, we cannot assure you that we will accurately anticipate which port locations will be characterized by high or low demand in the future, and our current contracts will not protect us from repositioning costs if ports that we expect to be high-demand ports turn out to be low-demand ports at the time leases expire.

Lessee defaults may adversely affect our business, results of operations and financial condition by decreasing revenue and increasing storage, repositioning, collection and recovery expenses.

Our containers are leased to numerous container lessees. Lessees are required to pay rent and indemnify us for damage to or loss of containers. Lessees may default in paying rent and performing other obligations under their leases. A delay or diminution in amounts received under the leases (including leases on our managed containers), or a default in the performance of maintenance or other lessee obligations under the leases could adversely affect our business, results of operations and financial condition and our ability to make payments on our debt.

Our cash flows from containers, principally container rental revenue, management fee revenue, gain on sale of container portfolios, gain on disposition of used equipment and commissions earned on the sale of containers on behalf of container investors, are affected significantly by the ability to collect payments under leases and the ability to replace cash flows from terminating leases by re-leasing or selling containers on favorable terms. All of these factors are subject to external economic conditions and the performance by lessees and service providers that are not within our control.

When lessees default, we may fail to recover all of our containers and the containers we do recover may be returned to locations where we will not be able to quickly re-lease or sell them on commercially acceptable terms. We may have to reposition these containers to other places where we can re-lease or sell them, which could be expensive depending on the locations and distances involved. Following repositioning, we may need to repair the containers and pay container depots for storage until the containers are re-leased. For our owned containers these costs will directly reduce our income before taxes and for our managed containers, lessee defaults will increase operating expenses, and thus reduce our management fee revenue. While we maintain insurance to cover such defaults, it is subject to large deductible amounts and significant exclusions and, therefore, may not be sufficient to prevent us from suffering material losses. Additionally, this insurance might not be available to us in the future on commercially reasonable terms or at all. While in recent years defaults by lessees, as measured by our experience and reflected on our financial statements as an allowance for doubtful accounts, have not constituted a significant percentage of our assets, we cannot assure you that any future defaults will not be material and any such future defaults could have a material adverse effect on our business, results of operations and financial condition.

Changes in market price, availability or transportation costs of containers could adversely affect our ability to maintain our supply of containers.

We currently purchase almost all of our containers from manufacturers based in China. If it were to become more expensive for us to procure containers in China or to transport these containers at a low cost from China to the locations where they are needed by our container lessees because of changes in exchange rates between the U.S. Dollar and Chinese Yuan, further consolidation among container suppliers, increased tariffs imposed by the United States or other governments or for any other reason, we may have to seek alternative sources of supply. We may not be able to make alternative arrangements quickly enough to meet our container needs, and the alternative arrangements may increase our costs. The availability of containers depends significantly on the availability and cost of steel in China. If a

 

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shortage of steel develops either in China or worldwide, container manufacturers may not be able to meet our demand for new containers which would limit our ability to add new containers to our fleet.

Terrorist attacks, the threat of such attacks or the outbreak of war and hostilities could negatively impact our operations and profitability and may expose us to liability.

Terrorist attacks and the threat of such attacks have contributed to economic instability in the United States and elsewhere, and further acts or threats of terrorism, violence, war or hostilities could similarly affect world trade and the industries in which we and our container lessees operate. For example, worldwide containerized trade dramatically decreased in the immediate aftermath of the September 11, 2001 terrorist attacks in the United States, which affected demand for leased containers. In addition, terrorist attacks, threats of terrorism, violence, war or hostilities may directly impact ports, depots, our facilities or those of our suppliers or container lessees and could impact our sales and our supply chain. A severe disruption to the worldwide ports system and flow of goods could result in a reduction in the level of international trade and lower demand for our containers.

We maintain liability insurance that we believe would apply to claims arising from a terrorist attack, and our lease agreements require our lessees to indemnify us for all costs, liabilities and expenses arising out of the use of our containers, including property damage to the containers, damage to third-party property and personal injury. However, our lessees may not have adequate resources to honor their indemnity obligations and our insurance coverage is subject to large deductibles, a $15.0 million limit on coverage and significant exclusions. Accordingly, we cannot assure you that we would be protected from liability (and expenses in defending against claims of liability) arising from a terrorist attack.

Our senior executives are critical to the success of our business and our inability to retain them or recruit new personnel could adversely affect our business.

Most of our senior executives and other management-level employees have over ten years of industry experience. We rely on this knowledge and experience in our strategic planning and in our day-to-day business operations. Our success depends in large part upon our ability to retain our senior management, the loss of one or more of whom could have a material adverse effect on our business. Our success also depends on our ability to retain our experienced sales force and technical personnel as well as recruiting new skilled sales, marketing and technical personnel. Competition for these individuals in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new container lessees and provide acceptable levels of customer service could suffer. With the exception of Mr. Hiromitsu Ogawa, our Executive Chairman, Mr. Masaaki (John) Nishibori, our President and Chief Executive Officer, and Mr. Victor Garcia, our Senior Vice President and Chief Financial Officer, we do not have employment agreements with any of our employees.

We rely on our proprietary information technology system to conduct our business. If this system fails to adequately perform its functions, or if we experience an interruption in its operation, our business, results of operations and financial prospects could be adversely affected.

The efficient operation of our business is highly dependent on our proprietary information technology system. We rely on our system to track transactions, such as repair and depot charges and changes to book value, and movements associated with each of our owned or managed containers. We use the information provided by this system in our day-to-day business decisions in order to effectively manage our lease portfolio and improve customer service. We also rely on it for the accurate tracking of the performance of our managed fleet for each container investor. The failure of our system to perform as we expect could disrupt our business, adversely affect our results of operations and cause our relationships with lessees and container investors to suffer. In addition, our information technology system is vulnerable to damage or interruption from circumstances beyond our control, including fire, natural

 

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disasters, power loss and computer systems failures and viruses. Any such interruption could have a material adverse effect on our business, results of operations and financial prospects.

Our level of indebtedness reduces our financial flexibility and could impede our ability to operate.

We intend to borrow additional amounts under our senior secured credit facility to purchase containers and expect that we will maintain a significant amount of indebtedness on an ongoing basis. All of our borrowings under our senior secured credit facility are due and payable on September 30, 2010, and there is no assurance that we will be able to refinance our outstanding indebtedness, or if refinancing is available, that it can be obtained on terms that we can afford.

Our senior secured credit facility requires us to pay a variable rate of interest, which will increase or decrease based on variations in certain financial indexes, and fluctuations in interest rates can significantly decrease our profits. We have purchased no hedge or similar contracts that would protect us against changes in interest rates.

The amount of our indebtedness could have important consequences for you, including the following:

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing funds available for operations, future business opportunities and other purposes;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

making it more difficult for us to satisfy our debt obligations, and any failure to comply with such obligations, including financial and other restrictive covenants, could result in an event of default under the agreements governing such indebtedness, which could lead to, among other things, an acceleration of our indebtedness or foreclosure on the assets securing our indebtedness, which could have a material adverse effect on our business or financial condition;

 

   

limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes; and

 

   

increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates.

We cannot assure you that we will generate sufficient cash flow from operations to service and repay our debt and related obligations and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our industry.

We will require a significant amount of cash to service and repay our outstanding indebtedness and our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and repay our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. We cannot assure you that:

 

   

our business will generate sufficient cash flow from operations to service and repay our debt and to fund working capital requirements and planned capital expenditures;

 

   

future borrowings will be available under our current or future credit facilities in an amount sufficient to enable us to refinance our debt; or

 

   

we will be able to refinance any of our debt on commercially reasonable terms or at all.

 

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Our senior secured credit facility imposes, and the terms of any future indebtedness may impose, significant operating, financial and other restrictions on us and our subsidiaries.

Restrictions imposed by our senior secured credit facility will limit or prohibit, among other things, our ability to:

 

    incur additional indebtedness;

 

    pay dividends on or redeem or repurchase our stock;

 

    enter into new lines of business;

 

    issue capital stock of our subsidiaries;

 

    make loans and certain types of investments;

 

    create liens;

 

    sell certain assets or merge with or into other companies;

 

    enter into certain transactions with stockholders and affiliates; and

 

    restrict dividends, distributions or other payments from our subsidiaries.

These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions, including breach of financial covenants, could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness, which will constitute substantially all of our container assets.

We face extensive competition in the container leasing industry.

We may be unable to compete favorably in the highly competitive container leasing and container management businesses. We compete with a relatively small number of major leasing companies, many smaller lessors, manufacturers of container equipment, companies and financial institutions offering finance leases, promoters of container ownership and leasing as a tax-efficient investment, container shipping lines, which sometimes lease their excess container stocks, and suppliers of alternative types of containers for freight transport. Some of these competitors have greater financial resources and access to capital than we do. Additionally, some of these competitors may have large, underutilized inventories of containers, which could lead to significant downward pressure on per diem rates, margins and prices of containers.

Competition among container leasing companies depends upon many factors, including, among others, per diem rates; lease terms, including lease duration, drop-off restrictions and repair provisions; customer service; and the location, availability, quality and individual characteristics of containers. New entrants into the leasing business have been attracted by the high rate of containerized trade growth in recent years. New entrants may be willing to offer pricing or other terms that we are unwilling or unable to match. As a result, we cannot assure you that we can maintain a high utilization rate or achieve our growth plans.

The international nature of the container industry exposes us to numerous risks.

Our ability to enforce lessees’ obligations will be subject to applicable law in the jurisdiction in which enforcement is sought. As containers are predominantly located on international waterways, it is not possible to predict, with any degree of certainty, the jurisdictions in which enforcement proceedings may be commenced. For example, repossession from defaulting lessees may be difficult and more expensive in jurisdictions in which laws do not confer the same security interests and rights to creditors and lessors as

 

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those in the United States and in jurisdictions where recovery of containers from defaulting lessees is more cumbersome. As a result, the relative success and expedience of enforcement proceedings with respect to containers in various jurisdictions cannot be predicted.

We are also subject to risks inherent in conducting business across national boundaries, any one of which could adversely impact our business. These risks include:

 

    regional or local economic downturns;

 

    changes in governmental policy or regulation;

 

    restrictions on the transfer of funds into or out of the country;

 

    import and export duties and quotas;

 

    domestic and foreign customs and tariffs;

 

    international incidents;

 

    war, hostilities and terrorist attacks, or the threat of any of these events;

 

    government instability;

 

    nationalization of foreign assets;

 

    government protectionism;

 

    compliance with export controls, including those of the U.S. Department of Commerce;

 

    compliance with import procedures and controls, including those of the U.S. Department of Homeland Security;

 

    consequences from changes in tax laws, including tax laws pertaining to the container investors;

 

    requirements relating to withholding taxes on remittances and other payments by subsidiaries;

 

    labor or other disruptions at key ports;

 

    difficulty in staffing and managing widespread operations; and

 

    restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions.

We cannot assure you that one or more of these factors will not impair our current or future international operations and, as a result, harm our overall business.

We may incur costs associated with new security regulations, which may adversely affect our business, financial condition and results of operations.

We may be subject to regulations promulgated in various countries, including the United States, seeking to protect the integrity of international commerce and prevent the use of containers for international terrorism or other illicit activities. For example, the Container Security Initiative, the Customs-Trade Partnership Against Terrorism and Operation Safe Commerce are among the programs administered by the U.S. Department of Homeland Security that are designed to enhance security for cargo moving throughout the international transportation system by identifying existing vulnerabilities in the supply chain and developing improved methods for ensuring the security of containerized cargo entering and leaving the United States. Moreover, the International Convention for Safe Containers, 1972 (CSC), as amended, adopted by the International Maritime Organization, applies to new and existing containers and seeks to maintain a high level of safety of human life in the transport and handling of containers by

 

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providing uniform international safety regulations. As these regulations develop and change, we may incur compliance costs due to the acquisition of new, compliant containers and/or the adaptation of existing containers to meet new requirements imposed by such regulations. Additionally, certain companies are currently developing or may in the future develop products designed to enhance the security of containers transported in international commerce. Regardless of the existence of current or future government regulations mandating the safety standards of intermodal shipping containers, our competitors may adopt such products or our container lessees may require that we adopt such products. In responding to such market pressures, we may incur increased costs, which could have a material adverse effect on our business, financial condition and results of operations.

Environmental liability may adversely affect our business and financial condition.

We are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants to air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and third-party claims for property damage and personal injury, as a result of violations of or liabilities under environmental laws and regulations in connection with our or our lessees’ current or historical operations. Under some environmental laws in the United States and certain other countries, the owner or operator of a leased container may be liable for environmental damage, cleanup or other costs in the event of a spill or discharge of material from a container without regard to the fault of the owner or operator. While we maintain liability insurance and require lessees to provide us with indemnity against certain losses, the insurance coverage may not be sufficient to protect against any or all liabilities and such indemnities may not be sufficient to protect us against losses arising from environmental damage. Moreover, our lessees may not have adequate resources, or may refuse to honor their indemnity obligations and our insurance coverage is subject to large deductibles, coverage limits and significant exclusions.

We may face litigation involving our management of containers for container investors.

We manage containers for container investors under management agreements that are negotiated with each container investor. We make no assurances to container investors that they will make any amount of profit on their investment or that our management activities will result in any particular level of income or return of their initial capital. We believe that as the number of containers that we manage for container investors increases, there is a possibility that we may be drawn into litigation relating to the investments. Although our management agreements contain contractual protections and indemnities that are designed to limit our exposure to such litigation, we cannot assure you that such provisions will be effective and that we will not be subject to a significant loss in a successful litigation by a container investor.

Certain liens may arise on our containers.

Depot operators, repairmen and transporters may come into possession of our containers from time to time and have sums due to them from the lessees or sublessees of the containers. In the event of nonpayment of those charges by the lessees or sublessees, we may be delayed in, or entirely barred from, repossessing the containers, or be required to make payments or incur expenses to discharge liens on our containers.

We may choose to pursue acquisitions or joint ventures that could present unforeseen integration obstacles or costs.

We may pursue acquisitions and joint ventures. Acquisitions involve a number of risks and present financial, managerial and operational challenges, including:

 

    potential disruption of our ongoing business and distraction of management;

 

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    difficulty integrating personnel and financial and other systems;

 

    hiring additional management and other critical personnel; and

 

    increasing the scope, geographic diversity and complexity of our operations.

In addition, we may encounter unforeseen obstacles or costs in the integration of acquired businesses. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business. Acquisitions or joint ventures may not be successful, and we may not realize any anticipated benefits from acquisitions or joint ventures.

In the future, we may be required to pay personal holding company taxes, which would have an adverse effect on our cash flows, results of operations and financial condition.

The Internal Revenue Code requires any company that qualifies as a “personal holding company” to pay personal holding company taxes in addition to regular income taxes. A company qualifies as a personal holding company if (1) more than 50.0% of the value of the company’s stock is held by five or fewer individuals and (2) at least 60.0% of the company’s adjusted ordinary gross income constitutes personal holding company income, which, in our case, includes adjusted income from the lease of our containers. If we or any of our subsidiaries are a personal holding company, our undistributed personal holding company income, which is generally taxable income with certain adjustments, including a deduction for federal income taxes and dividends paid, will be taxed at a rate of 15.0%. Based upon our operating results, we were not classified as a personal holding company for the year ended December 31, 2005. Whether or not we or any of our subsidiaries are classified as personal holding companies for the year ended December 31, 2006 or in future years will depend upon the amount of our personal holding company income and the percentage of our outstanding common stock that will be beneficially owned after this offering by Hiromitsu Ogawa, who currently beneficially owns 100.0% of our common stock. We cannot assure you that we will not at some point in the future become liable for personal holding company taxes. The payment of personal holding company taxes in the future would have an adverse effect on our cash flows, results of operations and financial condition.

Risks Related to This Offering

An active market for our common stock may not develop, which may inhibit the ability of our stockholders to sell their shares.

Prior to this offering, there has been no public market for our common stock. An active or liquid trading market in our common stock may not develop upon completion of this offering, or if it does develop, it may not continue. The lack of an active market may impair your ability to sell your stock at the time you wish to sell it or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of our common stock. An inactive market may also impair our ability to raise capital by selling stock and may impair our ability to acquire other companies or technologies by using our stock as consideration.

The price of our common stock may be highly volatile and may decline regardless of our operating performance.

The initial public offering price for the common stock sold in this offering will be determined by negotiation between Piper Jaffray & Co., on behalf of the underwriters, and us. This price may not reflect the market price of our common stock following this offering and we cannot assure you that the market price will equal or exceed the initial public offering price. See “Underwriting” for a discussion of the factors that we and the underwriters will consider in determining the initial public offering price. The

 

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trading price of our common stock is likely to be subject to wide fluctuations. Factors affecting the trading price of our common stock may include:

 

    variations in our financial results;

 

    changes in financial estimates or investment recommendations by any securities analysts following our business;

 

    the public’s response to our press releases, our other public announcements and our filings with the Securities and Exchange Commission;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    future sales of common stock by us or our directors, officers or significant stockholders or the perception such sales may occur;

 

    our ability to achieve operating results consistent with securities analysts’ projections;

 

    the operating and stock price performance of other companies that investors may deem comparable to us;

 

    recruitment or departure of key personnel;

 

    our ability to timely address changing container lessee preferences;

 

    container market and industry factors;

 

    general stock market conditions; and

 

    other events or factors, including those resulting from war, incidents of terrorism or responses to such events.

In addition, if the market for companies deemed similar to us or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business or financial results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

The assumed initial public offering price of our common stock is significantly greater than the net tangible book value of our common stock, which means you will experience immediate and substantial dilution.

The assumed initial public offering price of $             per share, which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus, is substantially higher than the pro forma net tangible book value of $             per share. As a result, investors purchasing stock in this offering will incur immediate dilution of $             per share of common stock purchased. An aggregate gain in net tangible book value of approximately $             per share will be attributable to our current stockholders as a result of this offering. If we choose to raise funds in the future through the issuance of equity securities or convertible debt securities, if outstanding options are exercised or if we grant stock awards, you will experience additional dilution of your percentage ownership of our company. This dilution may be substantial. In addition, these securities may have powers, preferences and rights that are senior to the holders of our common stock and may further limit our ability to pay dividends on our common stock.

Future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline and impair our ability to obtain capital through future stock offerings.

A substantial number of shares of our common stock held by our current stockholders could be sold into the public market after this offering. The occurrence of such sales, or the perception that such sales could occur, could materially and adversely affect our stock price and could impair our ability to obtain capital through an offering of equity securities. The shares of common stock being sold in this offering will be freely tradable, except for any shares acquired by our affiliates.

 

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In connection with this offering, our directors, officers and stockholders have either entered into or have agreed to enter into written lock-up agreements providing that, for a period of 180 days from the date of this prospectus, they will not, among other things, sell their shares without the prior written consent of Piper Jaffray. See “Shares Eligible for Future Sale—Lock-up Agreements” for more information regarding these lock-up agreements. Upon the expiration of the lock-up period, an additional              shares of our common stock will be tradable in the public market subject, in most cases, to volume and other restrictions under federal securities laws. In addition, upon completion of this offering, options exercisable for an aggregate of approximately              shares of our common stock will be outstanding. We have entered into agreements with the holders of approximately              shares of our common stock under which, subject to the applicable lock-up agreements, we may be required to register future sales of these shares.

We do not expect to pay any dividends in the foreseeable future.

We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. In addition, our senior secured credit facility includes restrictions on our ability to pay cash dividends. Agreements governing future indebtedness will likely contain similar restrictions on our ability to pay cash dividends. Consequently, investors must rely on sales of their common stock as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

If securities analysts do not publish research or reports about our business or if they change their financial estimates or investment recommendation, the price of our stock could decline.

The trading market for our common shares will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control or influence the decisions or opinions of these analysts and we cannot assure you that any analysts will cover us.

If any analyst who covers us changes his or her financial estimates or investment recommendation, the price of our stock could decline. If any analyst ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Our founder, Hiromitsu Ogawa, will continue to have substantial control over us after this offering and could act in a manner with which other stockholders may disagree or that is not necessarily in the interests of other stockholders.

After this offering, based upon beneficial ownership as of January 31, 2006, Mr. Ogawa will beneficially own approximately     % of our outstanding common stock. As a result, he may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, he may have the ability to control the management and affairs of our company. Mr. Ogawa may have interests that are different from yours. For example, he may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of us or otherwise discourage a potential acquiror from attempting to obtain control of us, which in turn could reduce the price of our common stock. In addition, as our Executive Chairman, Mr. Ogawa will influence decisions to maintain our existing management and directors in office, delay or prevent changes of control of our company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

 

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Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our common stock.

Our certificate of incorporation and bylaws and Delaware corporate law each contain provisions that could delay, defer or prevent a change in control of our company or changes in our management. Among other things, these provisions:

 

   

authorize us to issue preferred stock that can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common stock;

 

   

permit removal of directors only for cause by the holders of a majority of the shares entitled to vote at the election of directors and allow only the directors to fill a vacancy on the board of directors;

 

   

prohibit stockholders from calling special meetings of stockholders;

 

   

prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

 

   

allow the authorized number of directors to be changed only by resolution of the board of directors;

 

   

establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;

 

   

classify our board of directors into three classes so that only a portion of our directors are elected each year; and

 

   

allow our directors to amend our bylaws.

These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of us. Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.

Implementation of required public-company corporate governance and financial reporting practices and policies will increase our costs, and we may be unable to provide the required financial information in a timely and reliable manner.

The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), adopted rules which will require us to include in our annual reports on Form 10-K an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on the effectiveness of such internal controls over financial reporting. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company. If we are not able to implement the requirements of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent auditors may not be able to attest as to the effectiveness of our internal controls over financial reporting. This result may subject us to adverse regulatory consequences, and could lead to a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if we disclose material weaknesses in our internal controls. In addition, if we fail to develop and maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner or otherwise comply with the standards applicable to us as a public company.

 

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Any failure by us to timely provide the required financial information could materially and adversely impact our financial condition and the market value of our stock.

We were previously a consolidated subsidiary of Interpool, and as such had previously implemented certain procedures to meet the standards applicable to public companies. Although we have taken a number of steps to implement effective controls and procedures, certain internal control deficiencies existed as of December 31, 2005 which constituted “material weaknesses” as defined by the Public Company Accounting Oversight Board. Certain complex transactions had not been accounted for properly in accordance with GAAP due to a lack of personnel with sufficient technical expertise. We have hired additional employees to assist us with complying with our public-company corporate governance and financial reporting obligations, the cost of which will reduce our profitability.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, principally in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry” and “Business.” Generally, you can identify these statements because they include words and phrases like “expect,” “estimate,” “anticipate,” “predict,” “believe,” “think,” “plan,” “will,” “should,” “intend,” “seek,” “potential” and similar expressions and variations. These statements are only predictions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which cannot be foreseen. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, among others, the risks we face that are described in the section entitled “Risk Factors” and elsewhere in this prospectus.

We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. The risk factors listed on the previous pages, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the previous risk factors and elsewhere in this prospectus could negatively impact our business, cash flows, results of operations, financial condition and stock price.

Forward-looking statements regarding our present plans or expectations for fleet size, management contracts, container purchases, sources and availability of financing, and growth involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, as well as the negotiation of agreements with container investors, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding our present expectations for operating results and cash flow involve risks and uncertainties relative to factors such as utilization rates, per diem rates, container prices, demand for containers by container shipping lines, supply and other factors discussed under “Risk Factors” or elsewhere in this prospectus, which also would cause actual results to differ from present plans. Such differences could be material.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this prospectus as a result of new information, future events or developments, except as required by federal securities laws. You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect.

Industry data and other statistical information used in this prospectus are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of common stock that we are selling in this offering will be approximately $             million, after deducting underwriting discounts and commissions and estimated offering expenses and assuming an initial public offering price of $             per share, which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $             million (assuming the number of shares set forth on the cover of this prospectus remains the same).

On October 1, 2006, we repurchased 50.0% of our then-outstanding common stock from Interpool. In connection with this transaction, we incurred $80.5 million of indebtedness, $37.5 million of which was pursuant to a convertible subordinated promissory note we issued to Interpool and the remainder was pursuant to borrowings under the revolving line of credit portion of our senior secured credit facility. Of this indebtedness, $77.5 million of the newly incurred indebtedness was incurred to pay the purchase price for the common stock and $3.0 million of which was used to repay a subordinated note we had previously issued to Interpool. We intend to use our net proceeds from this offering in the following manner:

 

   

approximately $37.5 million to repay the convertible subordinated note issued to Interpool;

 

   

approximately $20.0 million to repay the outstanding term loan under our senior secured credit facility; and

 

   

the remainder to repay a portion of the amount outstanding under the revolving line of credit under our senior secured credit facility.

The $37.5 million note issued to Interpool bears interest at a rate of 7.87% per year for the first six months. Thereafter, the interest rate will increase by 1.00% for each six-month period that the principal amount of such note remains outstanding. The convertible subordinated note is due and payable on October 30, 2010. For additional information on this note, see “Certain Relationships and Related-Party Transactions.”

We borrowed $20.0 million under the term loan portion of our senior secured credit facility on October 2, 2006 to pay part of the cash portion of the purchase price payable to Interpool in connection with our repurchase of all of our common stock held by Interpool and our repayment of the remaining principal and interest on a subordinated note we had previously issued to Interpool. The term loan bears interest at variable rates based on the Eurodollar rate or a base rate described in our senior secured credit facility plus a margin that changes depending on certain financial criteria. The term loan is due and payable on September 30, 2010. As of December 31, 2006, the interest rate on the term loan was 7.57%.

In addition, we borrowed $23.0 million under the revolving line of credit portion of our senior secured credit facility on October 2, 2006 to pay part of the cash portion of the purchase price payable to Interpool in connection with our repurchase of all of our common stock held by Interpool. The revolving line of credit bears interest at variable rates based on the Eurodollar rate or a base rate described in our senior secured credit facility plus a margin that changes depending on certain financial criteria. The amounts outstanding under the revolving line of credit are due and payable on September 30, 2010. As of December 31, 2006, the interest rate on the amount outstanding under the revolving line of credit was 7.32%.

 

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DIVIDEND POLICY

We have never paid cash dividends on our common stock and we intend to retain our future earnings, if any, to fund the development and growth of our business. We therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our future decisions concerning the payment of dividends on our common stock will depend upon the results of our operations, our financial condition and our capital expenditure plans, as well as any other factors that our board of directors, in its sole discretion, may consider relevant. In addition, our existing indebtedness restricts, and our future indebtedness may restrict, our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth the following information with respect to our capitalization as of September 30, 2006:

 

    our actual capitalization as of September 30, 2006;

 

    adjustments to give effect to the following events (collectively referred to as the “Interpool Transaction”) as if such events had occurred on September 30, 2006:

 

    our repurchase of Interpool’s 50.0% interest in our common stock;

 

    repayment of a subordinated note we had previously issued to Interpool;

 

    termination of a warrant to purchase our common stock held by Interpool;

 

    issuance by us of a convertible subordinated note to Interpool for a principal amount of $37.5 million; and

 

    our borrowing of $20.0 million under the term loan portion of our senior secured credit facility and $23.0 million under the revolving line of credit portion of such facility;

 

    adjustments to give effect to the following events (collectively referred to as the “Conversion of Preferred Stock”), all of which will occur immediately prior to the completion of this offering, as if such events had occurred on September 30, 2006:

 

    conversion of all outstanding shares of Series A cumulative redeemable convertible preferred stock into 1,726 shares of common stock;

 

    payment of all accrued dividends on the Series A cumulative redeemable convertible preferred stock; and

 

    receipt of the repayment of the promissory notes (including all accrued and unpaid interest) issued to certain executive officers in connection with their purchase of our Series A cumulative redeemable convertible preferred stock;

 

    adjustments to give effect to the following events related to this offering (collectively referred to as the “Offering”) as if such events had occurred on September 30, 2006:

 

    the sale by us of              shares of common stock in this offering at an assumed initial public offering price of              per share, which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus;

 

    receipt of our estimated net proceeds from this offering of $             million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us;

 

    application of our estimated net proceeds of this offering to repay certain indebtedness as set forth in “Use of Proceeds;” and

 

    an amendment to our certificate of incorporation to increase our authorized capital stock to              shares of common stock and              shares of preferred stock, as if all of these events had occurred on September 30, 2006; and

 

    on a pro forma, as adjusted, basis to reflect all of the foregoing adjustments.

 

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You should read this table together with the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related-Party Transactions,” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

     As of September 30, 2006
     Actual     Adjustments
for Interpool
Transaction(1)
    Adjustments for
Conversion
of Preferred
Stock
  Adjustments
for the
Offering
  Pro Forma,
As Adjusted
     (in thousands)
     (unaudited)

Debt:

          

Senior secured credit facility

   $ 72,890     $ 43,000        

Subordinated note payable to affiliate

     3,027       (3,027 )      

Convertible subordinated note

     —         37,500        
                

Total debt

     75,917          

Cumulative redeemable convertible preferred stock(2)

     4,894          
                

Stockholders’ equity:

          

Common stock(2)

     2,520       (1,260 )      

Accumulated other comprehensive income (loss)

     (48 )     24        

Retained earnings

     40,537       (20,269 )      
                

Total stockholders’ equity

     43,009          
                

Total capitalization

   $ 123,820          
                

(1) In connection with our repurchase of all our common stock owned by Interpool we have applied pushdown accounting in accordance with Staff Accounting Bulletin No. 54, Application of “Pushdown” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase, and accounted for the purchase as a step acquisition in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. See “Unaudited Pro Forma Financial Information” and “Certain Relationships and Related-Party Transactions.”
(2) The following table summarizes our authorized and outstanding common and preferred stock on an actual basis, adjusted for the Interpool Transaction, adjusted for the Conversion of Preferred Stock, adjusted for the Offering and on a pro forma, as adjusted basis.

 

     Actual    Adjusted for
Interpool
Transaction
   Adjusted for
Conversion
of Preferred
Stock
   Adjusted for
the Offering
   Pro Forma,
As Adjusted

Series A 10.5% cumulative redeemable convertible preferred stock, no par value

              

Shares authorized

   2,652    2,652         

Shares outstanding

   1,726    1,726         

Undesignated preferred stock, par value $0.0001

              

Shares authorized

   —      —           

Shares outstanding

   —      —           

Common stock, par value $0.0001

              

Shares authorized

   200,000    200,000         

Shares outstanding

   50,400    25,200         

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities divided by the pro forma number of shares of common stock outstanding after giving retroactive effect to the events set forth below. The pro forma financial information set forth below reflects the receipt of net proceeds of $             million from our sale of shares of common stock in this offering, assuming an initial public offering price of $             per share, which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses and the application of the net proceeds to repay certain indebtedness as set forth in “Use of Proceeds.”

After giving effect to the offering and the conversion of all outstanding shares of our Series A cumulative redeemable convertible preferred stock into shares of our common stock, the pro forma net tangible book value of our common stock as of December 31, 2006 would have been $             million, or approximately $             per share. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and immediate dilution of $             per share to new investors. The following table illustrates this per share dilution:

 

Initial public offering price

      $             

Net tangible book value as of December 31, 2006

   $                

Increase in pro forma net tangible book value attributable to new investors

     
         

Pro forma net tangible book value after this offering

     
         

Dilution to new investors

      $  
         

The following table presents as of December 31, 2006, on a pro forma basis, the conversion of all outstanding shares of our Series A cumulative redeemable convertible preferred stock into shares of our common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the assumed initial public offering price of $             per share, which is the mid-point of the initial public offering price range as set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds to repay certain indebtedness as set forth in “Use of Proceeds.”

 

     Shares Purchased     Total Consideration     Average
Price per
Share
      Number    Percent     Amount    Percent    

Existing stockholders

                   %   $                              %   $             

New investors

            
                              

Total

      100.0 %   $      100.0 %   $  
                              

The foregoing table and calculations:

 

   

include              shares of common stock issuable upon the exercise of options outstanding under our 2007 Equity Incentive Plan that were granted after December 31, 2006 with an exercise price equal to the public offering price in this offering; and

 

   

exclude              shares of common stock available for issuance under our 2007 Equity Incentive Plan.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected financial data presented below under the heading “Statement of Operations Data” for the years ended December 31, 2003, 2004 and 2005 and under the heading “Balance Sheet Data” as of December 31, 2004 and 2005 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected financial data presented below under the heading “Statement of Operations Data” for the year ended December 31, 2002 and under the heading “Balance Sheet Data” as of December 31, 2002 and 2003 have been derived from our audited consolidated financial statements not included in this prospectus. The selected financial data presented below under the heading “Statement of Operations Data” for the year ended December 31, 2001 and under the heading “Balance Sheet Data” as of December 31, 2001 are unaudited and have been derived from our unaudited financial statements not included in this prospectus. The selected financial data presented below under the heading “Statement of Operations Data” for the nine months ended September 30, 2005, and 2006 and the selected financial data presented below under the heading “Balance Sheet Data” as of September 30, 2006 are unaudited and have been derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. In the opinion of management, all unaudited selected financial data presented below under the headings “Statement of Operations Data” and “Balance Sheet Data” reflect all normal and recurring adjustments necessary to present fairly our results for and as of the periods presented. The operating data presented below under the heading “Selected Operating Data” are not audited. Historical results are not necessarily indicative of the results of operations to be expected in future periods. You should read the selected consolidated financial data and operating data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,     Nine Months
Ended September 30,
 
     2001(1)    2002     2003     2004     2005         2005           2006    
     (in thousands)  
     (unaudited)                            (unaudited)  

Statement of Operations Data:

               

Revenue

               

Container rental revenue

   $ 41,855    $ 38,514     $ 39,729     $ 45,855     $ 39,614     $ 30,387     $ 25,118  

Management fee revenue

     4,864      4,868       4,872       6,809       11,230       7,900       8,530  

Gain on sale of container portfolios

     2,859      5,102       3,289       13,420       9,913       5,352       8,364  

Finance lease income

     655      378       194       602       829       585       928  
                                                       

Total revenue

     50,233      48,862       48,084       66,686       61,586       44,224       42,940  

Operating expenses

               

Depreciation of container rental equipment

     12,729      15,809       15,359       15,545       14,764       11,078       9,653  

Impairment of container rental equipment

     —        4,231       989       275       572       639       270  

Loss (gain) on disposition of used container equipment

     304      145       (319 )     (718 )     (1,166 )     (1,322 )     (804 )

Equipment rental expense

     10,753      10,759       10,787       10,636       6,875       6,087       1,187  

Storage, handling and other expenses

     9,615      11,175       9,043       5,653       3,432       3,167       2,232  

Marketing, general and administrative expenses

     6,524      6,712       9,317       11,783       12,551       8,740       9,505  
                                                       

Total operating expenses

     39,925      48,831       45,176       43,174       37,028       28,389       22,043  
                                                       

Operating income

     10,308      31       2,908       23,512       24,558       15,835       20,897  

Net interest expense

     9,900      8,430       7,350       7,623       7,771       5,746       4,146  
                                                       

Income (loss) before income taxes

     408      (8,399 )     (4,442 )     15,889       16,787       10,089       16,751  

Income tax expense (benefit)

     227      (2,758 )     (1,230 )     6,353       6,541       3,931       6,725  
                                                       

Net income (loss)

     181      (5,641 )     (3,212 )     9,536       10,246       6,158       10,026  

(Accretion) decretion of preferred stock

     —        —         (476 )     (641 )     (713 )     (535 )     1,464  
                                                       

Net income (loss) available to common stockholders

   $ 181    $ (5,641 )   $ (3,688 )   $ 8,895     $ 9,533     $ 5,623     $ 11,490  
                                                       

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     Year Ended December 31,    Nine Months
Ended September 30,
     2002     2003     2004    2005    2005    2006
     (in thousands, except share and per share data)
                           (unaudited)

Net income (loss) per share available to common stockholders

               

Basic

   $ (111.92 )   $ (73.17 )   $ 176.49    $ 189.15    $ 111.57    $ 227.98

Diluted

     (111.92 )     (73.17 )     176.49      189.15      111.57      193.73

Weighted-average shares outstanding

               

Basic

     50,400       50,400       50,400      50,400      50,400      50,400

Diluted

     50,400       50,400       50,400      50,400      50,400      51,753

Other Financial Data:

               

EBITDA (unaudited)(2)

   $ 16,006     $ 18,395     $ 39,155    $ 39,417    $ 26,974    $ 30,625

Purchase of containers

     31,814       60,699       125,732      127,288      114,175      89,366

Net proceeds from sale of container portfolios

     38,705       37,373       119,224      102,097      58,658      67,912

 

     As of December 31,   

As of September 30,

2006

     2001    2002    2003    2004    2005   
     (in thousands)
     (unaudited)                        (unaudited)

Balance Sheet Data:

                 

Cash

   $ 718    $ 4,618    $ 3,341    $ 5,532    $ 7,573    $ 4,269

Container rental equipment, net

     159,290      141,491      160,893      141,127      134,563      159,418

Net investment in direct finance leases

     3,930      2,042      1,150      3,750      7,269      7,371

Total assets

     192,511      174,453      193,098      181,958      179,408      208,581

Long-term debt

     128,400      107,650      120,650      98,650      80,825      75,917

Total liabilities

     168,815      157,432      178,357      156,018      141,527      160,678

Cumulative redeemable convertible preferred stock

     237      237      1,600      3,847      6,358      4,894

Total stockholders’ equity

     23,459      16,784      13,142      22,093      31,523      43,009

 

     As of December 31,     As of September 30,  
      2001    2002     2003     2004     2005     2005     2006  
                      (unaudited)                    

Selected Operating Data:

               

Managed fleet in TEUs(3)

   234,918    268,075     307,056     416,254     456,076     438,967     472,681  

Owned fleet in TEUs(3)

   196,366    207,625     228,353     171,790     141,653     164,316     172,571  
                                         

Total

   431,284    475,700     535,409     588,044     597,729     603,283     645,252  
                                         

Percentage of on-lease fleet on long-term leases

      50.2 %   60.0 %   57.7 %   64.7 %   62.7 %   63.8 %

Percentage of on-lease fleet on short-term leases

      48.9     38.7     41.2     33.5     35.9     34.3  

Percentage of on-lease fleet on finance leases

      0.9     1.3     1.1     1.8     1.4     1.9  
                                       

Total

      100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                                       
         

Year Ended December 31,

    Nine Months Ended
September 30,
 
     2002     2003     2004     2005     2005     2006  
   (unaudited)              

Utilization rate(4)

   73.8 %   81.6 %   89.8 %   90.7 %   91.1 %   89.9 %

(1) Before 2002, our fiscal year ended on June 30. The selected financial data presented under the heading “Statement of Operations Data” for the twelve months ended December 31, 2001 have been derived by adding financial data for the fiscal year ended June 30, 2001 to financial data for the six months ended December 31, 2001 and subtracting the financial data for the first six months of the fiscal year ended June 30, 2001.

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(2) EBITDA is defined as income (loss) before interest, income taxes, depreciation and amortization. We believe EBITDA is helpful in understanding our past financial performance as a supplement to net income (loss) and other performance measures calculated in conformity with GAAP. Our management regularly uses EBITDA to understand, manage and evaluate our business and make operating decisions. It can also be useful to investors, as a supplement to GAAP measures, in evaluating our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for any measure reported under GAAP. Some of these limitations are:

 

    EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    EBITDA does not reflect changes in our working capital needs;

 

    EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

    Although depreciation and amortization are non-cash charges, most of the assets being depreciated will be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

 

    EBITDA is not calculated identically by all companies; therefore, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.

The following is a reconciliation of net income (loss) to EBITDA for the periods presented:

 

     Year Ended December 31,    Nine Months Ended
September 30,
     2002     2003     2004    2005    2005    2006
     (in thousands)
     (unaudited)

Net income (loss)

   $ (5,641 )   $ (3,212 )   $ 9,536    $ 10,246    $ 6,158    $ 10,026

Add:

               

Net interest expense

     8,430       7,350       7,623      7,771      5,746      4,146

Depreciation

     15,975       15,487       15,643      14,859      11,139      9,728

Income tax expense (benefit)

     (2,758 )     (1,230 )     6,353      6,541      3,931      6,725
                                           

EBITDA

   $ 16,006     $ 18,395     $ 39,155    $ 39,417    $ 26,974    $ 30,625
                                           

 

(3) Reflects the total number of TEUs included in our managed or owned fleet, as applicable, as of the end of the period indicated, including units held for sale and units held at the manufacturer that we have purchased.
(4) Reflects the average number of TEUs in our fleet on lease as a percentage of total TEUs available for lease. In calculating TEUs available for lease, we exclude units held for sale and units held at the manufacturer that we have purchased. The utilization rate for a period is calculated by averaging the utilization rates at the end of each calendar month during the period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the calculation of our utilization rate.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information has been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus. The pro forma statements of operations for the year ended December 31, 2005 and the nine months ended September 30, 2006 and the pro forma balance sheet as of September 30, 2006 give pro forma effect to: (1) the Interpool Transaction; (2) the Conversion of Preferred Stock; and (3) the Offering. The pro forma statements of operations for the year ended December 31, 2005 and the nine months ended September 30, 2006 give effect to these transactions as if they had occurred on January 1, 2005. The pro forma balance sheet as of September 30, 2006 gives effect to the transactions as if the transactions occurred on that date. In connection with the Interpool Transaction we have applied pushdown accounting in accordance with Staff Accounting Bulletin No. 54 (“SAB No. 54”) and accounted for the purchase as a step acquisition in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), which requires fair value adjustments to the historical bases in our assets and liabilities. Accordingly, we obtained an independent valuation of our assets and liabilities as of October 1, 2006. The pro forma adjustments reflect 50.0% of the book value of our identifiable net assets as of September 30, 2006 (in proportion to Mr. Ogawa’s beneficial ownership of our common stock prior to the Interpool Transaction) and 50.0% of the fair value of our identifiable net assets as of October 1, 2006 (in proportion to the change in Mr. Ogawa’s beneficial ownership of our common stock as a result of the Interpool Transaction). The pro forma adjustments are based on the third-party valuation of our tangible and intangible assets and upon assumptions that management believes to be reasonable.

The unaudited pro forma financial information is for informational purposes only and should not be considered indicative of actual results that would have been achieved had the Interpool Transaction, the Conversion of Preferred Stock and the Offering been completed on the date indicated and does not purport to be indicative of results of operations as of any future dates or for any future period. The unaudited pro forma financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus.

The primary pro forma effects of the application of SAB No. 54 and SFAS No. 141 to the Interpool Transaction are as follows:

 

   

a pro forma increase in the net value of container rental equipment of $334,000, resulting in a pro forma increase in annual depreciation expense of $32,000;

 

   

a pro forma recognition of $7.1 million of intangible assets, resulting in the pro forma recognition of annual amortization expense of $1.2 million;

 

   

a pro forma increase in outstanding indebtedness of $77.5 million, resulting in a pro forma increase in annual interest expense of $5.2 million. We intend to repay this additional indebtedness with our net proceeds from this offering. As a result, we do not expect to incur this additional interest expense in periods following the offering;

 

   

a pro forma reduction in net income as a result of these pro forma increases in expenses, resulting in a pro forma reduction in our effective tax rate; and

 

   

a pro forma recognition of goodwill of $51.6 million.

These pro forma adjustments do not give effect to the increased expenses we will incur as a public company or any compensation expense that will be associated with stock options and stock grants for a total of              shares of common stock that we intend to make in connection with this offering.

 

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Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

     Year Ended December 31, 2005
     Actual     Adjustments
for Interpool
Transaction
    Adjustments
for
Conversion
of Preferred
Stock
   Adjustments
for the
Offering
   Pro Forma,
As Adjusted
    

(in thousands, except share and per share data)

    

(unaudited)

Total revenue

   $ 61,586            

Operating expenses

            

Depreciation of container rental equipment

     14,764     $ 32 (1)        

Amortization of intangible assets

     —         1,158 (2)        

Other operating expenses

     22,264            
                  

Total operating expenses

     37,028            
                  

Operating income

     24,558            

Net interest expense

     7,771       5,171 (3)        
                  

Income before income taxes

     16,787            

Income tax expense

     6,541       (2,481 )(4)        
                  

Net income

     10,246            

Accretion of preferred stock

     (713 )          
                  

Net income available to common stockholders

   $ 9,533            
                  

Basic and diluted net income per share available to holders of common stock

   $ 189.15            

Weighted-average shares outstanding used to compute basic and diluted net income per share available to holders of common stock

     50,400       (25,200 )(5)        

(1) Adjustment reflects a proportionate increase in depreciation expense due to the 0.2% increase in our net balance of container rental equipment in the pro forma balance sheet for September 30, 2006.
(2) Reflects the straight line amortization of $7.1 million of intangible assets primarily comprising relationships with container shipping lines and container investors, trademarks and software over the estimated period of remaining economic benefit for each category of intangible assets ranging from three to ten years.
(3) Reflects the change in interest expense as a result of the incremental $77.5 million in debt incurred by us to finance our repurchase of all our shares of common stock owned by Interpool. Details are as follows:

 

     Year Ended
December 31,
2005
 
     (in thousands)  
     (unaudited)  

Interest expense on the $37.5 million convertible subordinated note issued to Interpool in connection with the Interpool Transaction at an average interest rate of 11.46%

   $ 4,298  

Interest expense on the subordinated note payable to Interpool repaid in connection with the Interpool Transaction

     (2,487 )

Interest expense on the additional $23.0 million we borrowed under the revolving line of credit portion of our senior secured credit facility at 7.0% interest

     1,610  

Interest expense on the $20.0 million term loan portion of our senior secured credit facility at 7.25% interest

     1,450  

Amortization expense on the $1.2 million debt issuance cost incurred relating to the revolving line of credit and term loan

     300  
        

Pro forma adjustment

   $ 5,171  
        

 

(4) Reflects reduced state and federal income tax expense at a 39.0% tax rate as a result of the lower taxable profit due to the pro forma increase in interest expense for the period.
(5) Represents shares repurchased and retired as a result of the Interpool Transaction.

 

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Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

     Nine Months Ended September 30, 2006
     Actual    Adjustments
for Interpool
Transaction
    Adjustments for
Conversion of
Preferred Stock
   Adjustments
for the
Offering
   Pro Forma,
As Adjusted
     (in thousands, except share and per share data)
     (unaudited)

Total revenue

   $ 42,940           

Operating expenses

             

Depreciation  of container rental equipment

     9,653    $ 24 (1)        

Amortization  of intangible assets

     —        869 (2)        

Other operating expenses

     12,390           
                 

Total operating expenses

     22,043           
                 

Operating income

     20,897           

Net  interest expense

     4,146      5,107 (3)        
                 

Income before income taxes

     16,751           

Income  tax expense

     6,725      2,400 (4)        
                 

Net income

     10,026           

Decretion of preferred stock

     1,464           
                 

Net income available to common stockholders

   $ 11,490           
                 

Net income per share available to holders of common stock

             

Basic

   $ 227.98           

Diluted

     193.73           

Weighted-average shares outstanding used to compute net income per share available to holders of common stock

             

Basic 

     50,400      (25,200 )(5)        

Diluted 

     51,753      (25,200 )(5)        

(1) Adjustment reflects a proportionate increase in depreciation expense due to the 0.2% increase in our net balance of container rental equipment in the pro forma balance sheet for September 30, 2006.
(2) Reflects the straight line amortization on $7.1 million of intangible assets primarily comprising relationships with container shipping lines and container investors, trademarks and software over the estimated period of remaining economic benefit for each category of intangible assets ranging from three to ten years.
(3) Reflects the change in interest expense as a result of the incremental $77.5 million in debt incurred by us to finance our repurchase of all our shares of common stock owned by Interpool. Details as follows:

 

     Nine Months Ended
September 30, 2006
 
     (in thousands)  
     (unaudited)  

Interest expense on the $37.5 million convertible subordinated note issued to Interpool at an average interest rate of 11.46%

   $ 3,223  

Interest expense on the subordinated note payable to Interpool repaid in connection with the Interpool Transaction

     (637 )

Interest expense on the additional $23.0 million we borrowed under the revolving line of credit portion of our senior secured credit facility at 7.0% interest

     1,208  

Interest expense on the $20.0 million term loan portion of our senior secured credit facility at 7.25% interest

     1,088  

Amortization expense on the $1.2 million debt issuance cost incurred relating to the revolving credit facility and term loan

     225  
        

Pro forma adjustment

   $ 5,107  
        

 

(4) Reflects reduced state and federal income tax expense at a 40.0% tax rate as a result of the lower taxable profit due to the incremental interest expense for the period.
(5) Represents shares repurchased and retired as a result of the Interpool Transaction.

 

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Pro Forma Condensed Consolidated Balance Sheet

 

     As of September 30, 2006
     Actual     Adjustments
for Interpool
Transaction
    Adjustments for
Conversion of
Preferred Stock
   Adjustments
for the
Offering
   Pro Forma,
As Adjusted
           (in thousands)
           (unaudited)

Assets

            

Cash  

   $ 4,269     $ (27 )(1)        

Container rental equipment, net of accumulated  depreciation

     159,418       334 (2)        

Furniture, fixtures  and equipment, net of accumulated depreciation

     482       (27 )(3)        

Intangible  assets

     —         7,050 (4)        

Goodwill

     —         51,581 (5)        

Other assets

     44,412            
                  

Total assets

   $ 208,581            
                  

Liabilities, Cumulative Redeemable Convertible Preferred Stock and Stockholders’ Equity

            

Revolving  line of credit

   $ 72,890       23,000 (6)        

Term  loan

     —         20,000 (6)        

Subordinated  note payable to affiliate

     3,027       (3,027 )(7)        

Convertible  subordinated note

     —         37,500 (8)        

Deferred income taxes

     26,915       2,943 (9)        

Other  liabilities

     57,846            
                  

Total liabilities

     160,678            

Series A 10.5% cumulative redeemable convertible preferred stock

     6,050            

Note receivable on preferred stock

     (1,156 )          
                  
     4,894            

Stockholders’ equity

            

Common  stock

     2,520       (1,260 )(10)        

Accumulated  other comprehensive loss

     (48 )     24 (11)        

Retained  earnings

     40,537       (20,269 )(11)        
                  

Total stockholders’ equity

     43,009            
                  

Total liabilities and stockholders’ equity

   $ 208,581            
                  

(1) Reflects the net cash payment to effect the Interpool Transaction.

 

     As of September 30, 2006  
     (in thousands)  
     (unaudited)  

Borrowing to effect the transaction

   $ 80,500  

Repurchase of shares

     (77,500 )

Repayment of subordinated note payable to affiliate

     (3,027 )
        

Pro forma adjustment

   $ (27 )
        

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(2) Reflects  the addition of 50.0% of the difference between our historical net cost and the fair market value.
     As of September 30, 2006
     (in thousands)
     (unaudited)

Fair market value of container rental equipment

   $ 160,087

Historical cost of container rental equipment, net

     159,418
      

Difference

     669
      

Pro forma adjustment

   $ 334
      

 

(3) Reflects  the subtraction of 50.0% of the difference between our historical cost and the fair market value.

 

     As of September 30, 2006  
     (in thousands)  
     (unaudited)  

Fair market value of furniture, fixtures and equipment

   $ 427  

Historical cost of furniture, fixtures and equipment, net

     482  
        

Difference

     (55 )
        

Pro forma adjustment

   $ (27 )
        

 

(4) Reflects  the recognition of $7.1 million of intangible assets primarily comprising relationships with container shipping lines and container investors, trademarks and software.
(5) Goodwill  reflects the excess of the purchase price over the amount allocated to 50.0% of the identifiable assets and liabilities.
(6) Reflects  the additional debt incurred under the senior secured credit facility to repurchase the shares.
(7) Reflects  the repayment of the outstanding Interpool subordinated note.
(8) Reflects  the issuance of a convertible subordinated note to Interpool.
(9) Reflects  deferred income taxes recognized on the step acquisition.
(10) Reflects  the shares repurchased from Interpool.
(11) Reflects  the elimination of retained earnings and other comprehensive loss associated with the shares repurchased from Interpool. The adjustment reduces retained earnings to 50.0% of the accumulated historical amount.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited and unaudited consolidated financial statements and related notes, as well as the unaudited pro forma financial statements included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are one of the world’s leading container leasing and management companies. We believe that our share of the worldwide leased container fleet, as measured in TEUs, increased from approximately 4.3% as of mid-1998 to 6.3% as of mid-2006, representing the seventh largest fleet of leased containers in the world. We purchase new containers, lease them to container shipping lines and either retain them as part of our owned fleet or sell them to container investors for whom we then provide management services. In operating our fleet, we lease, re-lease and dispose of containers and contract for the repair, repositioning and storage of containers. As of December 31, 2006, our fleet comprised 669,000 TEUs, 72.2% of which represented our managed fleet and 27.8% of which represented our owned fleet.

We plan to increase both the number of owned containers as well as the number of managed containers in our fleet. As a result of this offering and the resulting incremental borrowing capacity under our senior secured credit facility, we expect to purchase approximately $150.0 million to $200.0 million of new containers in 2007. We believe it is important to maintain a balance between the size of our owned fleet and our managed fleet to preserve our strength of having of multiple sources of revenue.

Our business comprises two reportable segments for financial statement reporting purposes—container management and container leasing. Our container leasing segment revenue comprises container rental revenue and finance lease income from our owned fleet and our container management segment revenue comprises gain on sale of container portfolios and management fee revenue for managing containers for container investors. For the year ended December 31, 2005 and the nine months ended September 30, 2006, our container management segment generated income before income taxes of $13.9 million and $10.4 million, respectively, and our container leasing segment generated income before income taxes of $4.7 million and $6.3 million, respectively.

Our revenue depends primarily upon a combination of: (1) the number of containers in our fleet; (2) the utilization level of containers in our fleet; and (3) the per diem rates charged under each container lease. These factors directly affect the amount of our container rental revenue and indirectly affect the amount of our management fee revenue. The number of TEUs in our fleet varies over time as we purchase new containers based on prevailing market conditions during the year, sell portfolios of containers to container investors and sell used containers to parties in the secondary resale market. The timing of our orders and the actual number of TEUs we order at any one time are based upon our expectations for the three to six months following our order regarding demand for containers, new container prices, per diem rates, interest rates, container investor interest in purchasing leased containers and competitive conditions. The time between the date we take delivery of a container and the date we begin to recognize revenue from a container can vary substantially. If we take delivery of a container before we are able to lease it, our operating results could be adversely affected until the container is either leased or sold.

 

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Our net income will fluctuate based, in part, upon changes in the proportion of our revenue from our container management segment and the proportion of our revenue from our container leasing segment. We incur significantly lower operating expenses in connection with the revenues from our container management segment as compared to the operating expenses associated with revenues from our container leasing segment. In particular, we recognize an insignificant amount of operating expense in connection with our gain on sale of container portfolios. As a result, a change in the amount of revenues from our container management segment typically will have a disproportionately larger impact on our net income than an equal change in the amount of revenue from our container leasing segment.

From April 1998 through September 2006, 50.0% of our common stock was owned by Mr. Ogawa and his family and 50.0% of our common stock was owned by Interpool. On October 1, 2006, we acquired Interpool’s 50.0% interest in our common stock for $77.5 million. We paid $40.0 million of cash and issued a convertible subordinated note to Interpool in the aggregate principal amount of $37.5 million. We will repay the note to Interpool out of the net proceeds we receive from this offering. Also, in connection with the repurchase of our common stock from Interpool, we repaid the outstanding $3.0 million balance on a subordinated note we had previously issued to Interpool, terminated a warrant held by Interpool to purchase our common stock and entered into a new container management agreement with Interpool. As a result of our repurchase of our common stock from Interpool and the resulting increase in Mr. Ogawa’s beneficial ownership of common stock from 50.0% to 100.0%, we applied pushdown accounting in accordance with SAB No. 54 and accounted for the purchase as a step acquisition in accordance with SFAS No. 141. For additional information on the impact of step acquisition accounting, see “Unaudited Pro Forma Financial Information.” Due to the application of pushdown accounting and step acquisition accounting in our financial statements, our financial condition and results of operations after September 30, 2006 will not be comparable in some respects to our financial condition and results of operations reflected in our historical financial statements as of dates or for periods prior to October 1, 2006.

Factors Affecting Our Performance

We believe there are a number of factors that have affected, and are likely to continue to affect, our operating performance. These factors include the following, among others:

 

    the strength of global and regional economies generally and the volume of global trade;

 

    changes in the amount of gain we can realize on sales of portfolios of leased containers to container investors;

 

    changes in demand for container leases;

 

    changes in the mix of short-term versus long-term leases;

 

    changes in the per diem rates for leases;

 

    changes in the number of containers in our owned fleet;

 

    defaults by container lessees;

 

    economic disruptions, health scares, financial turmoil and political instability;

 

    terrorism, or the threat of terrorism, violence or hostilities that affect the flow of world trade and the demand for containers;

 

    the development of emerging economies in Asia and other parts of the world and the resulting change in trade patterns;

 

    fluctuations in interest rates; and

 

    increased competition.

 

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For further details of these and other factors which may affect our business and results of operations, see “Risk Factors.”

Key Financial Metrics

Utilization.    We measure utilization on the basis of TEUs on lease expressed as a percentage of our total fleet available for lease. We calculate TEUs available for lease by excluding containers that have been manufactured for us but have not been delivered and containers designated as held-for-sale units. We calculate our utilization rate for a period by averaging the utilization rates at the end of each calendar month during the period. Our utilization is primarily driven by the overall level of container demand, the location of our available containers and the quality of our relationships with container lessees. The location of available containers is critical because containers available in high-demand locations are more readily leased and are typically leased on more favorable terms than containers available in low-demand locations.

The container leasing market is highly competitive. As such, our relationships with our container lessees are important to ensure that container shipping lines continue to select us as one of their providers of leased containers. Our average fleet utilization rate has increased from 81.6% for the year ended December 31, 2003 to 89.9% for the nine months ended September 30, 2006. This increase was primarily attributable to a significant increase in world trade, as measured by container port handling in TEUs, which grew by 39.5% from 2003 to 2006 according to The Drewry Annual Container Market Review and Forecast 2006/2007. In addition, there has been strong growth in overall container ship capacity to meet the increased trade demands. According to Drewry, container ship capacity has increased by 43.6% from 6.5 million TEUs in 2003 to 9.4 million TEUs in 2006.

Per Diem Rates.    The per diem rate for a lease is set at the time we enter into a lease agreement. Our long-term per diem rate has historically been strongly influenced by new container pricing (which in turn is heavily influenced by steel and other component pricing), interest rates, the balance of supply and demand for containers at a particular time and location, our estimate of the residual value of the container at the end of the lease, the type and age of the container being leased, purchasing activities of containers by container shipping lines and efficiencies in container utilization by container shipping lines. Average per diem rates for containers in our owned fleet and in the portfolios of containers comprising our managed fleet change only slightly in response to changes in new container prices because existing lease agreements can only be re-priced upon the expiration of the lease. Average per diem rates for long-term leases for all of the standard 20' dry van containers in our total fleet increased by 8.8% from December 31, 2003 to December 31, 2005 and increased by an additional 1.6% over the nine months ended September 30, 2006. Average per diem rates for short-term leases for all of the standard 20' dry van containers in our total fleet increased by 7.0% from December 31, 2003 to December 31, 2005, but declined 3.3% over the nine months ended September 30, 2006.

Revenue

Our revenue comprises container rental revenue, management fee revenue, gain on sale of container portfolios and finance lease income.

Container Rental Revenue.    We generate container rental revenue by leasing our owned containers to container shipping lines. Container rental revenue comprises monthly lease payments due under the lease agreements together with payments for other charges set forth in the leases, such as handling fees, drop-off charges and repair charges. The operating results of our owned container business is determined by the amount by which our container rental revenue exceeds our ownership costs, consisting primarily of depreciation, equipment rental expense, interest expense, storage, handling and other expenses and related marketing, general and administrative expenses.

 

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Management Fee Revenue.    Management fee revenue is generated by our management services, which include the leasing, re-leasing, repair, repositioning, storage and disposition of containers. We provide these management services pursuant to management agreements with container investors that purchase portfolios of containers from us. Under these agreements, we earn fees for the management of the containers and a commission, or managed units’ sales fee, upon disposition of containers under management. The management agreements typically have terms of eight to 12 years. Our management fees are calculated as a percentage of net operating revenue for each managed container, which is calculated as the lease payment and any other revenue attributable to a specific container owned by the container investor under a lease minus operating expenses related to the container but does not include the container investor’s depreciation or financing expense. The management fee percentage varies based upon the type of lease and the terms of the management agreement. Management fee percentages for long-term leases are generally lower than management fee percentages for short-term leases because less expertise is required to manage long-term leases. The managed units’ sales fees are equal to a fixed dollar amount or based upon a percentage of the sales price.

Gain on Sale of Container Portfolios.    Gain on sale of container portfolios is generated when we sell containers, most of which are on lease at the time of sale, to container investors. Historically, we have entered into management agreements with container investors to manage the portfolios of containers that we have sold to them. The amount of revenue we recognize on these sales of containers is equal to the difference between the cash we receive from container investors and the net book value of the containers sold. We rely upon our borrowing capacity under our senior secured credit facility for the flexibility to hold containers until we sell them to container investors. We have historically been able to sell leased containers to container investors at a gain, and we have typically recognized higher revenue from gain on sale of container portfolios in periods of rising container prices. Because we enter into firm purchase orders for containers before we begin finding lessees for the containers, there is a risk that the time necessary to lease these containers may be much longer than we anticipate or that the price that container investors are willing to pay for portfolios of containers may decline before we take delivery. The price that a container investor is willing to pay for a portfolio of containers depends on a number of factors, including the historical and future expected cash flows from the portfolio to the container investor, the credit ratings of the lessees, the mix of short-term and long-term leases, the number of TEUs in the portfolio, the timing of the sale and alternative investment opportunities available to the container investor. If any of these factors change unexpectedly during the period between the date of our purchase order to the date a container investor purchases the container from us, we may recognize a lower gain on sale of the containers to investors, sell them to container investors at a loss or retain them as part of our owned fleet.

Finance Lease Income.    A small percentage of our total fleet is subject to finance leases. Under a finance lease, the lessee’s payment consists of principal and interest components. The interest component is recognized as finance lease income. Lessees under our finance leases have the substantive risks and rewards of container ownership and the right to purchase the containers at the end of the lease term for a nominal amount.

Operating Expenses

Our operating expenses are depreciation of container rental equipment, impairment of container rental equipment, equipment rental expense, storage, handling and other expenses applicable to our owned containers as well as marketing, general and administrative expenses for our total fleet.

We depreciate most of our containers on a straight line basis over a period of 12.5 years to a fixed residual value. We regularly assess both the estimated useful life of our containers and the expected residual values, and, when warranted, adjust our depreciation estimate accordingly. Depreciation of container rental equipment expense will vary over time based upon the number and the purchase price of

 

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containers in our owned fleet. Beginning in the fourth quarter of 2006 depreciation of our existing owned fleet will decrease as a result of an increase in our estimates of the residual values of our containers. However, this decrease could be partially or totally offset as a result of an increase in the size of our owned fleet in subsequent periods.

Impairment of container rental equipment is recognized in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). Under SFAS No. 144, if the carrying amount of a container available for sale exceeds the estimated future cash flows from that container, we recognize an impairment charge equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. See “—Critical Accounting Policies and Estimates.”

Equipment rental expense represents the amount that we pay to third parties to lease containers that we sublease to container shipping lines. As of September 30, 2006, approximately 6,800 TEUs in our fleet were leased to us. We do not intend to renew these leases and expect equipment rental expenses to decrease through the second quarter of 2008, at which point our existing leases for these containers will terminate.

Storage, handling and other expenses are operating costs of our owned fleet. Storage and handling expenses occur when container shipping lines drop off containers at depots around the world. Storage and handling expenses vary significantly by location. Other expenses include repair expenses, which are the result of normal wear and tear on the containers, and repositioning expenses, which are incurred when we contract to move containers from locations where our inventories exceed actual or expected demand to locations with higher demand. Storage, handling and other expenses are directly related to the number of containers in our owned fleet and inversely related to our utilization rate for those containers. As utilization increases, we typically have lower storage, handling and repositioning expenses.

Our marketing, general and administrative expenses are primarily employee-related costs such as salary, bonus and commission expense, employee benefits, rent, allowance for doubtful accounts and travel and entertainment costs, as well as expenses incurred for outside services such as legal, consulting and audit-related fees. We expect marketing, general and administrative expenses to be higher in the future as we incur additional costs related to operating as a public company.

In future periods, our operating expenses will include amortization of intangible assets due to the allocation of a portion of the purchase price paid to Interpool when we acquired Interpool’s 50.0% interest in our common stock and the application of pushdown and step-acquisition accounting. Our intangible assets primarily comprise relationships with container shipping lines and container investors, trademarks and software. We amortize these intangible assets on a straight line basis over the estimated period of remaining economic benefit for each category of intangible assets, ranging from three to ten years. See “Unaudited Pro Forma Financial Information.”

Our operating expenses are offset by gain on disposition of used container equipment. This gain is the result of our sale of older used containers in the secondary resale market and is the difference between: (1) the cash we receive for these units, less selling expenses; and (2) the net book value of the units.

 

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Results of Operations

Comparison of the Nine Months Ended September 30, 2006 to the Nine Months Ended September 30, 2005

The following table summarizes our operating results for the nine months ended September 30, 2005 and 2006:

 

     Nine Months Ended
September 30,
   Percent
Change
 
     2005    2006   
     (in thousands)
(unaudited)
      

Total revenue

   $ 44,224    $ 42,940    (2.9 )%

Operating expenses

     28,389      22,043    (22.4 )

Net income

     6,158      10,026    62.8  

Total revenue decreased $1.3 million, or 2.9%, to $42.9 million for the nine months ended September 30, 2006 from $44.2 million for the nine months ended September 30, 2005. The decrease in total revenue was primarily due to a $5.3 million, or 17.3%, reduction in container rental revenue for the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. The container rental revenue decline was offset in part by an increase in gain on sale of container portfolios of $3.0 million, or 56.3%, over the nine months ended September 30, 2005 as well as a $630,000, or 8.0%, increase in management fee revenue over the nine months ended September 30, 2005. Net income increased $3.9 million, or 62.8%, to $10.0 million for the nine months ended September 30, 2006 from $6.2 million for the nine months ended September 30, 2005. The increase in net income was primarily due to the $3.0 million, or 56.3%, increase in gain on sale of container portfolios over these same periods as well as a $630,000, or 8.0%, increase in management fee revenue over these same periods and the $4.9 million, or 80.5%, reduction in equipment rental expense.

Revenue.    The following table summarizes changes in the components of our total revenue for the nine months ended September 30, 2005 and 2006:

 

                     As a Percent of
Total Revenue
 
     Nine Months Ended
September 30,
  

Percent

Change

    Nine Months Ended
September 30,
 
     2005    2006        2005         2006    
     (in thousands)
(unaudited)
                  

Container rental revenue

   $ 30,387    $ 25,118    (17.3 )%   68.7 %   58.4 %

Management fee revenue

     7,900      8,530    8.0     17.9     19.9  

Gain on sale of container portfolios

     5,352      8,364    56.3     12.1     19.5  

Finance lease income

     585      928    58.6     1.3     2.2  
                            

Total revenue

   $ 44,224    $ 42,940    (2.9 )   100.0 %   100.0 %
                            

Container Rental Revenue.    Container rental revenue decreased $5.3 million, or 17.3%, to $25.1 million for the nine months ended September 30, 2006 from $30.4 million for the nine months ended September 30, 2005. The decrease in container rental revenue was mainly due to a decrease of 11.1% in the average number of TEUs in our owned fleet available to lease during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. The lower average size of our owned fleet during the nine months ended September 30, 2006 primarily resulted from sales of container portfolios during the third and fourth quarters of 2005. Additionally, due to increased deliveries during the nine months ended September 30, 2006 of containers purchased by container shipping lines, the average short-

 

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term lease per diem rates declined during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. Lower per diem rates on our short-term lease fleet were partly offset by higher per diem rates on our long-term lease fleet during the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005.

Management Fee Revenue.    Management fee revenue increased $630,000, or 8.0%, to $8.5 million for the nine months ended September 30, 2006 from $7.9 million for the nine months ended September 30, 2005. Management fees comprised $6.1 million for the nine months ended September 30, 2006 and 2005. Managed units’ sales fees were $2.4 million and $1.8 million for the nine months ended September 30, 2006 and September 30, 2005, respectively. The average number of TEUs in our managed fleet increased by 8.9% for the nine months ended September 30, 2006 as compared to the comparable period in 2005. Offsetting the positive impact of our larger managed fleet was lower fee income associated with the portfolio sold by Interpool to a Swiss investor group in March 2006. We retained management of the underlying portfolio; however, our management fee percentage with the Swiss investor group is lower than our management fee percentage with Interpool for this portfolio prior to the transfer. We expect to manage additional containers for the Swiss investor group on these terms through the term of this agreement which expires in March 2016.

Gain on Sale of Container Portfolios.    Gain on sale of container portfolios increased $3.0 million, or 56.3%, to $8.4 million for the nine months ended September 30, 2006 from $5.4 million for the nine months ended September 30, 2005. This increase is principally due to achieving a higher sales margin over the book value of containers sold to container investors during the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005. We sold approximately 38,000 TEUs for the nine months ended September 30, 2006 as compared to 30,000 TEUs for the nine months ended September 30, 2005.

Finance Lease Income.    Finance lease income increased $343,000, or 58.6%, to $928,000 for the nine months ended September 30, 2006 from $585,000 for the nine months ended September 30, 2005. This increase was primarily due to new finance leases signed during the nine months ended September 30, 2006. During the nine months ended September 30, 2006, we increased the number of TEUs leased by us under finance leases to approximately 10,800 TEUs as of September 30, 2006, compared to approximately 7,300 TEUs as of September 30, 2005.

Expenses.    The following table summarizes changes in expenses for the nine months ended September 30, 2005 and 2006:

 

     Nine Months Ended
September 30,
   

Percent

Change

 
     2005     2006    
     (in thousands)
(unaudited)
       

Depreciation of container rental equipment

   $ 11,078     $ 9,653     (12.9 )%

Impairment of container rental equipment

     639       270     (57.7 )

Gain on disposition of used container equipment

     (1,322 )     (804 )   (39.2 )

Equipment rental expense

     6,087       1,187     (80.5 )

Storage, handling and other expenses

     3,167       2,232     (29.5 )

Marketing, general and administrative expenses

     8,740       9,505     8.8  
                  

Total operating expenses

     28,389       22,043     (22.4 )

Interest expense

     5,765       4,183     (27.4 )

Interest income

     (19 )     (37 )   94.7  
                  

Net interest expense

     5,746       4,146     (27.8 )

Income tax expense

     3,931       6,725     71.1  

 

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Depreciation of Container Rental Equipment.    Depreciation of container rental equipment decreased $1.4 million, or 12.9%, to $9.7 million for the nine months ended September 30, 2006 from $11.1 million for the nine months ended September 30, 2005. This decrease was primarily due to a lower average number of TEUs in our owned fleet during the first nine months of 2006 as compared to the nine months ended September 30, 2005. This lower average number of TEUs in our owned fleet resulted primarily from sales of container portfolios to container investors during the last six months of 2005 and the disposition of our older equipment into the secondary resale market during the same six-month period.

We reassess residual values of our container equipment as market conditions warrant. Based on our expectation of prices for containers in the secondary market, we plan to increase our estimated residual values on our owned fleet beginning in the fourth quarter of 2006. The impact of this adjustment will be lower depreciation of our existing owned fleet in future quarters. However, this decrease could be partially or totally offset as a result of an increase in the size of our owned fleet in subsequent periods. If sales proceeds from dispositions of used containers are below our estimated residual values, we may report higher impairment charges on equipment designated for sale and/or lower gain on disposition of used equipment in the future.

Impairment of Container Rental Equipment.    Impairment of container rental equipment decreased $369,000, or 57.7%, to $270,000 for the nine months ended September 30, 2006 from $639,000 for the nine months ended September 30, 2005. This decrease was primarily due to our having higher book value of units impaired during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2006.

Gain on Disposition of Used Container Equipment.    Gain on disposition of used container equipment decreased $518,000, or 39.2%, to $804,000 for the nine months ended September 30, 2006 from $1.3 million for the nine months ended September 30, 2005. The lower gain was due to our sale of fewer containers at a lower average gain per unit during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. The lower number of units sold during the nine months ended September 30, 2006 reflects the strong leasing market conditions in 2006 as well as our success in removing older equipment from our fleet.

Equipment Rental Expense.    Equipment rental expense decreased $4.9 million, or 80.5%, to $1.2 million for the nine months ended September 30, 2006 from $6.1 million for the nine months ended September 30, 2005. In 2005, we exercised buy-out options for approximately 27,000 TEUs under existing lease contracts which resulted in a decrease in equipment rental expense. We do not intend to renew these leases and expect equipment rental expenses to decrease through the second quarter of 2008, at which point the leases for these containers will have terminated.

Storage, Handling and Other Expenses.    Storage, handling and other expenses decreased $935,000, or 29.5%, to $2.2 million for the nine months ended September 30, 2006 from $3.2 million for the nine months ended September 30, 2005. The decrease for the nine months ended September 30, 2006 was primarily due to operating a smaller owned fleet during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. These expenses were also lower due to our sale in 2005 of older equipment from our fleet that had higher maintenance expense.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses increased $765,000, or 8.8%, to $9.5 million for the nine months ended September 30, 2006 compared to $8.7 million for the nine months ended September 30, 2005. The increase was primarily due to higher professional fees, allowance for doubtful accounts and employee costs. We expect marketing, general and administrative expenses to be higher in the future as we incur additional costs related to operating as a public company.

Net Interest Expense.    Net interest expense decreased $1.6 million, or 27.8%, to $4.1 million for the nine months ended September 30, 2006 from $5.7 million for the nine months ended September 30,

 

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2005. This decrease was primarily attributable to our carrying lower debt balances on our senior secured credit facility and on our subordinated note to Interpool. This overall decrease was partially offset by increases in market interest rates to which our senior secured credit facility borrowings are linked. As a result of the net increase of $77.5 million of debt we incurred on October 1, 2006, our interest expense will increase over the next several quarters. See “Unaudited Pro Forma Financial Information.” However, we intend to repay this additional debt with our net proceeds from this offering. In the future, we expect to increase the size of our owned fleet which will likely increase our net interest expense.

Income Tax Expense.    Income tax expense increased $2.8 million, or 71.1%, to $6.7 million for the nine months ended September 30, 2006 from $3.9 million for the nine months ended September 30, 2005. The increase was primarily due to the 66.0% increase in pretax income and was partly offset by a reduction in effective tax rates. Our effective tax rate was 40.1% for the nine months ended September 30, 2006 and 39.0% for the nine months ended September 30, 2005.

Segment Information.    The following table summarizes our results of operations for each of our business segments for the nine months ended September 30, 2005 and 2006:

 

                     As a Percent of
Total Revenue
 
     Nine Months Ended
September 30,
  

Percent

Change

    Nine Months Ended
September 30,
 
     2005    2006      2005     2006  
     (in thousands)
(unaudited)
                  

Container Leasing

            

Total revenue

   $ 30,972    $ 26,046    (15.9 )%   70.0 %   60.7 %

Total operating expenses

     21,925      15,514    (29.2 )   49.6     36.1  

Interest expense

     5,765      4,183    (27.4 )   13.0     9.7  
                            

Income before taxes attributable to segment

   $ 3,282    $ 6,349    93.4     7.4 %   14.8 %
                            

Container Management

            

Total revenue

   $ 13,252    $ 16,894    27.5     30.0 %   39.3 %

Total operating expenses

     5,116      6,529    27.6     11.6     15.2  
                            

Income before taxes attributable to segment

   $ 8,136    $ 10,365    27.4     18.4 %   24.1 %
                            

Container Leasing.    Total revenue from our container leasing segment decreased $4.9 million, or 15.9%, to $26.0 million during the nine months ended September 30, 2006 from $31.0 million during the nine months ended September 30, 2005. The decrease was primarily due to an 11.1% decrease in the average size of our owned fleet during the nine months ended September 30, 2006 as compared to the average size of our owned fleet during the nine months ended September 30, 2005. Additionally, due to increased deliveries of containers purchased by container shipping lines, we realized lower average per diem rates on short-term leases during the nine months ended September 30, 2006 compared to the per diem rates on short-term leases we realized during the nine months ended September 30, 2005.

Total operating expenses for the container leasing segment decreased $6.4 million, or 29.2%, to $15.5 million for the nine months ended September 30, 2006 from $21.9 million during the nine months ended September 30, 2005. The decrease was primarily due to a reduction in equipment rental expense and depreciation of container rental equipment and a reduced allocation of marketing, general and administrative expenses due to the smaller percentage of our total fleet represented by our owned fleet.

Container Management.    Total revenue from our container management segment increased $3.6 million, or 27.5%, to $16.9 million for the nine months ended September 30, 2006 from $13.3 million

 

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for the nine months ended September 30, 2005. The increase in revenue was primarily due to a 56.3% increase in gain on sale of container portfolios to $8.4 million during the nine months ended September 30, 2006 compared to $5.4 million during the same period in 2005. The increase in management revenue was also due to an 8.0% increase in container management fees to $8.5 million during the nine months ended September 30, 2006 compared to $7.9 million during the nine months ended September 30, 2005. In addition, during the nine months ended September 30, 2006 we operated a larger managed fleet than we operated during the nine months ended September 30, 2005.

Total expenses for the container management segment increased $1.4 million, or 27.6%, to $6.5 million for the nine months ended September 30, 2006 from $5.1 million for the nine months ended September 30, 2005 due to increases in marketing, general and administrative expenses and a larger allocation of these expenses due to the larger percentage of our total fleet represented by our managed fleet.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

The following table summarizes our operating results for 2004 and 2005:

 

     Year Ended
December 31,
  

Percent

Change

 
     2004    2005   
     (in thousands)       

Total revenue

   $ 66,686    $ 61,586    (7.6 )%

Operating expenses

     43,174      37,028    (14.2 )

Net income

     9,536      10,246    7.4  

Total revenue decreased $5.1 million, or 7.6%, to $61.6 million in 2005 compared to $66.7 million in 2004. The decrease was primarily due to a 13.6% decrease in our container rental revenue. In addition, gain on sale of container portfolios decreased $3.5 million, or 26.1%, to $9.9 million in 2005 from $13.4 million in 2004. These declines in revenue were offset in part by an increase in management fee revenue of $4.4 million, or 64.9%, to $11.2 million in 2005 from $6.8 million in 2004. Operating expenses declined $6.1 million, or 14.2%, to $37.0 million in 2005 from $43.2 million in 2004. This reduction in operating expenses more than offset the decline in total revenues over these same periods. The primary expense reduction was a $3.8 million decline in equipment rental expense in 2005. Net income increased by $710,000, or 7.4%, to $10.2 million in 2005 from $9.5 million in 2004, primarily as a result of the decrease in revenue and the reduction in operating expenses.

Revenue.    The following table summarizes changes in the components of our total revenue for 2004 and 2005:

 

                As a Percent of
Total Revenue
 
     Year Ended
December 31,
  

Percent

Change

    Year Ended
December 31,
 
     2004    2005      2004     2005  
     (in thousands)                   

Container rental revenue

   $ 45,855    $ 39,614    (13.6 )%   68.8 %   64.3 %

Management fee revenue

     6,809      11,230    64.9     10.2     18.2  

Gain on sale of container portfolios

     13,420      9,913    (26.1 )   20.1     16.1  

Finance lease income

     602      829    37.7     0.9     1.3  
                            

Total revenue

   $ 66,686    $ 61,586    (7.6 )   100.0 %   100.0 %
                            

Container Rental Revenue.    Container rental revenue decreased $6.2 million, or 13.6%, to $39.6 million for 2005 from $45.9 million for 2004. The decrease in container rental revenue was primarily due to a 24.8% reduction in the average number of TEUs in our owned fleet in 2005 as compared to 2004,

 

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primarily reflecting sales of container portfolios and gain on disposition of used container equipment into the secondary resale market during 2005. Included in container rental revenue for 2004 was a $2.0 million payment by Interpool to reconcile revenue allocation under our agreement with Interpool with respect to the amount of container rental revenue that was attributable to the containers we managed for Interpool as compared to our owned fleet. We recognized the payment we received from Interpool in connection with the resolution of this matter as revenue attributable to our owned containers.

The decline in revenue attributable to the decrease in our average numbers of TEUs available for lease in 2005 as compared to 2004 was partially offset by higher average per diem rates on both short- and long-term leases in 2005 as compared to 2004 and by a slight increase in average utilization over this same period. The average utilization rates for our total fleet increased to approximately 90.7% in 2005 compared to approximately 89.8% in 2004, although utilization rates decreased slightly during the second half of 2005.

Management Fee Revenue.    Management fee revenue increased $4.4 million, or 64.9%, to $11.2 million for 2005 from $6.8 million in 2004. Management fees comprised $8.1 million and $5.9 million for 2005 and 2004, respectively. Managed units’ sales fees comprised $3.1 million and $900,000 for 2005 and 2004, respectively. The increase in management fees is primarily attributable to a 24.0% increase in the average number of TEUs in our managed fleet in 2005 as compared to 2004 together with higher average per diem rates for both short- and long-term leases in 2005 as compared to 2004 as well as a slight increase in average utilization in 2005. Additionally, there was an increase in the number of containers sold on behalf of container investors in 2005 as compared to 2004 that generated higher managed units’ sales fee revenue.

Gain on Sale of Container Portfolios.    Gain on sale of container portfolios decreased $3.5 million, or 26.1%, to $9.9 million for 2005 from $13.4 million for 2004. The decline in gain on sale of container portfolios during 2005 as compared to 2004 was primarily due to our sale of fewer leased containers to container investors in 2005. We sold 53,000 TEUs in 2005 and 78,000 TEUs in 2004.

Finance Lease Income.    Finance lease income increased $227,000, or 37.7%, to $829,000 for 2005 from $602,000 for 2004, primarily due to an increased number of finance leases signed in 2005. In 2005 we added approximately a net 2,900 TEUs under finance lease, increasing the number of TEUs under finance leases to approximately 8,700 TEUs at December 31, 2005, compared to approximately 5,800 TEUs as of December 31, 2004.

Expenses.    The following table summarizes changes in expenses for the years ended December 31, 2004 and 2005:

 

     Year Ended December 31,    

Percent

Change

 
             2004                     2005            
     (in thousands)        

Depreciation of container rental equipment

   $ 15,545     $ 14,764     (5.0 )%

Impairment of container rental equipment

     275       572     108.0  

Gain on disposition of used container equipment

     (718 )     (1,166 )   62.4  

Equipment rental expense

     10,636       6,875     (35.4 )

Storage, handling and other expenses

     5,653       3,432     (39.3 )

Marketing, general and administrative expenses

     11,783       12,551     6.5  
                  

Total operating expenses

     43,174       37,028     (14.2 )

Interest expense

     7,651       7,798     1.9  

Interest income

     (28 )     (27 )   (3.6 )
                  

Net interest expense

     7,623       7,771     1.9  

Income tax expense

     6,353       6,541     3.0  

 

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Depreciation of Container Rental Equipment.    Depreciation of container rental equipment decreased $781,000, or 5.0%, to $14.8 million for 2005 from $15.5 million for 2004. This decrease was primarily due to a lower average number of TEUs in our owned fleet during 2005 as result of our sale of container portfolios to container investors in 2005 and our increased level of disposition of older equipment into the secondary resale market.

Impairment of Container Rental Equipment.    Impairment of container rental equipment expense increased $297,000, or 108.0%, to approximately $572,000 for 2005, from $275,000 in 2004. This increase was primarily due to additional units designated for sale that were subsequently deemed to be impaired.

Gain on Disposition of Used Container Equipment.    Gain on disposition of used container equipment increased $448,000, or 62.4%, to $1.2 million in 2005 from $718,000 in 2004. The increased gain was due to an increase in the number of TEUs we sold to the secondary resale market during 2005 as compared to 2004. We sold approximately 19,000 TEUs and 12,000 TEUs during 2005 and 2004, respectively.

Equipment Rental Expense.    Equipment rental expense decreased $3.8 million, or 35.4%, to $6.9 million for 2005 from $10.6 million for 2004. In 2005, we exercised buy-out options for 28,000 TEUs leased to us by third parties, which resulted in the decrease in equipment rental expense.

Storage, Handling and Other Expenses.    Storage, handling and other expenses decreased $2.2 million, or 39.3%, to $3.4 million for 2005 from $5.7 million for 2004. The decrease was due to reduced storage and repositioning expenses which resulted from our operating on average a smaller owned fleet and higher utilization of our containers in 2005 as compared to 2004.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses increased $768,000, or 6.5%, to $12.6 million for 2005 compared to $11.8 million for 2004. The increase was primarily due to higher employee costs, increased office rental expense as a result of moving into new premises and increased stock compensation expense recognized in 2005.

Net Interest Expense.    Net interest expense increased $148,000, or 1.9%, to $7.8 million for 2005 from $7.6 million for 2004. This increase was primarily attributable to increases in market interest rates to which our borrowings under our senior secured credit facility are linked and an increase in average borrowings outstanding during 2005 under our senior secured line of credit. As of December 31, 2005, the one-month U.S.-dollar Eurodollar rate was 4.22% compared to 2.31% as of December 31, 2004. We were able to moderate the impact of these interest rate increases by replacing our old revolving line of credit, which had a spread over Eurodollar rate of 2.25% with a new facility which has a spread of 1.75% over the Eurodollar rate. The new facility was put in place in April 2005.

Income Tax Expense.    Income tax expense increased $188,000, or 3.0%, to $6.5 million for 2005 from $6.4 million for 2004. The increase was due to the 5.7% increase in pretax income offset by a reduction in effective tax rates. Our effective tax rate was 39.0% for 2005 and 40.0% for 2004.

 

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Segment Information.    The following table summarizes our results of operations for each of our business segments for the years ended 2004 and 2005:

 

                As a Percent of
Total Revenue
 
     Year Ended
December 31,
  

Percent

Change

    Year Ended
December 31,
 
     2004    2005      2004     2005  
     (in thousands)                   

Container Leasing

            

Total revenue

   $ 46,457    $ 40,443    (12.9 )%   69.7 %   65.7 %

Total operating expenses

     35,215      27,943    (20.7 )   52.8     45.4  

Interest expense

     7,651      7,798    1.9     11.5     12.7  
                            

Income before taxes attributable to segment

   $ 3,591    $ 4,702    30.9     5.4 %   7.6 %
                            

Container Management

            

Total revenue

   $ 20,229    $ 21,143    4.5 %   30.3 %   34.3 %

Total operating expenses

     6,352      7,287    14.7     9.5     11.8  
                            

Income before taxes attributable to segment

   $ 13,877    $ 13,856    (0.2 )   20.8 %   22.5 %
                            

Container Leasing.    Total revenue from our container leasing segment decreased $6.0 million, or 12.9%, to $40.4 million for 2005 from $46.5 million for 2004. The decrease was primarily due to a 24.8% decrease in the average number of TEUs in our owned fleet during 2005 as compared to 2004. Additionally, due to competitive pressures, we realized lower average per diem rates on short-term leases during 2005 compared to the per diem rates on short-term leases we realized during 2004. Also included in the year ended December 31, 2004 was a $2.0 million payment by Interpool to reconcile revenue allocation under our agreement with Interpool with respect to the amount of container rental revenue that was attributable to containers we managed for Interpool as compared to our owned fleet.

Total operating expenses for the container leasing segment decreased $7.3 million, or 20.7%, to $27.9 million for 2005 from $35.2 million for 2004. The decrease was primarily due to a decrease in equipment rental expense, depreciation of container rental equipment and a reduced allocation of marketing, general and administrative expenses due to the smaller percentage of our total fleet represented by our owned fleet.

Container Management.    Total revenue from our container management segment increased $914,000, or 4.5%, to $21.1 million for 2005 from $20.2 million for 2004. The increase was due to an increase in management fee revenue from $6.8 million for 2004 to $11.2 million for 2005, offset in part by a decrease in our gain on sale of container portfolios of $3.5 million, or 26.1%, to $9.9 million for 2005 from $13.4 million for 2004.

Total operating expenses for the container management segment increased $935,000, or 14.7%, to $7.3 million for 2005 from $6.4 million for 2004 due to increases in marketing, general and administrative expenses and a larger allocation of these expenses to our container management segment.

 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

The following table summarizes our operating results for 2003 and 2004:

 

     Year Ended
December 31,
   Percent
Change
 
     2003     2004   
     (in thousands)       

Total revenue

   $ 48,084     $ 66,686    38.7 %

Operating expenses

     45,176       43,174    (4.4 )

Net income

     (3,212 )     9,536    NM  

Total revenue increased $18.6 million, or 38.7%, to $66.7 million in 2004 from $48.1 million in 2003. The increase in total revenue was primarily due to increases in gain on sale of container portfolios, container rental revenue and management fee revenue of $10.1 million, or 308.0%, $6.1 million, or 15.4%, and $1.9 million, or 39.8%, respectively, for 2004 as compared to 2003. Each of the components of total revenue increased as a result of the increased demand for containers and increased utilization in 2004 as compared to 2003. Net income for 2004 was $9.5 million compared to a loss of $3.2 million in 2003, primarily as a result of the increase in revenue, particularly the increase in gain on sale of container portfolios and management fee revenue, as well as a decrease in operating expenses. Operating expenses declined by $2.0 million, or 4.4%, to $43.2 million in 2004 from $45.2 million in 2003, which was primarily due to a decline in storage, handling and other expenses of $3.4 million, or 37.5%, to $5.7 million in 2004 from $9.0 million in 2003. These expenses declined as a result of the increase in the average utilization rate for our total fleet to 89.8% in 2004 from 81.6% in 2003.

Revenue.    The following table summarizes changes in the components of our total revenue for the years ended December 31, 2003 and 2004:

 

                As a Percent of
Total Revenue
 
     Year Ended
December 31,
  

Percent

Change

    Year Ended
December 31,
 
     2003    2004      2003     2004  
     (in thousands)                   

Container rental revenue

   $ 39,729    $ 45,855    15.4 %   82.7 %   68.8 %

Management fee revenue

     4,872      6,809    39.8     10.1     10.2  

Gain on sale of container portfolios

     3,289      13,420    308.0     6.8     20.1  

Finance lease income

     194      602    210.3     0.4     0.9  
                            

Total revenue

   $ 48,084    $ 66,686    38.7     100.0 %   100.0 %
                            

Container Rental Revenue.    Container rental revenue increased $6.1 million, or 15.4%, to $45.9 million for 2004 from $39.7 million for 2003. The increase in container rental revenue was due to a higher utilization rate. The average utilization rate for our total fleet increased to an average of approximately 89.8% during 2004 compared to an average of approximately 81.6% in 2003. The increase in utilization was primarily due to strong market demand for long-term leases by the container shipping lines, together with our decision to increase the amount of containers on long-term lease. We realized an increase in per diem rates in the second half of 2004, due primarily to an increase in the price of new containers.

Management Fee Revenue.    Management fee revenue increased $1.9 million, or 39.8%, to $6.8 million for 2004, from $4.9 million for 2003. Management fees comprised $5.9 million and $4.7 million for 2004 and 2003, respectively. Managed units’ sales fees comprised $900,000 and $200,000 for 2004 and 2003, respectively. The increase in management fees was primarily attributable to an increase in the

 

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number of containers managed on behalf of container investors. Additionally, due to the general improvement in market conditions, including, in particular, the increase in utilization rates, net operating revenue earned by container investors was also higher which led to higher management fees. Furthermore, there was an increase in the number of containers sold on behalf of container investors combined with an increase in the average sales fee earned per container in 2004 as compared to 2003. Together, these factors generated higher managed units’ sales fee revenue. In 2004, our average managed fleet increased by 19.5% as compared to our average managed fleet in 2003. The increase in containers under management for container investors reflected increased demand from container investors to invest in leased containers.

Gain on Sale of Container Portfolios.    Gain on sale of containers to container investors increased $10.1 million, or 308.0%, to $13.4 million for 2004 from $3.3 million for 2003 primarily due to the sale of a higher number of containers. As the container leasing market improved during 2004, we were able to sell more portfolios of leased containers. We sold 78,000 TEUs and 29,000 TEUs of containers to container investors during 2004 and 2003, respectively.

Finance Lease Income.    Finance lease income increased $408,000, or 210.3%, to $602,000 for 2004 from $194,000 for 2003 primarily due to new finance leases signed in 2004. The average number of TEUs under finance leases increased by 66.9% from 2003 to 2004.

Expenses.    The following table summarizes changes in expenses for 2003 and 2004:

 

     Year Ended
December 31,
    Percent
Change
 
     2003     2004    
     (in thousands)        

Depreciation of container rental equipment

   $ 15,359     $ 15,545     1.2 %

Impairment of container rental equipment

     989       275     (72.2 )

Gain on disposition of used container equipment

     (319 )     (718 )   125.1  

Equipment rental expense

     10,787       10,636     (1.4 )

Storage, handling and other expenses

     9,043       5,653     (37.5 )

Marketing, general and administrative expenses

     9,317       11,783     26.5  
                  

Total operating expenses

     45,176       43,174     (4.4 )

Interest expense

     7,386       7,651     3.6  

Interest income

     (36 )     (28 )   (22.2 )
                  

Net interest expense

     7,350       7,623     3.7  

Income tax expense (benefit)

     (1,230 )     6,353     NM  

Depreciation of Container Rental Equipment.    Depreciation of container rental equipment increased $186,000, or 1.2%, to $15.5 million for 2004, from $15.4 million for 2003. This increase was primarily due to the net increase in the number of containers owned by us.

Impairment of Container Rental Equipment.    Impairment of container rental equipment of leasing containers identified for sale decreased $714,000, or 72.2%, to $275,000 for 2004, from $989,000 for 2003. This decrease was primarily due to an increase in new container pricing in 2004 which in turn resulted in higher selling prices of our older containers.

Gain on Disposition of Used Container Equipment.    Our gain on disposition of used container equipment increased $399,000, or 125.1%, to $718,000 in 2004 from $319,000 in 2003 due to an increase in container sales in the secondary resale market in 2004 as compared to levels in 2003.

 

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Equipment Rental Expense.    Equipment rental expense decreased $151,000, or 1.4%, to $10.6 million for 2004 from $10.8 million for 2003 as a result of our electing in the second quarter of 2003 to exercise a buy-out of certain containers leased by us to third parties.

Storage, Handling and Other Expenses.    Storage, handling and other expenses decreased $3.4 million, or 37.5%, to $5.7 million for 2004 from $9.0 million for 2003, due primarily to a reduction in storage and repositioning expenses resulting from the higher utilization in 2004 as compared to 2003.

Marketing, General and Administrative Expenses.    Marketing, general and administrative expenses increased $2.5 million, or 26.5%, to $11.8 million for 2004 from $9.3 million for 2003. The increase was primarily due to higher employee costs relating mainly to the awarding of bonuses in 2004 as compared to 2003 when no bonuses were awarded as well as increased stock compensation expense in 2004.

Net Interest Expense.    Net interest expense increased $273,000, or 3.7%, to $7.6 million for 2004 from $7.4 million for 2003. This increase was primarily attributable to increases in market interest rates to which the interest rate on our senior secured credit facility is linked.

Income Tax Expense (Benefit).    Income tax expense increased to $6.4 million for 2004 compared to an income tax benefit of $1.2 million for 2003. The increase was a result of a pretax profit we recorded for 2004 compared to a pretax loss for 2003. The effective tax rate in 2004 was 40.0% compared to an effective tax benefit of 27.7%. The lower effective tax benefit in 2003 as compared to the effective tax rate in 2004 was primarily due to the non-deductibility of stock compensation expense having a greater impact on the rate in 2003 than 2004.

Segment Information.    The following table sets forth the results of operations of our business segments for 2003 and 2004:

 

                      As a Percent of
Total Revenue
 
     Year Ended December 31,   

Percent

Change

    Year Ended
December 31,
 
         2003             2004            2003         2004    
     (in thousands)                   

Container Leasing

           

Total revenue

   $ 39,923     $ 46,457    16.4 %   83.0 %   69.7 %

Total operating expenses

     39,545       35,215    (10.9 )   82.2     52.8  

Interest expense

     7,386       7,651    3.6     15.4     11.5  
                             

Income (loss) before taxes attributable to segment

   $ (7,008 )   $ 3,591    NM     (14.6 )%   5.4 %
                             

Container Management

           

Total revenue

   $ 8,161     $ 20,229    147.9 %   17.0 %   30.3 %

Total operating expenses

     4,745       6,352    33.9     9.9     9.5  
                             

Income before taxes attributable to segment

   $ 3,416     $ 13,877    306.2     7.1 %   20.8 %
                             

Container Leasing.    Total revenue from the container leasing segment increased $6.5 million, or 16.4%, to $46.5 million in 2004 from $39.9 million in 2003. The increase was primarily due to an increase in the average utilization rate for our total fleet from 81.6% for 2003 to 89.8% for 2004. Also included for the year ended December 31, 2004 was a $2.0 million payment by Interpool to reconcile revenue allocation under our agreement with Interpool with respect to the amount of container rental revenue that was attributable to the containers we managed for Interpool as compared to our owned fleet.

 

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Total operating expenses for the container leasing segment decreased $4.3 million, or 10.9%, to $35.2 million in 2004 from $39.5 million in 2003. The decrease was primarily due to a reduction in operating costs, reflecting the improvement in owned fleet utilization in 2004, and a lower allocation of these expenses to our container leasing segment.

Container Management.    Total revenue from the container management segment increased $12.1 million, or 147.9%, to $20.2 million in 2004 from $8.2 million in 2003. The increase was due to an increase in management fee revenue of $1.9 million, or 39.8%, to $6.8 million in 2004 from $4.9 million in 2003, primarily resulting from the increase in containers under management for container investors. Gain on sale of container portfolios increased $10.1 million, or 308.0%, to $13.4 million in 2004 from $3.3 million in 2003. As the container leasing market improved during 2004, we were able to generate more sales of portfolios of leased containers to container investors.

Total operating expenses for the container management segment increased $1.6 million, or 33.9%, to $6.4 million in 2004 from $4.7 million in 2003 due to increases in marketing, general and administrative expenses and a higher allocation of these expenses to our container management segment.

Quarterly Financial Data

The following table presents condensed consolidated statements of operations data for each of the seven quarters in the period ended September 30, 2006. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.

 

     2005 Quarters Ended    2006 Quarters Ended
     Mar. 31    June 30    Sep. 30    Dec. 31    Mar. 31    June 30    Sep. 30
     (in thousands, except per share amounts)
(unaudited)

Revenue

   $ 14,969    $ 13,190    $ 16,065    $ 17,362    $ 13,172    $ 14,249    $ 15,519

Operating expenses

     9,739      9,688      8,962      8,639      8,034      7,311      6,698

Operating income

     5,230      3,502      7,103      8,723      5,138      6,938      8,821

Net income

     2,072      1,110      2,975      4,089      2,120      3,409      4,497

Earnings per share:

                    

Basic

   $ 37.58    $ 18.48    $ 55.50    $ 77.59    $ 51.75    $ 77.32    $ 98.91

Diluted

     37.58      18.48      55.50      77.59      40.96      65.87      86.90

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, the average utilization rates of our fleet have been lowest in the first and second quarters of the year as container shipping lines drop off at depots containers they had on short-term leases to carry goods for the prior winter holiday season. In addition, container shipping lines historically enter into long-term container leases in response to increased demand for containers beginning at the end of the second quarter and continuing into the third and fourth quarters as their shipping activity increases for the winter holiday season. We have also historically reported higher levels of gain on sale of container portfolios in the third and fourth quarters as we sell portfolios of recently leased containers to container investors.

The overall seasonal trends have typically resulted in the first quarter being our least profitable quarter, and the third and fourth quarters being our most profitable quarters. In the first quarter of 2005 our profitability was not as low due to higher growth in world trade volume, and resulting high utilization rates. In addition, sales of containers to container investors in the first quarter of 2005 resulted in that quarter being a more profitable quarter than the second quarter of 2005, which had lower gain on sale of container portfolios.

Our quarterly results are also affected by other factors such as the timing of sales of container portfolios to container investors, the overall demand for containers by container shipping lines, the number of new

 

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containers available for lease by our competitors and the resulting impact on per diem and utilization rates, and other unanticipated circumstances. Some of these circumstances will change from quarter to quarter. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year. For example, 2003 was a loss year for us due to low container demand caused by the global economic weakness after the terrorist attacks on September 11, 2001. We experienced low container demand from container shipping lines throughout 2003, and that low demand continued into the first quarter of 2004, our seasonally lowest profit quarter. In April 2004 we experienced an increase in demand from container shipping lines for containers. Lease activity and utilization increased steadily each month thereafter, and 2004 became a profitable year for the company. This trend continued into 2005.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash flows from operations, sales of portfolios of containers and borrowings under our senior secured credit facility. From January 1, 2003 through September 30, 2006, we sold to European and Asian container investors containers representing 198,000 TEUs for $326.6 million of gross proceeds. We believe that cash flow from operations, future sales of portfolios of containers and borrowing availability under our senior secured credit facility are sufficient to meet our liquidity needs for at least the next 12 months.

We have typically funded a significant portion of the purchase price for new containers through borrowings under our senior secured credit facility. However, from time to time we have funded new container acquisitions through the use of working capital. We intend to primarily use our senior secured credit facility to fund the purchase of new containers in the future. We have typically used the proceeds from sales of portfolios of containers to container investors to repay our senior secured credit facility. As we expand our owned fleet, our senior secured credit facility balance will be higher, which will result in higher interest expense and may reduce our ability to finance additional purchases of new containers.

Cash Flow

The following table sets forth certain historical cash flow information for the three years ended December 31, 2005 and nine months ended September 30, 2005 and 2006:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2003     2004     2005     2005     2006  
     (in thousands)        
           (unaudited)  

Net income (loss)

   $ (3,212 )   $ 9,536     $ 10,246     $ 6,158     $ 10,026  

Adjustments to net income

     5,814       10,815       19,168       17,114       2,711  
                                        

Net cash provided by operating activities

     2,602       20,351       29,414       23,272       12,737  

Net cash provided by (used in) investing activities

     (16,925 )     3,784       (8,228 )     (42,209 )     (9,933 )

Net cash provided by (used in) financing activities

     13,000       (22,000 )     (19,042 )     21,640       (6,104 )

Effect on cash of foreign currency translation

     46       56       (103 )     (123 )     (4 )
                                        

Net increase (decrease) in cash

     (1,277 )     2,191       2,041       2,580       (3,304 )

Cash at beginning of period

     4,618       3,341       5,532       5,532       7,573  
                                        

Cash at end of period

   $ 3,341     $ 5,532     $ 7,573     $ 8,112     $ 4,269  
                                        

 

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Operating Cash Flows.    Net cash provided by operating activities was $12.7 million for the nine months ended September 30, 2006 compared to $23.3 million for the nine months ended September 30, 2005. Net income for the nine months ended September 30, 2006 was $3.8 million greater than for the nine months ended September 30, 2005. The decrease in net cash provided by operating activities in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to a larger amount of our income coming from gain on disposition of used equipment and higher working capital due to increased leasing activity in the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005.

Net cash provided by operating activities was $29.4 million in 2005, $20.4 million in 2004 and $2.6 million in 2003. Net income for 2005 was $710,000 greater than net income for 2004. Non-cash items, such as depreciation, amortization, gain on sale of container portfolios and deferred income taxes, which are included in the calculation of net income, increased to $13.9 million in 2005 from $10.8 million in 2004. The contribution to the increase in net cash from changes in other operating assets and liabilities (generally, accounts receivable and payable) increased to $5.3 million in 2005. There was no net change in other operating assets and liabilities in 2004. The increase in net cash provided by operating activities in 2004 compared to 2003 was primarily due to the increase in net income of $12.7 million from 2003 to 2004.

We are subject to federal and state income taxes as a Subchapter C corporation under the Internal Revenue Code. We file a U.S. federal income tax return. We are liable for federal income taxes on our worldwide income. Through the year ended December 31, 2005, due to our suspended passive activity losses, we have paid immaterial amounts of income taxes to the taxing authorities. However, we estimate these suspended passive activity losses will be fully utilized during the year ended December 31, 2006. As a result, beginning in 2007 we expect we will begin paying cash taxes.

Investing Activities Cash Flows.    Net cash used in investing activities amounted to $9.9 million for the nine months ended September 30, 2006 compared to $42.2 million for the nine months ended September 30, 2005. The decrease was due to lower container purchases and higher proceeds from sales of container portfolios during the nine months ended September 30, 2006 as compared to the same period in 2005.

Net cash used in investing activities amounted to $8.2 million in 2005 and $16.9 million in 2003. Net cash provided by investing activities amounted to $3.8 million in 2004. The increase in net cash used in these activities in 2005 as compared to 2004 was primarily due to a decrease in net proceeds from sale of containers portfolios of $17.1 million offset by an increase in net proceeds from sale of owned container equipment of $6.2 million. The increase in net cash provided by these activities in 2004 as compared to 2003 was primarily due to an increase in the net proceeds from sale of container portfolios of $81.8 million, an increase in proceeds from sale of owned container equipment of $2.9 million and an increase in cash collections on finance leases of $940,000, offset by an increase in the cost of purchased containers of $65.0 million.

Financing Activities Cash Flows.    Net cash used in financing activities amounted to $6.1 million for the nine months ended September 30, 2006 and net cash provided by financing activities amounted to $21.6 million for the nine months ended September 30, 2005. The change in net cash from financing activities in the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005 was due to lower net borrowing under our senior secured credit facility of $8.9 million as compared to net borrowing of $38.0 million for the nine months ended September 30, 2005. During the nine months ended September 30, 2006 we had lower net borrowing need due to a higher level of proceeds from sale of container portfolios, as previously discussed.

Net cash used in financing activities amounted to $19.0 million in 2005 and $22.0 million in 2004. Net cash provided by financing activities amounted to $13.0 million in 2003. The decrease in net cash used in

 

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financing activities in 2005 as compared to 2004 was due to a net repayment of indebtedness of $1.0 million in 2005 as compared to a net repayment of indebtedness of $22.0 million in 2004. During 2005 we also made $16.8 million of payments on our subordinated note payable to Interpool. We did not make any payments on our subordinated note payable to Interpool during 2004. The increase in net cash used in financing activities in 2004 as compared to 2003 was primarily due to our making a net repayment on our bank debt of $22.0 million in 2004 compared to a net borrowing of $13.0 million during 2003. In 2004 we had a lower amount of container purchases relative to container sales as compared to 2003. In 2004 we also benefited from an improved operating environment that resulted in our generating more cash from our operations as compared to the cash generated from our operations in 2003.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments by due date as of September 30, 2006:

 

     Payments Due by Period
     Total    1 year    1-2
years
   2-3
years
   3-4 years    4-5
years
   >5
years
    

(in thousands)

(unaudited)

Total debt obligations:

                    

Senior secured credit facility(1)

   $ 72,890    $ —      $ —      $ —      $ 72,890    $ —      $ —  

Subordinated note(1)

     3,027      1,730      1,297      —        —        —        —  

Operating lease obligations

     1,972      1,580      392      —        —        —        —  

Purchase obligations payable

     25,799      25,799      —        —        —        —        —  

Rent, office facilities and equipment

     3,017      865      738      702      657      55      —  

Capital lease obligations

     846      725      121      —        —        —        —  

Container purchases commitments

     1,383      1,383      —        —        —        —        —  
                                                

Total contractual obligations

   $ 108,934    $ 32,082    $ 2,548    $ 702    $ 73,547    $ 55    $ —  
                                                

(1)

As described below, subsequent to the date of this table, we borrowed an additional $43.0 million under our senior secured credit facility, repaid our existing subordinated note obligation and issued a $37.5 million convertible subordinated note to Interpool.

On September 29, 2006, we amended our senior secured credit facility to provide for a maximum total commitment amount of up to $190.0 million, consisting of a $20.0 million term loan facility and a $170.0 million revolving line of credit. Loans under the senior secured credit facility bear interest at variable rates based on the Eurodollar rate or a base rate described in our senior secured credit facility plus a margin that changes depending on certain financial criteria. In addition, there is a commitment fee on the unused amount of the total commitment which is payable quarterly in arrears. The senior secured credit facility provides that swing line loans (up to $10.0 million in the aggregate) and standby letters of credit (up to $15.0 million in the aggregate) will be available to us. These sublimits are part of, and not in addition to, the total commitment of $170.0 million under the revolving line of credit. Both the revolving line of credit and the term loan facility terminate on September 30, 2010.

On October 1, 2006, we acquired Interpool’s 50.0% interest in our common stock for $77.5 million. We paid $40.0 million in cash and issued a convertible subordinated note to Interpool in the aggregate principal amount of $37.5 million. Interest on the convertible subordinated note starts at 7.87% per annum for the six-month period ended March 31, 2007 and increases by 1.0% each subsequent six-month period. The note provides Interpool with an option to convert the obligation into a significant

 

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minority position if the note is not repaid following this offering. The note matures on October 30, 2010, is subordinated to our $20.0 million term loan facility and $170.0 million revolving line of credit and is secured by a second priority lien on our assets. The note subjects us to various financial and other covenants. As of December 31, 2006, we were in compliance with these covenants. We plan to repay all of the indebtedness under the note with our net proceeds from this offering.

On October 2, 2006, we borrowed the full $20.0 million under the term loan facility and an additional $23.0 million under the revolving line of credit facility. We used the proceeds to pay the $40.0 million cash portion of the repurchase price for our stock previously owned by Interpool and repaid the remaining $3.0 million outstanding balance on the subordinated note we issued to Interpool in 1998. Our senior secured credit facility contains various financial and other covenants. As of December 31, 2006, we were in compliance with these covenants. We intend to repay the $20.0 million term loan with a portion of the net proceeds of this offering and to use the balance of the proceeds to repay a portion of the amounts outstanding under the revolving line of credit.

Off-Balance Sheet Arrangements

At December 31, 2005 and September 30, 2006, we had no off-balance sheet arrangements or obligations. An off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement involving an unconsolidated entity under which we would have: (1) retained a contingent interest in transferred assets; (2) an obligation under derivative instruments classified as equity; (3) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development services with us; or (4) made guarantees.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, the reported amounts of income and expense during the reporting period and the disclosure of contingent assets and liabilities as of the date of the financial statements. We have identified the policies and estimates below as critical to our business operations and the understanding of our results of operations. These policies and estimates are considered critical due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact that these estimates can have on our financial statements. The following accounting policies and estimates include inherent risks and uncertainties related to judgments and assumptions made by us. Our estimates are based on the relevant information available at the end of each period.

Revenue Recognition

Container Rental Revenue.    We recognize revenue from operating leases of our owned containers as earned over the term of the lease. Where minimum lease payments vary over the lease term, revenue is recognized on a straight-line basis over the term of the lease. We cease recognition of lease revenue if and when a container lessee defaults in making timely lease payments or we otherwise determine that future lease payments are not likely to be collected from the lessee. Our determination of the collectibility of future lease payments is made by management on the basis of available information, including the current creditworthiness of container shipping lines that lease containers from us, historical collection results and review of specific past due receivables. If we experience unexpected payment defaults from our container lessees, we will cease revenue recognition for those leases which will reduce container rental revenue.

Finance Lease Income.    Finance lease income is recognized using the effective interest method, which generates a constant rate of interest over the period of the lease. The same risks of collectibility discussed above apply to our collection of finance lease income. If we experience unexpected payment defaults

 

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under our finance leases, we cease revenue recognition for those leases which will reduce finance lease income.

Management Fee Revenue and Gain on Sale of Container Portfolios.    In addition to leasing owned containers we sell portfolios of containers to container investors. After the date of sale, we generally manage the containers sold to these container investors. As these arrangements contain multiple parts (the sale of an asset followed by the provision of management services), we evaluate the arrangements under Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). We have determined that the sale of the container and the management services are separate units of accounting thereby requiring revenue to be recognized separately for each part of the arrangement.

One requirement of EITF 00-21 for the two deliverables to be accounted for as separate units of accounting is that management can determine the fair value of the undelivered item (the management services), when the first item (the sale of containers) is delivered. Assessing fair value evidence requires judgment. On the basis of available competitive and other data, to date we have determined that evidence exists to support our assessment of the fair value of our management services. However, we are one of the few companies in the business of selling and managing portfolios of leased containers and in the future data may not be available to support our assessment of fair value. Should fair value evidence not be satisfactory in the future, the gain on sale of container portfolios and the management services may need to be accounted for as one unit of accounting. This would result in the gain on sale of container portfolios being deferred and recognized over the term of the management agreement, which typically ranges from eight to 12 years, rather than in the period the sale occurs.

Based on the conclusion that the sale of containers and the management services can be accounted for separately, we recognize gain on sale of container portfolios when the sale of the containers is completed. The gain is the difference between the sales price and the net book value of the containers sold.

We recognize revenue from management fees earned under management agreements on a monthly basis. Fees are calculated as a percentage of net operating income, which is revenue from the containers under management minus direct operating expense related to those containers. If a lessee of a managed container defaults in making timely lease payments or we otherwise determine that future lease payments are not likely to be collected from the lessee, then we will cease to record lease revenue, which in turn will result in reduced management fee revenue.

Accounting for Container Leasing Equipment

Accounting for container leasing equipment includes depreciation, impairment testing and the impairment of containers as held for sale.

Depreciation.    When we acquire containers, we record the cost of the container on our balance sheet. We then depreciate the container over its estimated “useful life” (which represents the number of years we expect to be able to lease the container to shipping companies) to its estimated “residual value” (which represents the amount we estimate we will recover upon the sale or other disposition of the equipment at the end of its “useful life” as a shipping container). Our estimates of useful life are based on our actual experience with our owned fleet, and our estimates of residual value are based on a number of factors including disposal price history.

We review our depreciation policies, including our estimates of useful lives and residual values, on a regular basis to determine whether a change in our estimates of useful lives and residual values is warranted. Prior to October 1, 2006, we estimated that standard dry van containers, which represent substantially all the containers in our fleet, had a useful life of 12.5 years and had residual values of $645 for a 20’, $795 for a 40’, and $805 for a 40’ high cube. Beginning on October 1, 2006, we changed our

 

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residual value estimates to $850 for a 20’, $950 for a 40’ and $1,000 for a 40’ high cube. Our change in residual value estimates is based on our recent sales history and current market conditions for the sale of used containers. The effect of this change will be a reduction in depreciation expense as compared to what would have been reported using the previous estimates. We continue to estimate a container’s “useful life” as a shipping container to be 12.5 years from the first lease out date after manufacture.

If market conditions in the future warrant a further change of our estimates of the useful lives or residual values of our containers, we may be required to again recognize increased or decreased depreciation expense. A decrease in either the useful life or residual value of our containers would result in increased depreciation expense and decreased net income (or increased net loss).

Impairment.    In accordance with SFAS No. 144, we periodically evaluate our containers held for use to determine whether there has been any event that would cause the book value of our containers to be impaired. Any such impairment would be expensed in our results of operations. Impairment exists when the future undiscounted cash flows generated by an asset are less than the net book value of that asset. If impairment exists, the containers are written down to their fair value. This fair value then becomes the containers’ new cost basis and is depreciated over their remaining useful life to their estimated residual values. Any impairment charge would result in decreased net income or increased net loss.

Containers Held for Sale.    We also evaluate all off-lease containers to determine whether the containers will be repaired and returned to service or sold based upon what we estimate will be the best economic alternative. If we designate a container as held for sale, depreciation on the container ceases, and the container is reported at the lower of (1) its recorded value or (2) the amount we expect to receive upon sale (less the estimated cost to sell the container). Any writedown of containers held for sale is reflected in our statement of operations as an expense. If a larger number of containers are identified for sale or prices for used containers drop, impairment charges for containers held for sale may increase which would result in decreased net income or increased net loss.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is reviewed regularly by our management and is based on the risk profile of the receivables, credit quality indicators such as the level of past due amounts and non-performing accounts and economic conditions. Our credit committee meets regularly to assess performance of our container lessees and to recommend actions to be taken in order to minimize credit risks. Changes in economic conditions or other events may necessitate additions or deductions to the allowance for doubtful accounts. The allowance is intended to provide for losses inherent in the owned fleet’s accounts receivable, and requires the application of estimates and judgments as to the outcome of collection efforts and the realization of collateral, among other things. If the financial condition of our container lessees were to deteriorate, reducing their ability to make payments, additional allowances may be required, which would decrease our net income or increase our net loss in the period of the adjustment.

Share Based Payments

For the period up to December 31, 2005, we accounted for our cumulative redeemable convertible preferred stock issued under our Executive Management Incentive Program in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). We have accounted for our preferred stock, granted in exchange for a note receivable, to certain key employees under the Executive Management Incentive Program as a stock option subject to variable accounting. Compensation expense, which has the effect of decreasing net income or increasing net loss, is calculated as the excess of the fair value of our preferred stock over the exercise price at each reporting date until a measurement date occurs. Considerable judgment is required to determine the fair value of our preferred stock as, to date, there has been no public market on which our

 

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preferred stock or our common stock trades. If our assessment of the fair value of our preferred stock were incorrect, our net income or net loss would be overstated or understated to the extent of our incorrect assessment. Immediately prior to the completion of this offering, our outstanding preferred stock will be converted into our common stock. Other than the increased number of outstanding shares of common stock and the related effect on our earnings per share, we do not expect any future effect on our income statement related to the value of these preferred shares.

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), Share-Based Payment, and related interpretations (“SFAS 123(R)”), to account for stock-based compensation using the modified prospective transition method and, therefore, have not restated our prior period results. SFAS 123(R) supersedes APB No. 25 and revises guidance in SFAS 123, Accounting for Stock-Based Compensation. Among other things, SFAS 123(R) requires that compensation expense be recognized in the financial statements for share-based awards based on the grant-date fair value of those awards. Our cumulative redeemable convertible preferred stock issued under the Executive Management Incentive Program was issued in 1998 and had no vesting term. As such, there is no compensation expense to be recognized for these shares upon adoption of FAS No. 123(R). Our preferred stock will be converted prior to this offering. Prior to the completion of this offering, we will adopt the 2007 Equity Incentive Plan described elsewhere in this prospectus. Pursuant to the plan we will issue stock options, restricted shares or other equity awards, which will result in additional compensation expense. The amount of the expense cannot be estimated at this time, as no awards have been granted under the plan.

Income Taxes

Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax basis of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is recorded to reduce our deferred tax assets to an amount we determine is more likely than not to be realized, based on our analyses of past operating results, future reversals of existing taxable temporary differences and projected taxable income. Our analyses of future taxable income are subject to a wide range of variables, many of which involve estimates. Uncertainty regarding future events and changes in tax regulation could materially alter our valuation of deferred tax liabilities and assets. If we determine that we would not be able to realize all or part of our deferred tax assets in the future, we would increase our valuation allowance and make a corresponding change to our earnings in the period in which we make such determination. If we later determine that we are more likely than not to realize our deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance.

In certain situations, a taxing authority may challenge positions adopted in our income tax filings. For transactions that we believe may be challenged, we may apply a different tax treatment for financial reporting purposes. We regularly assess the tax positions for such transactions and include reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning

 

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after December 15, 2006. We do not anticipate that the adoption of FIN 48 will have a significant effect on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). This statement establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 is effective for financial statements issued for years beginning after November 15, 2007, and interim periods within those years with earlier application encouraged. We do not expect the adoption of SFAS No. 157 to have a material effect on our consolidated financial position or results of operations.

In September 2006, the SEC issued SAB No. 108 which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. If the effect of initial adoption is determined to be material, the cumulative effect may be reported as an adjustment to the beginning of year retained earnings with disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment. The guidance is applicable in our 2006 fiscal year. We will apply this guidance in assessing any future misstatements.

On September 8, 2006, the FASB posted the Staff Position (FSP), Accounting for Planned Major Maintenance Activities (“FSP AUG AIR-1”). FSP AUG AIR-1 amends certain provisions in the AICPA Industry Audit Guide, Audits of Airlines, and APB Opinion No. 28, Interim Financial Reporting. FSP AUG AIR-1 prohibits the use of the currently allowed accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial statements. This guidance is effective for the first fiscal period beginning after December 15, 2006, and shall be applied retrospectively for all financial statements presented, unless impracticable to do so.

Our leases require the lessee to pay for any damage to the container beyond normal wear and tear at the end of the lease term. We also offer a damage protection plan (“DPP”) pursuant to which the lessee pays an upfront fee in exchange for not being charged for certain damages at the end of the lease term. For containers not subject to a DPP, we currently accrue for repairs once we have made the decision to repair the container, which is made in advance of us incurring the repair obligation. For containers covered by a DPP, we account for periodic maintenance and repairs on an accrual basis. In addition, we accrue for repairs to containers once we have made the decision to repair the container, which is made in advance of us incurring the obligation to the depot for the repair. We will implement FSP AUG AIR-1 as of January 1, 2007 with application retrospectively to all comparable prior periods presented. The impact of implementing FSP AUG AIR-1 on the financial statements will be to reduce liabilities and increase stockholders’ equity by $1.5 million as of December 31, 2005 and September 30, 2006. As the equipment repair accruals have not changed significantly from period to period, we do not anticipate any material change to our results of operations following the adoption of FSP AUG AIR-1.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in foreign exchange rates and interest rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below.

 

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Foreign Exchange Rate Risk.    Although we have significant foreign-based operations, the U.S. dollar is our primary operating currency. Thus, substantially all of our revenue and expenses in 2003, 2004 and 2005 and the nine months ended September 30, 2006 were denominated in U.S. dollars. Foreign exchange fluctuations did not materially impact our financial results in those periods.

Interest Rate Risk.    The nature of our business exposes us to market risk arising from changes in interest rates to which our variable-rate debt is linked. During 2003, 2004, 2005 and the nine months ended September 30, 2006 we did not utilize interest rate swap agreements or other hedging agreements to manage the market risk associated with fluctuations in interest rates.

As of September 30, 2006 the principal amount of debt outstanding under fixed-rate arrangements and variable-rate arrangements was $3.0 million and $72.9 million, respectively. A 1.0% increase or decrease in underlying interest rates will increase or decrease interest expense by approximately $700,000 annually assuming debt remains constant at September 30, 2006 levels.

Quantitative and Qualitative Disclosures About Credit Risk

We maintain detailed credit records about our container lessees. Our credit policy sets different maximum exposure limits for our container lessees. Credit criteria may include, but are not limited to, container lessee trade route, country, social and political climate, assessments of net worth, asset ownership, bank and trade credit references, credit bureau reports, including those from Dynamar, operational history and financial strength. We monitor our container lessees’ performance and our lease exposures on an ongoing basis, and our credit management processes are aided by the long payment experience we have with most of our container lessees and our broad network of long-standing relationships in the shipping industry that provide current information about our container lessees. In managing this risk we also make an allowance for doubtful accounts. The allowance for doubtful accounts is developed based on two key components: (1) specific reserves for receivables which are impaired for which management believes full collection is doubtful; and (2) reserves for estimated losses inherent in the receivables based upon historical trends.

As of September 30, 2006, approximately 88.1% of accounts receivable for our total fleet and 89.4% of the finance lease receivables were from container lessees outside of the United States. China, (including Hong Kong) and Korea accounted for 14.0% and 10.3%, respectively, of our total fleet container leasing revenue for the nine months ended September 30, 2006. No other countries accounted for greater than 10.0% of our total fleet container leasing revenue for the same period. Total fleet container leasing revenue differs from our reported container rental revenue in that total fleet container leasing revenue comprises revenue earned from leases on containers in our total fleet, including revenue earned by our investors from leases on containers in our managed fleet, while our reported container revenue only comprises container leasing revenue associated with our owned fleet. We derive revenue with respect to container leasing revenue associated with our managed fleet from management fees based upon the operating performance of the managed containers.

Revenue from our seven largest container lessees represented 51.1% of the revenue from our container leasing segment for the nine months ended September 30, 2006, with revenue from our single largest container lessee accounting for 14.4%, or $3.8 million, of revenue from our container leasing segment during such period. This $3.8 million of revenue represented 8.8% of our total revenue for the nine months ended September 30, 2006.

An allowance of $2.6 million has been established against non-performing receivables as of September 30, 2006. For the nine months ended September 30, 2006, receivable write-offs, net of recoveries, totaled $912,000.

 

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INDUSTRY

We operate in the worldwide intermodal freight container leasing industry. Intermodal freight containers, or containers, are large, standardized steel boxes used to transport cargo by a number of means, including ship, truck and rail. Container shipping lines use containers as the primary means for packaging and transporting freight internationally, principally from export-oriented economies in Asia to North America and Western Europe.

Containers are built in accordance with standard dimensions and weight specifications established by the International Standards Organization. The industry-standard measurement unit is the 20’ equivalent unit, or TEU, which compares the size of a container to a standard container 20’ in length. For example, a 20’ container is equivalent to one TEU and a 40’ container is equivalent to two TEUs. Containers are eight feet wide, come in lengths of 20’, 40’ or 45’ and are either 8’6” or 9’6” tall. The two principal types of containers are described as follows:

 

   

Dry van containers.    A dry van container is constructed of steel sides, roof and end panel with a set of doors on the other end, a wooden floor and a steel undercarriage. Dry van containers are the least expensive and most commonly used type of container. According to Containerisation International, World Container Census 2006, dry van containers comprised approximately 89.2% of the worldwide container fleet, as measured in TEUs, as of mid-2005. They are used to carry general cargo, such as manufactured component parts, consumer staples, electronics and apparel.

 

   

Specialized containers.    Specialized containers consist of open-top, flat-rack, refrigerated and tank containers. An open-top container is similar in construction to a dry van container except that the roof is replaced with a tarpaulin supported by removable roof bows. A flat-rack container is a heavily reinforced steel platform with a wood deck and steel end panels. Open-top and flat-rack containers are generally used to move heavy or oversized cargo, such as marble slabs, building products or machinery. A refrigerated container has an integral refrigeration unit on one end which plugs into an outside power source and is used to transport perishable goods. Tank containers are used to transport bulk products such as chemicals, oils, and other liquids. According to Containerisation International, World Container Census 2006, specialized containers comprised approximately 10.8% of the worldwide container fleet, as measured in TEUs, as of mid-2005.

Containers provide a secure and cost-effective method of transportation because they can be used in multiple modes of transportation, making it possible to move cargo from a point of origin to a final destination without repeated unpacking and repacking. As a result, containers reduce transit time and freight and labor costs as they permit faster loading and unloading of shipping vessels and more efficient utilization of transportation containers than traditional bulk shipping methods. The protection provided by containers also reduces damage, loss and theft of cargo during shipment. While the useful economic life of containers varies based upon the damage and normal wear and tear suffered by the container, we estimate that the useful economic life for a dry van container used in intermodal transportation is 12.5 years.

Container shipping lines own and lease containers for their use. Containerisation International, Market Analysis: Container Leasing Market 2006, estimates that as of mid-2006 transportation companies, including container shipping lines and freight forwarders, owned approximately 57.3% of the total worldwide container fleet and container leasing companies owned approximately 42.7% of the total worldwide container fleet. Given the uncertainty and variability of export volumes and the fact that container shipping lines have difficulty in accurately forecasting their container requirements at different ports, the availability of containers for lease significantly reduces a shipping line’s need to purchase and maintain excess container inventory. In addition, container leases allow the container shipping lines to

 

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adjust their container fleets both seasonally and over time and help to balance trade flows. The flexibility offered by container leasing helps container shipping lines improve their overall container fleet management and provides the container shipping lines with an alternative source of financing.

Over the last 25 years, containerized trade has grown at a rate greater than that of worldwide economic growth. According to The Drewry Annual Container Market Review and Forecast 2006/2007, worldwide containerized cargo volume grew each year from 1980 through 2005, attaining a compounded annual growth rate of 9.8% during that period. Drewry estimates that 2006 container cargo volume grew 10.3% over the prior year. Drewry forecasts that cargo volume will continue to grow at approximately 9.0% annually through 2011, as illustrated by the following chart:

LOGO

We believe that this projected growth is due to several factors, including the continuing shift in global manufacturing capacity to lower labor cost regions such as China and India, the continued integration of developing high-growth economies into global trade patterns, the continued conversion of cargo from bulk shipping into container shipping and the growing liberalization and integration of world trade. Current trends in containerized shipbuilding also support expectations for increased container demand. According to the Drewry report, current orders for container ships set to be delivered between 2006 and 2009 represent approximately 4.2 million TEUs of shipping vessel capacity, or the equivalent of 48.4% of the existing container ship fleet. Given that we believe that container shipping lines require two TEUs of available containers for every TEU of capacity on their container ships, we expect that container demand should remain strong.

 

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BUSINESS

Overview

We are one of the world’s leading container leasing and management companies. We believe that our share of the worldwide leased container fleet, as measured in TEUs, increased from approximately 4.3% as of mid-1998 to 6.3% as of mid-2006, representing the seventh largest fleet of leased containers in the world. We operate our business through two segments: container leasing and container management. We purchase new containers, lease them to container shipping lines and either retain them as part of our owned fleet or sell them to container investors for whom we then provide management services. In operating our fleet, we lease, re-lease and dispose of containers and contract for the repair, repositioning and storage of containers. As of December 31, 2006, our fleet comprised 669,000 TEUs, 72.2% of which represented our managed fleet and 27.8% of which represented our owned fleet.

We were founded in 1989 by our Executive Chairman, Hiromitsu Ogawa, as a traditional container leasing company that leased containers owned by us to container shipping lines. In 1998, we shifted our strategic focus from leasing containers owned by us to managing containers owned by container investors. Our managed fleet, as measured in TEUs, increased at a compounded annual grow