NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

 

(1) The Company and Nature of Operations

 

CAI International, Inc. (CAI or the Company) was originally incorporated under the name Container Applications International, Inc. in the state of Nevada on August 3, 1989. On February 2, 2007, the Company was reincorporated under its present name in the state of Delaware. The Company operates in the international intermodal marine cargo container leasing business. Within this single industry sector, the Company generates revenue from two reportable segments: container leasing and container management. The container leasing segment specializes primarily in the ownership and leasing of intermodal dry freight standard containers, while the container management segment manages containers for container investors. The Company leases its containers principally to international container shipping lines located throughout the world. The Company sells containers primarily to investor groups and provides management services to those investors in return for a management fee.

 

The Company completed an initial public offering of its common stock at $15.00 per share on May 16, 2007, and listed its common stock on the New York Stock exchange under the symbol “CAP”.

 

On September 12, 2007, the Company formed Container Applications Limited (CAI Barbados), a wholly owned subsidiary in Barbados, to facilitate the Company’s international leasing and related business operations.

 

On April 30, 2008, the Company acquired CAI Consent Sweden AB (Consent), formerly named Consent Equipment AB, a European container and intermodal equipment leasing company, for $14.6 million in cash (net of $1.3 million cash acquired) and the assumption of approximately $25.7 million in debt. Consent was originally headquartered in Gothenburg, Sweden at the time of its acquisition. Consent moved its headquarters to the Company’s European office in the United Kingdom in February 2010.

 

The Company’s corporate headquarters are located in San Francisco, California.

 

(2) Accounting Policies and Recent Accounting Pronouncements

 

(a) Accounting Policies

 

During the three months ended March 31, 2011, the Company completed its review of historical disposal experience relating to its fleet of standard dry van equipment and refrigerated container equipment and decided to increase the estimated residual values used in its equipment depreciation calculations effective January 1, 2011. The following table shows the current and prior residual values adopted by the Company for each type of equipment:

 

 

There were no other changes to the Company’s accounting policies during the quarter ended March 31, 2011. See Notes 2(a) through 2(n) to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 16, 2011.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of March 31, 2011 and December 31, 2010, the results of operations for the three months ended March 31, 2011 and 2010 and the Company’s cash flows for the three months ended March 31, 2011 and 2010. The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2011 or in any future period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended December 31, 2010 and 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2011.

 

The accompanying unaudited consolidated financial statements include the accounts of the Company. All intercompany transactions have been eliminated in consolidation. The minority interest relating to the Company’s 80%-owned subsidiary, CAIJ, Inc., is not shown separately in the accompanying unaudited consolidated financial statements as required under ASC 810, Consolidation, as the amount is immaterial.

 

Management performed an evaluation of the Company’s activities through the filing of this Form 10-Q and has concluded there are no significant subsequent events requiring disclosure through the filing of this Form 10-Q other than those disclosed in Note 15.

(b) Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2009-13, Revenue Recognition (Topic 605) - Multiple­ Deliverable Revenue Arrangements , which formally codifies the FASB's ratification in September 2009 of Emerging Issues Task Force ("EITF") Issue No. 08-1, Revenue Arrangements with Multiple Deliverables. ASU 2009-13 updates the current guidance pertaining to multiple-element revenue arrangements included in the FASB's ASC Topic 605-25 Revenue Recognition-Multiple-Element Arrangements, which originated primarily from EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. ASU 2009-13 is effective for annual reporting periods beginning January 1, 2011 for calendar- year entities. Accordingly, the company adopted ASU 2009-13 on January 1, 2011, which had no effect on the company's consolidated financial position, results of operations or cash flows. 

 

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (topic 820), Improving Disclosures About Fair Value Measurements , which requires new disclosures for fair value measurements including significant transfers in and out of Level 1 and Level 2 of the fair value hierarchy. This ASU requires additional information in the roll-forward of Level 3 assets and liabilities including the presentation of purchases, sales, issuances and settlements on a gross basis. It also provides clarification on existing disclosures relating to the level of disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for annual and interim reporting periods beginning after December 15, 2009. The additional information in the roll forward of Level 3 assets and liabilities will be effective for fiscal years beginning after December 15, 2010. The portion of ASU 2011-06 that is effective for annual and interim reporting periods beginning after December 15, 2009 did not have an impact on the Company’s statements of financial position and results of operations. The remaining disclosure requirements that are effective for fiscal years beginning after December 15, 2010 did not have an impact on the Company’s statement of financial position and results of operations.

(3) Consolidation of Variable Interest Entities as a Non-Controlling Interest

 

            The Company regularly performs a review of the container funds that it manages for investors to determine whether a fund is a variable interest entity (VIE) and whether the Company has a variable interest that provides it with a controlling financial interest and is the primary beneficiary of the VIE in accordance with ASC 810, Consolidation . If the fund is determined to be a VIE, a further analysis is performed to determine if the Company is a primary beneficiary of the VIE and meets both of the following criteria under Paragraph 14A of ASC 810:

 

            If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under ASC 810. The equity attributable to the VIE is shown as a non-controlling interest on our consolidated balance sheet and the after tax result attributable to its operations is shown as a net income or loss attributable to non-controlling interest on the Company’s consolidated statement of operations.

 

            Included among the funds that the Company manages are several Japanese container funds that were established by a related party under separate investment agreements allowed under Japanese commercial laws (see Note 11). Each of the funds is financed by unrelated Japanese third party investors. The container funds under management are considered VIEs because as manager of the funds, the Company has the power to direct the activities that most significantly impact the entity’s economic performance such as leasing and managing the containers owned by the funds. With the exception of two specific funds established in September 2010, the fees earned for arranging, managing and establishing the funds are not significant to the expected returns of the funds so the Company does not have a variable interest in the funds. The rights to receive benefits and obligations to absorb losses that could potentially be significant to the funds belong to the third party investors, so the Company concluded that it is not the primary beneficiary of the funds. With the exception of the sale of containers to two funds established in September 2010, the Company recognized gains on sale of containers to the unconsolidated VIEs as sales in the ordinary course of the business. There was no sale of containers to the VIEs for the three months ended March 31, 2011. For the three months ended March 31, 2010, the Company sold $5.3 million of containers and recognized a gain of $266,000, respectively, relating to the sale of container portfolios to the Japanese VIEs.

 

            In September 2010, the Company transferred approximately $16.0 million of containers to two specific Japanese funds that are considered VIEs. The terms of the transaction included options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance so the Company has a variable interest in the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these two specific VIEs and included the assets and liabilities as of March 31, 2011 and December 31, 2010 and the results of operations and cash flows for the three months ended March 31, 2011 in the consolidated financial statements.

 

            The containers transferred to the two Japanese VIEs had a balance of $15.1 million as of March 31, 2011. The container equipment along with $675,000 of cash held by these container funds and $1.7 million of net investment in direct finance leases, have been included on the consolidated balance sheet with the offsetting equity related to the funds presented separately as non-controlling interest of $18.3 million in the equity section of the Company’s consolidated balance sheet as of March 31, 2011. No gain or loss was recognized upon the initial consolidation of the VIE in September 2010. The net income of $199,000 attributable to the two Japanese funds is presented as net income attributable to non-controlling interest and was deducted from the Company’s consolidated statement of income for the three months ended March 31, 2011.

 

(4) Net Investment in Direct Finance Leases

 

            The following table represents the components of the net investment in finance leases (in thousands):

 

 

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 (1)  At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivable is reduced as customer payments are received.  Approximately $5.4 million and $4.0 million of unguaranteed residual value at March 31, 2011 and December 31, 2010, respectively, were included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of March 31, 2011 and December 31, 2010.

(2) The Company evaluates potential losses in its finance lease portfolio by regularly reviewing the specific receivables in the portfolio and analyzing historical loss experience. For the period 2004 through  March 31, 2011, the Company's loss experience on its gross finance lease receivables, after considering equipment recoveries, was less than 2.0%.

(3) The difference between the gross finance lease receivable and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of March 31, 2011 and December 31, 2010.

 

            In order to estimate the allowance for losses contained in the gross finance lease receivables, the Company reviews the credit worthiness of the customers on an ongoing basis. The review includes monitoring the credit quality indicators and the aging of receivables of our customers and general economic conditions.   

 

            The categories of gross finance lease receivables based on the Company's internal customer credit ratings can be described as follows:

 

            Tier 1 —These customers are typically large international shipping lines which have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to modest.

 

            Tier 2 —These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.

 

           Tier 3 —Customers in this category exhibit volatility in payments on a regular basis. The Company has initiated or implemented plans to recover equipment on lease to these customers and believes that default is likely, or has already occurred.

 

           Based on the above categories, the Company's gross finance lease receivables as of March 31, 2011, are as follows (in thousands):

 

 

           Contractual maturities of the Company's gross finance lease receivables subsequent to March 31, 2011 are as follows (in thousands):

 

 

(5) Intangible Assets

 

The Company amortizes intangible assets on a straight line basis over their estimated useful lives as follows:

 

 

Total amortization expense for the three months ended March 31, 2011 and 2010 was $343,000 and $354,000, respectively. Intangible assets as of March 31, 2011 were as follows (in thousands):

 

 

(6) Revolving Credit Facility, Term Loans and Capital Lease Obligations

The Company’s revolving credit facility, including any amounts drawn on the facility, is secured by substantially all of the assets of the Company (not otherwise used as security for its other credit facilities) including the containers owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts. The Company's term loan with a consortium of banks, related party term loan and capital lease obligations are secured by a specific pool of containers owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.

(a)      Revolving Credit Facility

The Company has a revolving line of credit agreement with a consortium of banks to finance the acquisition of assets and for general working capital purposes. This agreement was amended on May 27, 2008 and August 20, 2010 to increase the maximum credit availability. As of March 31, 2011, the maximum credit commitment under the revolving line of credit was $330.0 million.

The Company’s revolving credit facility may be increased under certain conditions described in the agreement governing the facility. In addition, there is a commitment fee on the unused amount of the total commitment, payable quarterly in arrears. The agreement provides that swing line loans (short-term borrowings of up to $10.0 million in the aggregate that are payable within 10 business days or at maturity date, whichever comes earlier) and standby letters of credit (up to $15.0 million in the aggregate) will be available to the Company. These credit commitments are part of, and not in addition to, the total commitment provided under the agreement. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit facility.  As of March 31, 2011, the interest rate under the amended agreement was approximately 2.3%. The agreement governing the Company’s revolving credit facility also contains various financial and other covenants. It also includes certain restrictions on the Company’s ability to incur other indebtedness or pay dividends to stockholders. As of March 31, 2011, the Company was in compliance with the terms of the revolving credit facility.

 

As of March 31, 2011, the outstanding balance under the Company’s revolving credit facility was $121.1 million. As of March 31, 2011, the Company had $208.8 million in availability under the revolving credit facility (net of $84,000 in letters of credit) subject to our ability to meet the collateral requirements under the agreement governing the facility. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default. The agreement under the Company’s revolving credit facility will terminate on September 25, 2014.

 

(b)   Term Loans

Term loans consist of the following:

(i )   Bank  Term Loan. On December 20, 2010, the Company entered into a Term Loan Agreement with a consortium of banks. Under this loan agreement, the Company was initially eligible to borrow up to $300.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company’s wholly owned foreign subsidiaries.  The Company initially borrowed $185.0 million under the agreement and has until September 2011 to utilize the remaining $115.0 million of the loan facility. The loan agreement is an amortizing facility with a term of six years, with quarterly payments of principal of $6.0 million each (e.g., 2.0% of the aggregate commitment).  Any unpaid principal will be due on December 20, 2016.  The applicable interest rate is equal to LIBOR plus 3.0% per annum for Eurodollar loans, and Base Rate plus 2.0% for base rate loans.  The Base Rate is defined as the highest of (i) the federal funds rate plus 1/2 of 1.0%, (ii) the prime rate (as published in The Wall Street Journal), and (iii) the Eurodollar rate (for three-month loans) plus 1.0%. The proceeds from the initial borrowing were used to pay part of the Company’s revolving credit facility.

 

On March 11, 2011 the Company entered into an Amendment to the Term Loan Agreement that reduces the quarterly payments of principal for the $185.0 million initially borrowed to $3.7 million each (e.g. 2.0% of the drawn amount) for the first 23 quarterly payment dates with a final payment of $99.9 million (54.0% of the drawn amount) due on December 20, 2016.   The Company is entitled to draw down the remaining $115.0 million commitment in up to three additional drawdowns through September 2011.  The quarterly payments of principal on these drawdowns (each determined separately) will be determined for each Principal Payment Date (other than the Maturity Date), an amount equal to the product of (x) the quotient obtained by dividing 46.0% by the number of remaining scheduled Principal Payment Dates, as of the Drawdown Date of such Term Loan and (y) the initial Principal Balance of such Term Loan, with a final payment due on December 20, 2016 of 54.0% of the initial Principal Balance of such Term Loan. As of March 31, 2011, the loan had a balance of $181.3 million and interest rate of 3.3%. The loan agreement contains various financial and other covenants. As of March 31, 2011, the Company was in compliance with all the covenants under the agreement.

(ii) Related Party Term Loan .  On August 20, 2009, the Company signed a $10.0 million five-year loan agreement with the Development Bank of Japan (DBJ). As of the date of closing of the loan agreement, DBJ owned approximately 9.4% of the Company’s outstanding common stock. The loan is payable in 19 quarterly installments of $200,000 starting October 31, 2009 and a final payment of $6.2 million on July 31, 2014. The loan bears a variable interest rate based on BBA LIBOR rate and is secured by a number of container rental equipment owned by the Company. The loan had a balance of $8.8 million and interest rate of 2.7% as of March 31, 2011. The agreement governing the Company’s term loan contains various financial and other covenants. As of March 31, 2011, the Company was in compliance with the terms of the term loan.

In December 2010, DBJ sold 753,000 shares of the Company’s stock that it owned, thereby reducing its equity interest to 4.9% of the Company’s total outstanding shares stock as of March 31, 2011.

(c)   Capital Lease Obligations

As of March 31, 2011, the Company had capital lease obligations of $14.2 million. The underlying obligations are denominated in U.S. Dollars and Euros at floating interest rates averaging 2.7% as of March 31, 2011 and maturity dates between April 2011 and June 2019. The liability under each lease is secured by the underlying equipment on the lease.

 

 

(7) Stock–Based Compensation Plan

 

(a) Stock Options

 

There was no activity in the Company’s stock option plan during the first quarter ended March 31, 2011. As of March 31, 2011, the Company had 972,680 outstanding shares of stock options granted to officers, employees and independent directors with a weighted average exercise price of $10.32 per share. The stock options granted to officers and selected senior managers have a vesting period of four years while stock options granted annually to independent members of the Company’s board of directors have a vesting period of one year. All stock options have a term of 10 years from date of grant as long as the grantee remains an employee or director of the Company.

 

The fair value of the stock options granted by the Company was determined using the Black-Scholes-Merton pricing model and is amortized as compensation expense on a straight-line basis over their vesting periods. For the three months ended March 31, 2011 and 2010, the Company recorded stock-based compensation expense of $265,000 and $224,000, respectively, relating to stock options granted to the Company’s officers and independent directors. As of March 31, 2011, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s executive officers and employees was approximately $624,000 which is to be recognized over a weighted average remaining vesting period of 1.9 years. Unamortized stock-based compensation cost relating to independent directors’ options at March 31, 2011 was approximately $61,000 which is to be recognized over a remaining vesting period of approximately 4.3 months. The average remaining term of the stock options for officers and independent directors is approximately 7.3 years. The aggregate intrinsic value of all options outstanding as of March 31, 2011 was approximately $15 .1   million based on the closing price of the Company’s common stock of $25.86 per share.

 

(b) Restricted Stock Grant

 

The Company granted certain management employees stock bonuses totaling 36,876 shares of restricted common stock on May 15, 2007 at a fair value of $15.00 per share. The restricted stock awards vest over three years and are amortized from grant date over three years on a straight line basis. If an employee resigns voluntarily or is terminated for “cause” (as defined in the stock grant documents), the employee will forfeit any unvested portion of the restricted stock award and the amortization of stock-based compensation expense will be adjusted prospectively and amortized over the remaining vesting period.

 

There was no activity relating to the Company’s restricted stocks for the three months ended March 31, 2011 as these have all been fully vested since July 2010. The stock compensation expense relating to restricted stocks for the three months ended March 31, 2011 and 2010 was zero and $44,000, respectively. As of March 31, 2011, there was no unrecognized compensation cost related to the restricted stocks.

 

Compensation expense relating to stock options and restricted stock is recorded as a component of administrative expenses in the Company’s consolidated statements of income.

 

(8) Income Taxes

 

The consolidated income tax expense for the three months ended March 31, 2011 and 2010 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2011 and 2010, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes and the effect of certain permanent differences.

 

The Company’s effective tax rate for the three months ended March 31, 2011 was 16.4% compared to 21.6 % for the three months ended March 31, 2010. The lower effective tax rate for the three months ended March 31, 2011 is due primarily to higher pretax income from foreign operations where statutory rates are lower than the U.S. income tax rates.

 

The Company recognizes in the financial statements a liability for tax uncertainty if it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. As of March 31, 2011, the Company had unrecognized tax benefits of $80,000, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was approximately $8,000 as of March 31, 2011. The Company does not believe the total amount of unrecognized tax benefits as of March 31, 2011 will increase or decrease for the remainder of 2011. The Company’s 2005 and 2006 income tax returns for the state of California are currently under examination by the state’s taxing authority.

 

(9) Fair Value of Financial Instruments

 

The carrying amount reported in the consolidated balance sheets for cash, accounts receivable, and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. The Company’s outstanding balances on revolving credit facility and capital lease obligation as of March 31, 2011 were estimated to have fair values of approximately $119.2 million and $13.6 million, respectively, based on the fair values of their estimated future payments calculated using the prevailing interest rates. Management believes that the principal amount of the Company’s term loans totaling $190.1 million and net investment in direct finance leases of $11.8 million approximate their fair value as of March 31, 2011.

 

 

(10) Commitments and Contingencies

 

In addition to its debt obligations described in Note 6 above, the Company has commitments to purchase approximately $83.8 million of container equipment as of March 31, 2011. The Company also utilizes certain office facilities and equipment under long-term non-cancellable operating lease agreements with total future minimum lease payments of approximately $6.8 million as of March 31, 2011.

 

(11) Related Party Transactions

The Company has transferred legal ownership of dry van containers to Japanese container funds which were established by Japan Investment Adviser Co., Ltd. (JIA) and CAIJ. CAIJ is an 80%-owned subsidiary of CAI with the remaining 20% owned by JIA. JIA is owned and controlled by a Managing Director of CAIJ.  Prior to the transfer of containers from the Company, the container funds received contributions from unrelated Japanese investors, under separate Japanese investment agreements allowed under Japanese commercial laws. The contributions were used to purchase container equipment from the Company. Under the terms of the agreements, the CAI-related Japanese entities manage the activities of the Japanese entities but may outsource the whole or part of each operation to a third party. Pursuant to its services agreement with investors, the Japanese container funds have outsourced the general management of their operations to CAIJ. The Japanese container funds have also entered into equipment management service agreements whereby the Company manages the activities such as leasing and managing of containers owned by the Japanese container funds.

 

As described in Note 3, the Japanese container funds are considered VIEs. However, with the exception of the two specific Japanese funds described in Note 3, the Company does not consider its interest in the Japanese container funds to be a variable interest. As such, the Company did not consolidate the assets and liabilities, results of operations or cash flows in its consolidated financial statements.

The sale of containers to the unconsolidated Japanese VIEs has been recorded on the Company’s books as a sale in the ordinary course of the business. No sale to the VIE occurred during the three months ended March 31, 2011. For the three months ended March 31, 2010, the Company sold $5.3 million of container equipment to the Japanese VIEs and recognized a gain of $266,000.

As described in Note 3, the Company has included in its consolidated financial statements, the assets and liabilities, results of operations, and results of cash flows of two specific Japanese container funds that it manages, in accordance with ASC 810.

On August 20, 2009, the Company signed a $10.0 million five-year loan agreement with the Development Bank of Japan (DBJ).  As of the date of closing of the loan agreement, DBJ owned approximately 9.4% of the Company’s outstanding common stock. See Note 6(b)(ii).

 

(12) Comprehensive Income

 

The following table provides a reconciliation of the Company’s net income to comprehensive income (in thousands):

 

 

(13) Segment Information

 

The Company operates in one industry segment, container leasing, but has two reportable business segments: container leasing and container management. The container leasing segment derives its revenue from the ownership and leasing of containers to container shipping lines and freight forwarders. The container management segment derives its revenue from management fees earned from portfolios of containers and associated leases which are managed on behalf of container investors. It also derives revenue from the sale of containers, previously owned by the Company, to container investors who in turn enter into management agreements with the Company. There are no inter-segment revenues.

 

With the exception of amortization of intangible assets and marketing, general and administrative expenses (MG&A), operating expenses are allocated directly to the container leasing segment. Amortization of intangible assets relating to owned and third party contracts is allocated directly to the container leasing segment and container management segment, respectively. The amortization of remaining intangible assets relating to the trademark and software is allocated to the segments based on average segment TEUs during the year.

During the year ended December 31, 2010, the Company refined its methodology for allocating MG&A expense to each segment based on a study which analyzed the departmental composition of MG&A expense. The expense allocation was based on either revenue or twenty-foot equivalent units (TEUs) of containers in each segment, depending on the function of the department which incurred the expense, after directly assigning MG&A expense relating to Consent and CAIJ subsidiaries to the container leasing and container management segment, respectively. Management believes that this allocation method results in a more representative distribution of MG&A expense between the two segments.  The Company applied this allocation method to MG&A expenses for the three months ended March 31, 2011 and adjusted the MG&A expense included in each segment’s operating expense previously reported for the same three-month period in 2010.  Prior to adoption of this method, the Company had been allocating MG&A expense to each segment based solely on the ratio of owned and managed TEUs to its total fleet of TEUs after directly assigning MG&A expense relating to Consent to the container leasing segment.

The Company makes its management decisions based on pre-tax income, and as such does not allocate income tax expense/benefit to its segments.

The allocation of assets between segments is determined by the direct allocation of the managed accounts receivable, the net carrying value of the intangible asset relating to third party contracts and a portion of the intangible asset relating to trademark and software (determined based on the percentage of average TEUs of managed containers to total average TEUs), to the managed container segment. The remaining balance of total assets is allocated to the container leasing business.

The following tables show condensed segment information for the Company’s container leasing and container management segments for the three months ended March 31, 2011 and 2010, reconciled to the Company’s income before taxes as shown in its consolidated statements of income for such periods (in thousands):

 

Using an expense allocation based solely on container fleet ownership, the Company had previously reported operating expenses of $7.2 million and $3.3 million, and net income of $4.7 million and net loss before income taxes $833,000 for the container leasing segment and container management segment, respectively, for three months ended March 31, 2010.

 

The Company’s container lessees use containers for their global trade utilizing many worldwide trade routes. The Company earns its revenue from international carriers when the containers are in use and carrying cargo around the world. Most of the Company’s leasing related revenue is denominated in U.S. dollars. Since all of the Company’s containers are used internationally and typically no container is domiciled in one particular place for a prolonged period of time, all of the Company’s long-lived assets are considered to be international with no single country of use.

 

(14) Earnings Per Share

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if their effect is anti-dilutive.

 

 

The following table sets forth the reconciliation of basic and diluted net income per share for the three months ended March 31, 2011 and 2010 (in thousands, except per share data).

 

		Three Months Ended March 31,
		2011				2010
Numerator:
Net income used in the calculation of basic and diluted earnings per share		$	12,796			$	3,049
Denominator:
Weighted average shares used in the calculation of basic and diluted earnings per share:
Basic			19,295				17,906
Diluted			19,758				18,038
Net income per share:
Basic		$	0.66			$	0.17
Diluted		$	0.65			$	0.17

The calculation of diluted earnings per share for the three months ended March 31, 2010 excluded from the denominator 450,180 shares of stock options granted to officers and directors because their effect would have been anti-dilutive.

  (15) Subsequent Events

The Company has evaluated subsequent events through the date the consolidated financial statements are available to be issued on May 6, 2011.

On April 15, 2011, the Company filed a shelf registration statement on Form S-3 with the SEC. Under this shelf registration statement, the Company may sell various debt and equity securities, or a combination thereof, to be offered from time to time up to an aggregate offering price of $250.0 million for all securities, and the selling stockholders may sell up to 2,500,000 shares of common stock in one or more offerings. The Company has no immediate plans to make any offer of any securities, but filed the registration statement in order to be able to access the capital markets more quickly and beneficially when desired. The shelf registration statement has not yet become effective and no securities may be offered or sold pursuant to the registration statement until it becomes effective. Any offering of securities by the Company or any selling stockholder will be made solely by means of a prospectus supplement.

 

On April 29, 2011, the Company announced that its President and CEO, Mr. Masaaki (John) Nishibori will retire as the Company's President and Chief Executive Officer, effective June 3, 2011. The Company’s Board of Directors appointed Mr. Victor Garcia, who is currently the Company's Senior Vice President and Chief Operating Officer, to succeed Mr. Nishibori as President and CEO. In addition, on April 29, 2011, the Board appointed Timothy B. Page as the Company's new Chief Financial Officer succeeding Mr. Gary M. Sawka who will resign as the Company's Interim Chief Financial Officer, effective upon Mr. Page’s starting date in mid-May 2011.  Mr. Sawka has been nominated in the Company's 2011 proxy statement to the Company's Board of Directors for approval at the annual stockholders meeting on June 3, 2011.