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 SHARE OPTIONS
The following share options in terms of The Trencor Share Option Plan have been granted to and accepted by executive directors and/or their family trusts:
| | NUMBER OF | | | |
| DATE | SHARES AT | OFFER PRICE | EXERCISABLE AS FOLLOWS
 |
| GRANTED | 31/12/2004 | PER SHARE | BETWEEN | AND |
| J E McQUEEN | 30/06/01 | 1 000 000 | R5,25 | 11/07/02 | 30/06/09 |
| 11/06/04 | 50 000 | R12,10 | 11/06/07 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/08 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/09 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/10 | 11/06/12 |
|
| | 1 200 000 | | | |
|
| H R VAN DER MERWE | 30/06/01 | 1 600 000 | R5,25 | 11/07/02 | 30/06/09 |
| 11/06/04 | 50 000 | R12,10 | 11/06/07 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/08 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/09 | 11/06/12 |
| 11/06/04 | 50 000 | R12,10 | 11/06/10 | 11/06/12 |
|
| | 1 800 000 | | | |
|
The right to exercise the options granted on 11 June 2004 is subject to certain performance criteria being met.
Subsequent to the year-end, on 3 March 2005 Messrs J E McQueen and H R van der Merwe each exercised options on 200 000 shares granted to them on 30 June 2001 at the option price of R5,25 per share. These shares were sold on 3 March 2005 for R17,00 per share.
DIRECTORS' INTERESTS
The number of shares held by the directors in the issued share capital of the company, other than indirect interests through Mobile Industries Ltd ('Mobile'), at 31 December 2004 and 2003 were as follows:
|
BENEFICIAL
|
NON-BENEFICIAL
| TOTAL |
| DIRECT | INDIRECT | DIRECT | INDIRECT |
| H A GORVY | - | - | - | - | - |
| J E HOELTER | - | - | - | - | - |
| C JOWELL | 41 210 | 20 904 | - | - | 62 114 |
| N I JOWELL | 41 808 | 20 904 | - | - | 62 712 |
| J E McQUEEN | 49 649 | 102 133 | - | - | 151 782 |
| D M NUREK | - | - | - | - | - |
| E OBLOWITZ | - | - | - | - | - |
| H R VAN DER MERWE | - | - | - | - | - |
|
| 132 667 | 143 941 | - | - | 276 608 |
|
None of the directors held any interest in the 6% convertible debentures in issue in the company (2003: nil).
Mr J E Hoelter has an indirect beneficial interest in 1 038 873 shares (2003: 1 038 873 shares) representing 5,5% (2003: 5,5%) in the issued common stock of Textainer Group Holdings Ltd, Trencor's 73% (2003: 73%) subsidiary.
There have been no changes in these interests between the financial year-end and the date of this report.
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 Sub-committees of the board
Several sub-committees exist, each with specific terms of reference, to assist the board in discharging its responsibilities. The composition of these committees is reviewed on an ongoing basis. The names of the members of the sub-committees appear on
page 3.
NOMINATION COMMITTEE
During 2002 the board appointed a nomination committee to identify and recommend to the board, suitable competent candidates for appointment as independent non-executive directors. The committee comprises three non-executive directors, two of whom are independent. On a proposal by the committee, the board appointed Mr E Oblowitz as an independent non-executive director with effect from 3 March 2004.
The committee meets on an ad-hoc basis. During the year, the committee held two meetings which were attended by all members.
EXECUTIVE COMMITTEE
The executive committee, comprising the three executive directors and one non-executive director, meets formally on a regular basis throughout the year and informally on a weekly basis. During the year, ten formal monthly meetings were held which were attended by all members.
This committee has the authority of the board, which is subject to annual review, to take decisions on matters involving financial risk management and matters requiring immediate action (subject to the approval of the committee chairman or his nominee) and passing of enabling resolutions, which:
- do not have major policy implications for the group, or
- have been discussed with and the support obtained from a majority of board members, save that any dissenting director has the right to call a board meeting, or
- if requiring significant capital expenditure, are in the normal course of business of the existing divisions and operations of the group.
AUDIT COMMITTEE
An audit committee, formally established by the board in the early 1990s, presently consists of four independent non-executive directors and normally meets at least twice a year, prior to the finalisation of the group's interim results and reviewed annual results, and at such other times as may be required. The committee is primarily responsible for assisting the board in carrying out its duties in regard to accounting policies, internal controls and audit, financial reporting, identification and monitoring of risk, and the relationship with the external auditors.
In addition to the committee members, the chairman of the board, the financial director and certain other group executives are normally invited to attend meetings of the committee as observers. The external auditors attend all meetings and have direct and unrestricted access to the audit committee at all times.
During the year, the committee met on two occasions. The meetings were attended by all members.
The audit committee is satisfied that the external auditors are independent in the discharge of their duties. The use of the services of the external auditors for significant non-audit services is considered by the committee on an ad-hoc basis.
The main group operating entities, Textainer Group Holdings Ltd and TrenStar Inc, each have their own audit committees comprising persons who are not executives within those entities. These committees submit minutes and reports to the Trencor audit committee after each meeting. The external auditors of these group entities have direct and unrestricted access to the respective audit committees.
Where appropriate, the internal audit function is primarily outsourced to suitably qualified independent external parties which are contracted on an ad-hoc basis to perform certain internal audit functions in terms of specified terms of reference and to report thereon to the executive committee and, if required, the main audit committee. The internal auditors have direct and unrestricted access to the respective audit committees.
REMUNERATION COMMITTEE
The remuneration committee of the board has been in existence since the early 1990s and was formalised in 1996. It reports directly to the board and comprises one independent non-executive director as committee chairman and the chairman of the board. The committee's task is to review the compensation of executive and non-executive directors and senior management and to grant options in terms of The Trencor Share Option Plan. Members of the remuneration committee are not eligible for participation under The Trencor Share Option Plan.
During the year, one committee meeting was held, which was attended by both members.
The committee may, if required, seek the advice of external independent consultants.
Succession planning
During 2003, the nomination committee and the board received a report on succession planning at the group's major subsidiaries and at Trencor. The board is satisfied that suitable succession plans are in place.
Board and board committee terms of reference
The board is ultimately accountable and responsible for the performance and affairs of the company. In essence, it provides strategic direction to the group, monitors and evaluates operational performance and executive management of the company and its subsidiary and associate companies, determines policies and processes to ensure effective risk management and internal controls, determines policies regarding communication and is responsible for ensuring an effective composition of the board.
Formal detailed terms of reference for the nomination, executive, audit and remuneration sub-committees have been approved and formally implemented and are reviewed by the board on a regular basis.
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Risk management
Responsibility for managing the company's risk lies ultimately with the board of directors. However, the executive committee and management at operating levels assist the board in discharging its responsibilities in this regard by identifying, monitoring and managing risk on an ongoing basis and within the authority conferred upon them by the board. The identification and mitigation of risk is a key responsibility of management throughout the group and of the executive committee.
The following significant risk exposures within our businesses and the possible impacts and the measures taken to mitigate such risks have been identified:
EXCHANGE RATE FLUCTUATIONS
Most of our businesses are dollar-based and, accordingly, changes in the R/US$ exchange rate can and do significantly affect the translation of assets, liabilities and profits into South African currency. As noted previously, in 2002 Trencor converted all of its rand borrowings into a US dollar loan. US$16,1 million of the original loan of US$56,4 million remained outstanding at 31 December 2004. The loan is repayable out of the proceeds from the collection of the long-term dollar export receivables and is thus effectively hedged. The long-term export receivables are all denominated in US dollars. The board has decided that these receivables should remain in dollars and should not be hedged into any other currency, save that the executive committee is authorised to sell limited amounts due to be collected forward, into rand, if it believes that it would enhance the rand receipts to do so. Unrealised gains and losses arising on the translation at reporting dates of the 'unhedged' portion of the long-term receivables are included in profit and changes in the R/US$ exchange rate may result in volatility in earnings when expressed in rand.
INTEREST RATES
Virtually all of the group's borrowings are denominated in foreign currency, principally US dollars. Textainer has a firm policy that long-term lease business should be financed with fixed rate debt and master lease (short-term) business should be financed with floating rate debt. Interest on loans raised to purchase containers leased out under long-term leases (usually of five years' duration at fixed rates) is swapped into fixed interest rate contracts of a similar term, while loans raised to purchase containers for master lease (leases of shorter term) are at variable rates. Furthermore, the company enters into interest-rate cap contracts to guard against unexpected increases in interest rates on such variable interest-rate loans. During 2002, Trencor effectively converted all of its rand-based debt into dollars by drawing down against a Letter of Credit facility granted by its foreign banks. The interest rate profiles in South Africa and the US made it beneficial for Trencor to have these borrowings in US dollars (bearing interest at a rate of approximately 4,388% per annum at 31 December 2004) rather than in rands.
CREDIT RISK CONCENTRATION
Textainer's customers are mainly international shipping lines which transport goods on international trade routes. Once the containers are on-hire with a lessee, Textainer does not track their location. The domicile of the lessee is not indicative of where the lessee is transporting containers. The business risk for Textainer in its international operations lies with the creditworthiness of the lessees rather than the geographic location of the containers or the domicile of the lessees. Revenue from one lessee accounted for approximately 11% and 12% of Textainer's lease rental income, with lease rental income of US$16,8 million and US$14,8 million for the years ended 31 December 2004 and 2003 respectively. Trade receivables from one lessee amounted to US$4,4 million and US$2,7 million or 10% of trade receivables as at 31 December 2004 and 2003 respectively.
DECREASE IN CONTAINER FLEET UTILISATION
A decline in utilisation, for example due to a reduction in world trade or in container traffic on particular routes or an oversupply of competitors' containers, could result in reduced revenue, increased storage expenses and thus lower profit. In order to reduce volatility in revenue and earnings, Textainer has increased the proportion of its overall fleet on long-term lease to 67% of the total. Almost 70% of Textainer's owned containers are on long-term lease. Textainer has also developed a very active used-container trading operation and thus has an effective infrastructure to dispose of containers that have reached the end of their economic lives on the best available terms.
CONTAINER OFF-HIRES IN LOW DEMAND LOCATIONS
A build up of off-hire containers in low demand locations where they cannot easily be on-hired again, could lead to decreased utilisation, reduced revenue, higher storage costs and the possibility of having to ship the equipment, at considerable cost, to positions where it can be leased out. To reduce this exposure, Textainer is increasingly placing containers into long-term leases and also negotiating more favourable lease terms that limit the number of containers which lessees may off-hire in low demand areas. It also regularly repositions containers from low to high demand locations.
NEW CONTAINER PRICES
Changes in the prices of new container equipment have an impact on lease rates. In general, declining new container prices lead to softening in rates, while increasing prices may result in upward pressure on lease rates.
DECLINING RESIDUAL VALUES OF CONTAINERS
The ultimate return from the ownership of a container will depend, in part, upon the residual value at the end of its economic life. The market value of a used container depends upon, among other things, its physical condition, supply and demand for containers of its type and remaining useful life in relation to the cost of a new container at the time of disposal and the location where it will be sold. A decline in residual values of containers can adversely affect returns from container ownership and cash flows.
DECREASE IN ACTIVITY - EFFECT ON LONG-TERM RECEIVABLE COLLECTIONS
Declines in lease rates, utilisation and residual values of equipment in the container industry can adversely affect the cash flows of container owners and could impair the ability of these companies to meet their obligations to the group and its export partners under the long-term export contracts. Conversely, improved market conditions may enhance their ability to meet these obligations. Trencor's in-depth understanding of the industry and many of the main participants enable the company to closely monitor the activities of these entities and, where necessary, take whatever actions may be required to protect the group's and its export partners' interests. Changes in market conditions in the industry require the company to make appropriate valuation adjustments from time to time to recognise the changes in the timing and possible non-receipt of instalments due under these long-term export contracts.
RISK AREAS IN TRENSTAR'S ACTIVITIES
TrenStar partly relies on information systems that support the core functions of managing asset movements. Accurate tracking of returnable packaging units between depots and various manufacturers and suppliers within the supply chain is necessary to (a) provide customers with added value in the form of visibility of returnable packaging units and other mobile assets, (b) ensure that transaction costs are correctly apportioned between the various users of the service and (c) to bill clients accurately and efficiently. The TrenStar mobile asset management system is a web-enabled tool that translates physical movements into billing and location data that is then passed through to the ERP system for further financial processing. Typical risk areas associated with enterprise systems such as TrenStar are within the domains of application and database design, technical architecture, software development methodology, configuration management, information security and IT continuity/disaster management.
Market and customer acceptance of TrenStar's unique business model can be a slow process, sometimes resulting in longer than expected lead times for successful closing of contracts.
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Information resources management
The proliferation of internet-based business activities has over the past few years prompted a spate of new legislation that has necessitated various actions to maintain compliance while protecting the interests of the company. The changing legal environment has made it necessary to monitor the legal implications of transacting electronically. Structures are in place to track developments and establish appropriate responses as required.
INFORMATION SECURITY
Compliance with legislative requirements contributes towards the protection of corporate information, but in itself only addresses a small part of the total number of threats posed to the business arising from its dependencies on information technology and the internet. Security policies and procedures for employees and the use of technologies such as enterprise and personal firewalls, antivirus systems, intrusion monitoring and detection are applied, as well as frequent application of software security 'patches' issued by vendors as and when vulnerabilities are discovered.
BUSINESS CONTINUITY
Trencor head office has established procedures that when invoked enable a complete recovery of the IT network and business systems within specified time limits. Textainer and TrenStar have their own business continuity plans.
Group strategy
Early in 2005 the board confirmed the strategy statement of the group as follows:
- Trencor's strategy is to invest in operations that have as their business:
To enable the controlled movement of goods by providing, managing and integrating the use of equipment, services, knowledge and information.
- We aim to do this by:
- providing a global and integrated set of offerings through owning, managing and/or leasing of assets used by customers in the controlled movement of goods;
- the increasing use of, and investment in, information and communication technologies and appropriate forms of information management and electronic trading.
- This strategy is intended to contribute to the growth and improvement of those existing businesses already involved in the movement of goods, and to include in our activities similar businesses that have the potential to render acceptable returns.
Code of ethics
The board, management and staff agreed a formal code of ethical conduct in 1998 which seeks to ensure high ethical standards. All directors, managers and employees are expected to strive at all times to adhere to this code, and to enhance the reputation of the group. The code is signed by all directors, managers and senior employees at least every three years.
Any transgression of the code is required to be brought to the attention of the audit committee.
Restrictions on trading in securities
A formal policy, implemented some years ago, prohibits directors, officers and employees from dealing in the company's securities and those of Mobile, from the date of the end of an interim reporting period until after the interim results have been published and similarly from the end of the financial year until after the reviewed annual results have been published. Directors and employees are reminded of this policy prior to the commencement of any restricted period.
In addition, no dealing in the company's securities is permitted by any director, officer or employee whilst in possession of information which could affect the price of the company's securities and which is not in the public domain.
Directors of the company and of its subsidiaries are required to obtain clearance from Trencor's chairman (and in the case of the chairman, from the chairman of the audit or remuneration committee) prior to dealing in the company's securities, and to timeously disclose to the company full details of any transaction for notification to and publication by the JSE Securities Exchange South Africa.
Information resources
Trencor, like other organisations, is reliant on information technology to effectively and efficiently conduct its business. The group's IT systems, policies and procedures are reviewed on an ongoing basis to ensure that effective internal controls are in place to manage risk and promote efficiencies, and as far as possible to comply with universally accepted standards and methods, such as (amongst others) CobiT (Control Objectives for Information Technology Resources), as endorsed by the IT Governance Institute.
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Stakeholder communication
Members of the executive committee of the board meet on an ad-hoc basis with institutional investors, investor analysts, individuals and members of the financial media. Discussions at such meetings are restricted to matters that are in the public domain.
Shareholders are informed, by means of press announcements and releases in South Africa and/or printed matter sent to such shareholders, of all relevant corporate matters and financial reporting as required in terms of prevailing legislation. In addition, such announcements are communicated via a broad range of channels in both the electronic and print media. The company maintains a corporate website (http://www.trencor.net) containing financial and other information, including interactive interim, reviewed and annual results. The site has links to the websites of each major operating subsidiary company.
Employment equity
In compliance with the Employment Equity Act, the group's South African operating entities have each developed their own employment equity policies and plans in consultation with their employees. The elected employment equity committees at the respective operations are responsible for ensuring and monitoring the achievement of the employment equity goals within their business units.
Training
Skills development committees at South African operations are charged with the responsibility to comply with the requirements of the Skills Development Act, so as to develop and improve the knowledge, skills and capabilities of employees as far as is reasonably possible.
Safety, health and environment
The group is committed to providing and maintaining a safe and healthy, risk-free working environment and continually strives to prevent workplace accidents, fatalities and occupational health and safety related incidents.
At 31 December 2004 the group had 408 employees (2003: 702) of which 118 (2003: 341) were based in South Africa and 290 (2003: 361) outside South Africa.
Based on the existing demographics of the group's staff complement and the various geographical locations throughout the world, the board is of the opinion that the impact on the group as a result of the HIV and AIDS epidemic within South Africa and elsewhere, although unquantifiable at this time, will not be significant.
There are no significant environmental impact issues caused by the group's operations and all group entities are, where relevant, at the very least fully compliant with the environmental legislation in their particular jurisdictions.
Access to information
The company and all of its South African subsidiaries are compliant with the provisions of the Promotion of Access to Information Act. The manual in terms of this legislation is available from the registered office of the company and on the company's website.
Financial Intelligence Centre Act
Group companies within South Africa have all administrative measures in place in respect of the regulations of the Financial Intelligence Centre Act which became effective on 1 July 2004.
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