| INTERPOOL INC ITEM 1A RISK FACTORS Investors in Interpool should consider the following risk factors as well as the other information contained herein |
| We are subject to the cyclicality and uncertainties of world trade which may impair demand for our chassis and containers |
| The demand for our chassis and containers primarily depends upon levels of world trade of finished goods and component parts |
| Recessionary business cycles, political conditions, the status of trade agreements and international conflicts may have an impact on our operating results |
| The demand for leased chassis also depends upon domestic economic conditions and volumes of exports to the United States which are likely to be adversely affected if the value of the United States dollar declines |
| When the volume of world trade decreases, our business of leasing chassis and containers may be adversely affected as the demand for chassis and containers is reduced |
| A substantial decline in world trade may also adversely affect our customers, leading to possible defaults and the return of equipment prior to the end of a lease term |
| We operate in a highly competitive industry, which may adversely affect our results of operations or ability to expand our business |
| The transportation equipment leasing industry is highly competitive |
| We compete with many domestic and foreign leasing companies, as well as container and chassis manufacturers, banks offering financing leases and promoters of equipment ownership and leasing as an investment in the US and abroad |
| Some of these competitors have greater financial resources and access to capital than we do |
| From time to time, the industry may have large under-utilized inventories of chassis and containers, which could lead to significant downward pressure on pricing and margins |
| In addition, if the available supply of intermodal transportation equipment were to increase significantly as a result of, among other factors, new companies entering the business of leasing and selling intermodal transportation equipment, our competitive position could be adversely affected |
| New entrants attracted by the projected high rate of containerized trade growth, together with the already highly competitive nature of our business, could put significant downward pressure on lease rates and margins and adversely affect our ability to achieve our growth plans |
| The expansion of such competition has, at times, led to overproduction of new containers and overbuying by shipping lines and leasing competitors and could continue to impact lease rates and utilization in the future |
| Certain of our leasing industry competitors have shifted their strategies toward an increase in long-term leasing of shipping containers which has also added to competitive pressures |
| Potential customers may decide to buy rather than lease chassis and containers |
| We, like other suppliers of leased chassis and containers, are dependent upon decisions by shipping lines and other transportation companies to lease rather than buy their equipment |
| If major shipping lines elect to construct their own facilities to manufacture containers or chassis, or to make investments in such facilities, these customers may decide to own a larger portion of their equipment fleets |
| In addition, our ability to achieve our strategy of expanding our business in response to customer demand for long-term leasing would be adversely affected if our customers shifted to more short-term leasing over long-term leasing |
| Most of the factors affecting the decisions of our customers are outside our control |
| Operating costs such as storage and repair and maintenance costs also increase as utilization decreases |
| Following our announcement in July 2003 that our Audit Committee had commissioned an internal investigation by special counsel into our accounting, we were notified that the SEC had opened an informal investigation of Interpool |
| As we anticipated, this investigation was converted to a formal investigation later in 2003 |
| We have fully cooperated with this investigation |
| During 2003 and 2004, the New York office of the SEC received a copy of the written report of the internal investigation and received documents and information from us, our Audit Committee and certain other parties pursuant to SEC subpoenas |
| During late 2003, we were also advised that the United States Attorneyapstas office for the District of New Jersey received a copy of the written report of the internal investigation by our Audit Committeeapstas Special Counsel and opened an investigation focusing on certain matters described in the report |
| We were informed that Interpool was neither a subject nor a target of the investigation by the US Attorneyapstas office |
| We have not had any communications with either the SEC or the US Attorneyapstas office relating to their respective investigations since 2004 |
| We do not have any information regarding the current status of either of these investigations |
| Therefore, we cannot predict the final outcome of either of these investigations and cannot be assured that they may not result in the taking of some action that may be adverse to us |
| Our internal controls and procedures may require further improvements |
| As indicated elsewhere in this Form 10-K report, our managementapstas review of our internal controls over financial reporting, using the framework defined by the Committee of Sponsoring Organizations of the Treadway Commission ( "e COSO "e ), has indicated that certain internal control deficiencies existed as of December 31, 2005 which constitute "e significant deficiencies "e or "e material weaknesses "e as defined by the Public Company Accounting Oversight Board (United States) ( "e PCAOB "e ) |
| As disclosed in our prior SEC filings, we have previously concluded that other internal control deficiencies identified by our external auditors and by management, as well as through the investigation by the Audit Committee of the Board of Directors, constituted "e material weaknesses "e or "e significant deficiencies "e as defined by the PCAOB as of December 31, 2004 |
| Based on remedial actions taken during 2005 and the testing of our key financial controls that has been completed, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that some, but not all, of the previously identified deficiencies and weaknesses had been corrected as of December 31, 2005 |
| However, other "e significant deficiencies "e and/or "e material weaknesses "e in our controls over financial reporting as of December 31, 2005 were identified, as disclosed in Item 9A of this 2005 Form 10-K report |
| We believe that actions to be implemented in 2006 and beyond will remediate the significant deficiencies and material weaknesses in our internal controls and information systems identified in Item 9A of this 2005 Form 10-K Report and that, after the required remediation, our processes and systems of internal controls will be effective |
| However, we cannot give assurances that any of the previously identified material weaknesses or significant deficiencies have been fully remediated or that any remaining weaknesses or deficiencies in internal controls will be effectively remediated in the future |
| Additional internal control weaknesses or deficiencies may also be identified from time to time in the future |
| Any material internal control weaknesses or deficiencies could materially affect our financial results |
| Sustained Asian economic instability could reduce demand for leasing |
| A number of the shipping lines to which we lease containers are entities domiciled in several Asian countries |
| In addition, many of our customers are substantially dependent upon shipments of goods exported from Asia |
| From time to time, there have been economic disruptions, financial turmoil and political instability in this region |
| If similar events were to occur in the future, they could adversely affect these customers and lead to a reduced demand for leasing of our containers or otherwise adversely affect us |
| Terrorist attacks or hostilities could adversely affect us |
| Potential acts of terrorism or hostilities may affect the ports and depots at which we and our customers operate as well as our other facilities or those of our customers and suppliers |
| In addition, any such incident or similar act of violence could lead to a disruption to the worldwide ports system and flow of goods or contribute to economic instability in other respects |
| To the extent any such event were to result directly or indirectly in a reduction in the level of international trade and reduced demand for transportation equipment, our business would be adversely affected |
| In addition, if one of our containers were to be involved in a terrorist attack, our customer agreements and insurance policies might not be adequate to fully protect us from any liability |
| We also may be subject to domestic or international regulations designed to prevent the use of containers for international terrorism or other illegal activities |
| As such regulations develop and change, we may incur increased compliance or related competitive costs affecting existing inventories or future containers that are acquired which could have a material adverse effect on our financial condition and results of operations |
| Environmental liability may adversely affect our business and financial situation |
| Like other companies, we are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those regulating the use and disposal of hazardous substances |
| 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 current or historical operations |
| Under some environmental laws in the United States and certain other countries, the owner 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 ownerapstas fault |
| While we maintain insurance and require lessees to indemnify against certain losses, such insurance and indemnities may not cover or be sufficient to protect us against losses arising from environmental damage |
| Many countries, including the United States, restrict, prohibit or otherwise regulate the use of chlorofluorocarbon compounds ( "e CFCs "e ) due to their ozone depleting and global warming effects |
| CFCs have historically been used in the manufacture and operation of older refrigerated containers, including some of our refrigerated containers |
| Regulation of CFCs or other refrigerants may become stricter in the future, and it may become necessary for us to retrofit any refrigerated containers in our fleet using CFCs with non-CFC refrigerants at substantial cost to us |
| The replacement refrigerant used in our new refrigerated containers also may become subject to similar regulation |
| In addition, refrigerated containers that are not retrofitted may command lower prices in the market for used containers once we retire these containers from our fleet |
| At December 31, 2005, 3prca of our fleet is composed of refrigerated containers |
| Defaults by our customers could adversely affect our business by decreasing revenues and increasing storage, collection and recovery expenses |
| We are dependent upon our lessees continuing to make lease payments for our equipment |
| A default by a lessee may cause us to lose revenues for past services and incur expenses for storage, collection and recovery |
| Repossession from defaulting lessees may be difficult and more expensive in jurisdictions whose laws do not confer the same security interests and rights to creditors and lessors as those in the United States and in jurisdictions where recovery of equipment from the defaulting lessees is more cumbersome |
| If a lessee defaults, we may be unable to re-lease recovered equipment for comparable rates or terms |
| Our reserves for anticipated losses may increase over historical levels or not be sufficient to cover actual losses, or our earnings may be adversely affected by customer defaults |
| Changes in market price, availability or transportation costs of equipment manufactured in China could adversely affect our ability to maintain our supply of containers |
| Changes in the political, economic or financial condition of China, which would increase the market price, availability or transportation costs of containers or chassis, could adversely affect our ability to maintain our supply of equipment |
| China is currently the largest container producing nation in the world and a significant supplier of chassis |
| We currently purchase substantially all of our containers and a majority of our chassis from manufacturers in China |
| In the event that it were to become more expensive for us to procure containers and chassis in China or to transport these containers or chassis at a low cost from China to the locations where they are needed, because of a shift in US trade policy toward China, increased tariffs imposed by the United States or other governments, a significant downturn in the political, economic or financial condition of China, or for any other reason, we would have to seek alternative sources of supply |
| We may not be able to make alternative arrangements quickly enough to meet our equipment needs, and the alternative arrangements may increase our costs |
| We are controlled by a limited number of stockholders; this concentrated ownership could discourage acquisition bids for us that are not supported by our majority stockholders or limit the price investors will be willing to pay in the future for shares of our common stock |
| As of March 1, 2006, approximately 66dtta7prca of our common stock is beneficially owned, directly or indirectly, in the aggregate by Martin Tuchman, Warren L Serenbetz, Jr, Raoul J Witteveen and Arthur L Burns, together with certain members of their immediate families and certain related entities |
| Each of Messrs |
| Tuchman, Serenbetz and Burns is a member of our Board of Directors and Mr |
| Tuchman and Mr |
| Burns are executive officers |
| Witteveen is a former director and executive officer |
| These individuals, either directly or indirectly, have the ability to elect all of the members of our Board of Directors and to control the outcome of all matters submitted to a vote of our stockholders |
| Our concentrated ownership may discourage acquisition bids for us that are not supported by our majority stockholders |
| This concentration of ownership could limit the price that investors might be willing to pay in the future for shares of our common stock |
| We have relationships with and have entered into transactions with members of our management and affiliated entities that may involve inherent conflicts of interest |
| Various relationships exist and various transactions have been entered into between or among us, on the one hand, and members of our management and affiliated entities, on the other hand |
| Some of these relationships and transactions may involve inherent conflicts of interest |
| See Item 13, "e Certain Relationships and Related Transactions "e and Note 10 to the Consolidated Financial Statements for more information |
| We are dependent on the knowledge and experience of members of our senior management; loss of these members could adversely affect our ability to formulate and achieve our strategy and pursue new business initiatives |
| Our growth and continued profitability are dependent upon, among other factors, the abilities, experience and continued service of certain members of our senior management, including Martin Tuchman, our Chairman and Chief Executive Officer |
| Tuchman holds, either directly or indirectly, a substantial equity interest in Interpool (approximately 30prca at March 1, 2006) and also is a director of Interpool |
| Additionally, other members of our senior management possess knowledge of, and extensive experience in, the intermodal transportation industry |
| We rely on this knowledge and experience in our strategic planning and in our day-to-day business operations |
| If one or more members of our senior management were to resign or otherwise be unavailable to serve us, the loss could adversely affect our ability to formulate and achieve our strategy and pursue new business initiatives |
| In addition, we do not currently have employment agreements with all of our executive officers |
| The volatility of the residual value of chassis and containers upon expiration of their leases could adversely affect our operating results |
| Although our operating results primarily depend upon equipment leasing, our profitability is also affected by the residual values (either for sale or re-leasing) of our chassis and containers upon expiration of their leases |
| These values, which can vary substantially, depend upon, among other factors, • The maintenance standards observed by lessees; • Expenses associated with off-hire, storage, repair, repositioning and re-marketing of returned equipment; • Our ability to negotiate lease extensions and remarket equipment profitably, which can be substantially impacted by the timing and volume of off-hired equipment; • The current cost of comparable new equipment; • Changes in lessees &apos requirements for leased containers; • The availability of used equipment; • Rates of inflation; • Prevailing market conditions, including used equipment prices at the locations of equipment returns; • The cost to remanufacture chassis; • The costs of materials and labor; and • The obsolescence of certain types of equipment in our fleet |
| Operating leases are subject to greater residual risk than direct financing leases |
| A recharacterization of our repatriation plan by the IRS could increase our tax liability |
| On December 27, 2005, Interpool, Inc |
| apstas wholly-owned Barbados subsidiary, Interpool Limited, made a distribution to Interpool, Inc |
| of approximately dlra305dtta0 million (the "e Distribution "e ), as part of a plan approved by Interpool, Inc |
| apstas Board of Directors to repatriate accumulated and current earnings and profits of Interpool Limited which previously had been considered permanently reinvested outside the United States |
| Pursuant to the American Jobs Creation Act of 2004 (the "e AJCA "e ), the Distribution was subject to US federal tax at a reduced rate of approximately 5dtta25prca |
| In connection with our repatriation plan, on December 14, 2005, effective as of close of business on November 30, 2005, Interpool Limited, which operated our international container leasing business, transferred substantially all of its operating assets and related liabilities to Interpool Containers Limited ( "e ICL "e ), a newly formed Barbados company which is a subsidiary of Interpool, Inc |
| ICL now operates our international container leasing business |
| We received a tax opinion from outside tax counsel which concluded, based on certain assumptions and representations (including representations regarding the reinvestment of proceeds of the Distribution), that the Distribution should qualify for the special 5dtta25prca federal tax rate as provided for in the AJCA In addition, we received a second tax opinion from another law firm confirming their agreement with the overall conclusions reached in the original opinion |
| In the event the IRS took a contrary view, and successfully challenged our tax positions pertaining to our repatriation plan, our tax liability could increase significantly |
| Loss of our eligibility for tax benefits under the US-Barbados tax treaty could increase our tax liability |
| Through December 31, 2005, we claimed tax benefits under an income tax convention between the United States and Barbados (the "e Tax Treaty "e ), the jurisdiction in which our subsidiaries, Interpool Limited and, as discussed above, ICL, operate our international container leasing business, were incorporated |
| Specifically, under the Tax Treaty, any profits of Interpool Limited and ICL from leasing of containers used in international trade generally are taxable only in Barbados and not in the United States |
| Interpool Limited and ICL are entitled to the benefits of the Tax Treaty for each year by satisfying the two-pronged test to the "e limitation of benefits "e provision: (1) more than 50prca of the shares of Interpool Limited and ICL were owned, directly or indirectly, by any combination of individual United States residents or citizens (the "e 51prca US ownership test "e ), and (2) its income was not used in substantial part, directly or indirectly, to meet liabilities to persons who were not residents or citizens of the United States (the "e base erosion test "e ) |
| We believe Interpool Limited and ICL passed both of these tests through December 31, 2005 |
| For periods beginning on or after January 1, 2005, in addition to having to satisfy the 51prca US ownership and base erosion tests described above, Interpool Limited and ICL are only eligible for the Tax Treaty benefits with respect to its container rental and sales income if Interpool, Inc |
| is listed on a "e recognized stock exchange "e and Interpool, Inc |
| apstas stock is "e primarily "e and "e regularly "e traded on such exchange |
| During April 2004 Interpool, Inc |
| was de-listed by the New York Stock Exchange |
| However, on January 13, 2005 Interpool, Inc |
| was again listed, and began trading, on the New York Stock Exchange |
| We believe this listing and its current trading volume satisfies the "e primarily "e and "e regularly "e traded requirements of the Tax Treaty, that Interpool Limited qualified again for benefits under the Tax Treaty on January 13, 2005, and that ICL qualified under the Tax Treaty when it began operations as of close of business on November 30, 2005 |
| We have estimated there should be no US current tax expense for the period from January 1, 2005 to January 12, 2005, when Interpool Limited was not eligible for the Tax Treaty |
| There is no assurance we will continue to satisfy the "e primarily "e and "e regularly "e traded, 51prca US ownership or base erosion tests of the Tax Treaty |
| In addition, at some future date the Tax Treaty could be further modified in a manner adverse to us or repealed in its entirety, or we might not continue to be eligible for these tax benefits |
| As companies resident in Barbados, Interpool Limited and ICL are required to file tax returns in Barbados and pay any tax liability to Barbados |
| Prior to the third quarter of 2005, no Barbados tax returns had been prepared or filed for Interpool Limited for any period subsequent to its 1997 tax year |
| As of September 30, 2005, all previously outstanding Barbados tax returns (1998-2004 tax years) were filed |
| There was no underpayment of taxes, interest or penalties (other than a nominal late filing penalty) with the filing of these returns |
| A substantial portion of our future cash flows will be needed to service our indebtedness |
| Historically, we have made, and continue to make, use of indebtedness to finance our equipment leasing activities and for other general corporate purposes |
| As of December 31, 2005, our total outstanding indebtedness was approximately dlra2dtta0 billion |
| We anticipate that we will incur additional indebtedness in the future |
| We are required to dedicate a substantial portion of our cash flow to payments on our indebtedness, thereby reducing the amount of cash flow available to fund working capital, capital expenditures, including fleet growth, and other corporate requirements |
| Should our cash flow be insufficient to service our debt obligations, we would be required to seek additional funds to meet our obligations |
| Additional funds, if needed, might not be available to us or, if available, might not be made available on terms acceptable to us |
| Our business is highly dependent upon the availability of capital |
| In particular, the growth and replacement of our fleet through new equipment purchases or acquisitions, as well as the refinancing of our existing debt, will require further debt or equity financings |
| There is no assurance that interest rates and advance rates on any future financings will be as attractive as those experienced in the past |
| If we raise additional funds by issuing equity securities, further dilution to the existing stockholders may result |
| Increases in interest rates may increase our debt service obligations and adversely affect our liquidity |
| After considering borrowings payable under floating rate agreements which have been converted to fixed rate debt through the use of interest rate swap agreements, approximately 20prca of our borrowings at December 31, 2005 were at variable rates of interest and expose us to interest rate risk |
| At December 31, 2005, we also had approximately dlra404dtta7 million of unrestricted cash and marketable securities on hand |
| As interest rates rise, our debt service obligations increase |
| A significant rise in interest rates could have a material adverse effect on results of operations in future periods |
| For further discussion on interest rate risk see Item 7A The price of our common stock may fluctuate |
| The market price for our common stock has fluctuated in the past, and several factors could cause the price to fluctuate substantially in the future |
| These factors include: • Announcements of developments related to our business; • Announcements of strategic acquisitions or dispositions of assets; • Exercise of outstanding Options or Warrants; • Fluctuations in our quarterly results of operations; • Sales of substantial amounts of our shares into the marketplace; • General conditions in our industry or the worldwide economy; • A shortfall in revenues or earnings compared to securities analysts &apos expectations; • Changes in analysts &apos recommendations or projections; and • An outbreak of war or hostilities |
| The current market price of our common stock may not be indicative of future market prices |
| Fluctuations in foreign exchange rates could affect our profitability |
| Most of our non-US transactions are individually of small amounts and in various denominations and thus are not suitable for cost-effective hedging |
| In addition, almost all of our container and chassis purchases are paid in US dollars |
| There can be no assurance that exchange rate fluctuations will not adversely affect our results of operation and financial position |
| Our future business prospects could be adversely affected by consolidation within the container shipping industry |
| Recently there have been several large shipping line acquisitions that have resulted in some consolidation within the container shipping industry |
| This has resulted in a reduction of the number of large shipping lines and also in an increase in concentration of business that we have with the combined groups |
| Our future business prospects could be adversely affected if there was a continued reduction in the number of shipping lines in the world |
| In addition, due to concentration risk, we might decide to limit the amount of business exposure we have with any single combined group if the exposure was deemed unacceptable |
| Our charter documents and Delaware law may inhibit a takeover and limit our growth opportunities, which could cause the market price of our shares to decline |
| Our Restated Certificate of Incorporation and Amended and Restated By-laws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable |
| These provisions apply even if the change may be considered beneficial by some stockholders |
| If a change of control or change in management is delayed or prevented, the market price of our shares could decline |
| In addition, our Restated Certificate of Incorporation and Amended and Restated By-laws contain provisions that may discourage acquisition bids for Interpool |
| Potential Initial Public Offering of CAI Our 50prca subsidiary, CAI, has engaged an investment banking firm to manage an initial public offering of CAIapstas common stock and a registration statement is currently being prepared for filing with the Securities and Exchange Commission during 2006 |
| CAIapstas ability to complete a public offering will depend upon a number of factors, and there can be no assurance that CAIapstas public offering will be completed within the anticipated time frame or at all |
| In the event CAI was to become a public company, CAI would become subject to the requirements of the federal securities laws and the costs associated with compliance therewith |
| In addition, in the event that CAI ultimately completes its public offering, the relationship between us and CAI could present additional conflicts of interest for us as well as potential liability under the securities laws for us and our representatives who serve on CAIapstas board of directors |