April 01, 2002
TRAILER BRIDGE INC (TRBR)Annual Report (SEC form 10-K)Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Year ended December 31, 2001 Compared to Year ended December 31, 2000 Operating revenues decreased $10.1 million, or 11.1%, to $81.6 million during 2001 from $91.7 million during 2000. This decrease was due to a $10.3 million or 12.2% decrease in total Puerto Rico revenue to $73.9 million due to decreased volume and rate deterioration in the Puerto Rico market and a decrease of $224,327 in non-Puerto Rico domestic revenue, partially offset by an increase in fuel surcharges and other revenue of $199,412. Core trailer volume to Puerto Rico decreased 1.4% in 2001 compared to 2000, and total car and other volume decreased 22.7% compared to 2000. As a result, core trailer revenue to Puerto Rico decreased 5.6% and car and other revenue decreased 26.6% compared to 2000. Revenue from shipper owned or leased equipment moving to Puerto Rico decreased 37.0% from 2000. Revenue from northbound shipments from Puerto Rico decreased 7.0% from 2000. The overall market to Puerto Rico, particularly with regard to the movement of used automobiles, not in trailers and shipper owned or leased movements, was characterized by overcapacity and intense rate competition. The Company's fuel surcharge of $3.4 million is included in the Company revenues for 2001 and increased from $2.9 million included in revenue in 2000. The Company's overall volume to and from Puerto Rico decreased 10.1% in 2001, while related revenue decreased $9.3 million or 9.4% compared to 2000 implying, an overall yield reduction of 2.3%. Vessel capacity deployed on the core continental U.S. to Puerto Rico traffic lane increased 8.1% during 2001 compared to 2000, due to the upgrade to weekly service from Newark, New Jersey from the bi-weekly service offered in 2000. Effective in the end of the fourth quarter of 2001 the Company discontinued this service. See further discussion below. Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 67.9% during 2001, compared to 78.9% during 2000. The market to and from Puerto Rico in 2001 was again characterized by increasing competitive activity throughout the year. The excess vessel capacity in the market was exacerbated by market volume reductions that resulted in overall market volume of trailers and containers declining 1.4% in 2001 with the largest decline in the northbound segment. The Company decreased its overall market share of freight moving in trailers or containers in both directions to 13.3% in 2001 from 13.6% in 2000, with all of that decrease coming from reduced share of market in the northbound segment. For 2001, the Company's market share was 13.1% southbound and 14.1% northbound compared to 13.1% southbound and 15.3% northbound in 2000. All of these market share figures are based on freight moving in trailers and containers and exclude cars and other wheeled vehicles moving southbound where the Company has a market share generally above 30%. The highly competitive market conditions resulted in a 2.3% reduction in yield. On March 21, 2001, the largest participant in the Puerto Rico market, NPR/Navieras, which had a 29.4% market share in 2000, in conjunction with its parent and affiliates, filed for Chapter 11 bankruptcy protection in the Delaware Bankruptcy Court in Wilmington, Delaware. Despite the bankruptcy filing NPR/Navieras continued to operate its regular service through- out 2001 placing additional downward pressure on rates. Through March 31, 2002, NPR/Navieras continues to operate its regular service. At the end of the fourth quarter of 2001 the company discontinued its weekly Northeast service between Newark, New Jersey and San Juan, Puerto Rico and implemented other operational changes to improve its performance. These changes primarily relate to concentrating the Company's mainland vessel operations in Jacksonville and discontinuing direct vessel service from the Northeast (Newark, NJ). Certain key customers that utilized the Northeast sailing have transitioned cargo previously handled from the Northeast to the Company's Jacksonville service. The direct Northeast sailing represented approximately 28% of the Company's total vessel capacity, but was significantly less in terms of actual volume and revenue. Of the three weekly sailings to Puerto Rico operated by the Company during the first nine months of 2001, the Northeast segment was the most under-utilized with southbound and northbound capacity utilization of 51% and 8%, respectively, compared to 75% and 24%, respectively, for the Company's Jacksonville sailings. Operating expenses increased $11.6 million, or 12.0% from $96.0 million in 2000 to $107.6 million for 2001. This increase was due to an increase in salary, wages and benefits of $967,021 due to increases in healthcare expense and workers compensation insurance; an increase in purchased transportation of $518,962 primarily due to increased tug charter hire expense related to the additional tug required for the weekly Newark service; an increase in operation and maintenance of $3.2 million primarily due to the dry docking expense associated with the two roll-on roll-off barges. The Company elected to fully expense the cost of the dry-dockings in the first and second quarter of 2001 totaling $1.3 million rather than capitalize such expenses and amortize them over the period between dry-dockings. While the Company believes that this conservative treatment is the preferred method under SEC guidelines, it may not be the prevailing industry standard used by other shipping companies, including competitors of the Company. Operation and maintenance expense was also affected by increased maintenance expense on Company owned trucks, partially offset by less stevedoring expense due to lower volumes. Operating expenses were further affected by asset impairments consisting of $3.0 million in vessel related charges; write down of $721,181 goodwill of and $99,240 of revenue equipment charges. Operating expenses were also impacted by restructuring charges for the Northeast Service shutdown of $1.1 million, an increase in taxes and licenses of $625,175 due to increased intangible tax on equipment and an accrual for the settlement of a sales tax dispute in Puerto Rico; an increase in insurance and claims of $277,059 primarily due to increased premiums for Hull and Machinery and Personal Injury insurance; an increase in other operating expenses of $1.4 million primarily the result of an increase of $2.9 million in bad debt expense; partially offset by a decrease of $419,309 in fuel expense due to reduced fuel prices. As a result, the Company's operating ratio increased to 132.0% during 2001 from 104.8% during 2000. Interest expense (net) decreased to $3.2 million in 2001 from $3.4 million in 2000 primarily due to lower interest rates on the Company's floating rate indebtedness. As a result of the factors described above the Company reported a net loss of $29.4 million for 2001 compared to net loss of $10.3 million in 2000. Known Trends During First Quarter of 2002. As previously discussed, during the fourth quarter of 2001 the Company discontinued its Northeast service. Additionally, the Company has off-hired or sold excess tractor and trailer equipment and reduced headcount. The Company now focuses all of its vessel capacity over Jacksonville, Florida, which has significantly reduced its operating expenses. Preliminary monthly operating results for 2002 indicate both increased volume and revenue compared to Company expectations. In addition, those preliminary results indicate a reduction in operating expenses in excess of the Company's initial estimate of such cost reductions. As a result the Company expects first quarter 2002 results from operations to be a significantly reduced loss as compared to both the first quarter of 2001 and the fourth quarter of 2001. Year ended December 31, 2000 Compared to Year ended December 31, 1999 Operating revenues increased $3.2 million, or 3.6%, to $91.7 million during 2000 from $88.6 million during 1999. This increase was due to a $2.9 million or 3.4% increase in total Puerto Rico revenue to $87.0 million through the utilization of additional capacity in the Puerto Rico market. Non-Puerto Rico domestic revenue increased $349,717 or 9.7% compared to 1999. Core trailer volume to Puerto Rico increased 14.1% in 2000 compared to 1999, and total car and other volume decreased 6.7% compared to 1999. As a result, core trailer revenue to Puerto Rico increased 9.6% and car and other revenue decreased 12.9% compared to 1999. Revenue from shipper owned or leased equipment moving to Puerto Rico decreased 27.9% from 1999. Revenue from northbound shipments from Puerto Rico decreased 7.0% from 1999. While overall volume to and from Puerto Rico increased 13.2% in 2000, related revenue increased only $639,466 million or .8% compared to 1999, implying an overall yield reduction of 11.0%. This significant yield deterioration was the result of continuing rate pressure as the competitive conditions in the U.S. to Puerto Rico traffic lane intensified. These intense competitive conditions are the result of excess vessel capacity serving the trade. The over capacity in the trade has been exacerbated by a 4.0% contraction in volume in the overall market during 2000. Vessel capacity deployed on the core continental U.S. to Puerto Rico traffic lane increased 20.9% during 2000 compared to 1999. Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 78.9% during 2000, compared to 83.3% during 1999. The market to and from Puerto Rico in 2000 was characterized by increasing competitive activity throughout the year. The excess vessel capacity in the market was exacerbated by market volume reductions that resulted in overall market volume declining 4.0% in 2000. While the Company increased its overall market share of freight moving in trailers or containers to 13.6% in 2000 from 11.6% in 1999, the highly competitive market conditions resulted in an 11.0% reduction in yield. On March 21, 2001, the largest participant in the Puerto Rico market, NPR/Navieras, which had a 29.0% market share in 2000, in conjunction with its parent and affiliates, filed for Chapter 11 bankruptcy protection in the Delaware Bankruptcy Court in Wilmington, Delaware. At the beginning of the fourth quarter of 2000 a fourth Triplestack Box Carrier was utilized to provide weekly service for the Northeast Service. Operating expenses for 2000 increased $7.4 million or 8.3% from $88.7 million in 1999 to $96.0 million. This increase was due to an increase in expenses associated with an overall 13.2% increase in Puerto Rico volume, including the expansion of the Company's northeast service. The increase in overall volume leads to additional variable costs associated with handling such volume. The expansion of the Company's northeast service required the use of an additional tug/barge unit with a concomitant increase in fuel and operating and maintenance expenses. The combination of additional volume and an additional tug/barge unit in operation resulted in a $4.3 million increase in operating and maintenance expenses and a $4.5 million increase in fuel expense, partially offset by a $2.9 million increase in fuel surcharges included in revenue, and a $2.4 million reduction in other operating expenses. All operating expenses were affected by the increase in volume and the addition of an additional tug/barge unit in service to expand the Company's northeast service. As a result, the Company's operating ratio increased to 104.8% during 2000 from 100.1% during 1999. Interest expense (net) increased to $3.4 million in 2000 from $3.3 million in 1999. The Company has recorded various deferred tax assets in prior years. Realization is dependent on generating sufficient taxable income in future years. As a result of the net losses incurred in recent years, a 100% valuation allowance has been established based on the provisions of SFAS No. 109. The establishment of this reserve resulted in income tax expense in 2000 of $3.1 million compared to an income tax benefit of $1.2 million in 1999. To provide the Company with additional liquidity, during 2000, the Company sold an affiliate a piece of land for $750,000. A gain of $336,818 was recognized on this transaction. During the year ended December 31, 2000, the Company changed its method of accounting for periodic vessel dry-docking. Prior to the change, the Company accrued estimates of future vessel dry docking costs. The Company now will expense these costs as incurred. This change resulted in a gain of $127,100, net of income taxes of $77,900 for the year ended December 31, 2000. As a result of the factors described above the Company reported a net loss of $10.3 million for 2000 compared to net loss of $2.1 million in 1999.
Net cash used by operations was $11.0 million in 2001 compared to net cash used by operations of $3.4 million in 2000. This represented a deterioration of $7.6 million from 2000. Net cash provided by investing activities of $341,465 in 2001 reflects $1.2 million in proceeds from the sale of older trailer equipment, partially offset by $810,830 of capital expenditures, which were primarily attributable to payments for additional containers and chassis. Net cash provided from financing activities was $10.3 million compared to $5.0 million in 2000 representing an increase of $5.3 million. Net cash provided from financing activities of $10.3 million consisted of $12.3 million in notes payable to an affiliate, consisting of $6.8 million in cash advances and $5.5 million in deferred charterhire, borrowings of $700,580 on notes payable under the Company's borrowing facility, partially offset by payments of $2.6 million on notes payable. At December 31, 2001, cash amounted to $441,320, working capital was a negative $21.4 million, including $15.6 million of the Company's borrowings that are subject to acceleration and therefore shown as current liabilities, and stockholders' equity was a negative $8.7 million. Due to the Company's financial performance in 2001, it is currently in default under financial and other covenants contained in its credit agreement with its senior lender. While the senior lender continues to fund draws under the Company's revolving line of credit and the Company is in discussions with the senior lender regarding the revolving line of credit, no assurance can be made that the lender will continue to do so. The Company depends on its secured revolving line of credit to maintain its liquidity, therefore continued access to the revolving line of credit is critical to the Company's cash flow needs and denial of access to such funds would have a material adverse effect on the Company's ability to operate and its financial condition by denying the Company necessary liquidity to fund its operations. As of December 31, 2001, the Company had $6.0 million drawn under the credit facility against a borrowing base of $6.9 million that is secured by net receivables of $10.5 million. Additionally, a default to the Company's senior lender would result in cross-defaults in other loan and/or lease documents that could result in acceleration of such debts or return of leased assets. See RISKS RELATED TO TRAILER BRIDGE, INC. - COVENANT DEFAULTS UNDER CERTAIN LOAN AGREEMENTS below. Due to the Company's financial performance during 2001 and the resulting lack of liquidity the Company is beyond its historical payment terms with many of its vendors and lessors. See RISKS RELATED TO TRAILER BRIDGE, INC. - VENDOR RELATIONSHIPS below. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. The Company's projected cash flows from operations combined with continued funding of its revolving credit line, maintenance of its vendor relationships and liquidity assistance from certain of its affiliates are all necessary to produce sufficient available liquidity to maintain its current level of operations through calendar 2002. Such projections include certain agreements with affiliates of the Company to assist the Company in meeting its 2002 cash flow requirements. Additionally, the Company intends to seek certain principal deferrals by the Company's lenders. No assurance can be made that the Company will be able to obtain such agreements with its affiliates or with its lenders. Therefore, there is substantial doubt as to the Company's ability to continue as a going concern. See RISKS RELATED TO TRAILER BRIDGE, INC. - ASSISTANCE FROM AFFILIATES below.
Inflation has had a minimal effect upon the Company's profitability in recent years. Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operation. The Company expects that inflation will affect its costs no more than it affects those of other truckload and marine carriers.
The Company's marine operations are subject to the seasonality of the Puerto Rico freight market where shipments are generally reduced during the first calendar quarter and increased during the fourth calendar quarter of each year in anticipation of Christmas. This seasonality was not as pronounced in 2001 and 2000 as it had been in previous years. At the end of the fourth quarter of 2001, the Company began implementing the termination of the weekly Northeast Service. The non-recurring operating expenses associated with such termination was $1.1 million and is included in restructuring expenses. For the three months ending December 31, 2001, operating revenues decreased $4.2 million or 18.1% from $23.5 million in 2000 to $19.2 million in 2001 as a result of decreased volume and lower rates. Total operating expenses for the three months ended December 31, 2001, increased $3.2 million to $31.8 million in 2001 from $28.6 million in 2000. Salary, wages and benefits decreased $259,191 as a result of reduced temporary labor, less overtime and less driver accessorial pay; purchased transportation decreased $1.6 million as a result of lower volume and improved utilization of Company owned trucks; fuel decreased $1.2 million as a result of lower fuel prices and less consumption; taxes and licenses increased significantly from $120,793 in 2000 to $507,629 in 2001 as a result of increased property taxes on owned and leased equipment and an accrual for a tax settlement in Puerto Rico; asset impairments charges of $3.8 million recorded in 2001 due to a $3.0 write down of certain vessels based upon independent appraisals, a $721,181 write down of goodwill, and a $99,240 write down of damaged revenue equipment. The Company's overall volume to and from Puerto Rico for the fourth quarter of 2001 decreased 15.8%, and related revenue decreased $4.2 million or 17.8% compared to the fourth quarter of 2000, implying an overall yield reduction of 2.5%. Vessel capacity deployed on the core continental U.S. to Puerto Rico traffic lane was 66.1% during 2001, compared to 79.5% during 2000. For the three months ended December 31, 2001 the Company's net loss was $13.3 compared to the same period in 2000 when the Company had a net loss of $9.6 million, including a non-recurring 100% valuation allowance for its deferred tax asset totaling $5.9 million. The following table sets forth certain unaudited financial information for the Company for each of the last eight quarters (in thousands except per share amounts):
2000 2001
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By Quarter
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Operating revenues........... $21,333 $23,765 $23,152 $23,456 $20,637 $21,659 $20,052 $19,220
Operating (loss) income...... (903) 1,303 340 (5,132) (4,532) (4,132) (4,851) (12,566)
Net (loss) income........... (1,151) 628 (210) (9,608) (5,374) (5,161) (5,598) (13,286)
This 10-K contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The matters discussed in this Report include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to the future operating performance of the Company. Investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. Without limitation, these risks and uncertainties include the risks of the Company maintaining or securing sufficient liquidity to operate its business, continued support of its lenders, vendors and employees, economic recessions, severe weather, changes in demand for transportation services offered by the Company, and changes in rate levels for transportation services offered by the Company.
The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. The Company's projected cash flows from operations combined with continued funding of its revolving credit line, maintenance of its vendor relationships and liquidity assistance from certain of its affiliates are all necessary to produce sufficient available liquidity to maintain its current level of operations through calendar 2002. Such projections include certain agreements with affiliates of the Company to assist the Company in meeting its 2002 cash flow requirements. Additionally, the Company intends to seek certain principal deferrals by the Company's lenders. No assurance can be made that the Company will be able to obtain such agreements with its affiliates or with its lenders. Therefore, there is substantial doubt as to the Company's ability to continue as a going concern.
COVENANT DEFAULTS UNDER CERTAIN LOAN AGREEMENTS. The operating performance of the Company has resulted in a number of covenant defaults under certain of the Company's loan agreements. The Company is current on all principal and interest payments to its lenders but the violation of the financial covenants, unless waived by the lenders, can result in acceleration of all amounts outstanding. In such an event the Company would be unable to pay all amounts outstanding without additional financing and no assurance can be given that the Company could secure such refinancing. Therefore acceleration by any of the Company's lenders could have a material adverse effect on the Company's business and operation as well as the price of the Company's stock. The Company's primary sources of working capital are cash flows from operations and borrowings under its revolving credit facility. There were $6.0 million in borrowings outstanding under our $15 million revolving credit facility December 31, 2001. This was effectively all that was available under the credit facility's borrowing base. The Company has consistently borrowed all that was available under the credit facility's borrowing base since the inception of the credit facility and continues to do so on a weekly or daily basis. Due to the performance of the Company, the Company is in violation of both its financial covenants under the revolving credit facility and the related term loan, under which $10.7 million was outstanding at December 31, 2001. The Company is in violation of both the Fixed Charge Coverage Ratio and the Minimum Tangible Net Worth covenant. The Company continues to work with the lender to obtain waivers of past defaults and in setting of new covenants that the Company can comply with and the lender continues to advance funds under the revolving credit facility despite the covenant violations described above. No assurance can be made that such negotiations will be successful and that such advances will continue to be made. Refusal of the lender to honor advance requests of the Company would have a material adverse affect on the Company's business and threaten the Company's ability to continue operations.
The Company has engaged and continues to engage in transactions with two affiliates - Kadampanattu Corp. and the Estate of Malcom P. McLean. Since inception, the Company has chartered its two ro/ro vessels from Kadampanattu Corp. under long term charters at a fixed daily price. At various times during the Company's existence the Company has borrowed funds from Kadampanattu Corp. on an unsecured basis, deferred charterhire or forgiven charterhire. For the year ended December 31, 2001, the Company accrued $5.5 million in charterhire net of the forgiveness of charterhire of $1.8 million in the first quarter of 2001 related to expenses incurred due to the required periodic drydocking of both ro/ro vessels. During 2001, Kadampanattu Corp. deferred $5.5 million of charterhire and advanced $6.8 million in unsecured loans to the Company. During the first quarter of 2002, the Company accrued $1.8 million of charterhire due to Kadampanattu Corp. and made cash payments of $1.1 million and deferred $700,000. At December 31, 2001, the outstanding payable amount to Kadampanattu Corp. was $18.8 million all of which was subordinated to the rights of the Company's lender under the revolving credit facility and related term loan and cannot be repaid until that facility is paid in full. However, such payable amount to Kadampanattu Corp. is due by its terms at January 1, 2003, and unless rescheduled or refinanced the Company would be unable to pay such amounts. The Company does not anticipate any unsecured borrowings or charter hire forgiveness from Kadampanattu Corp. through the remainder of calendar 2002 but may utilize deferrals similar to that granted in the first quarter of 2002. No assurances can be made that Kadampanattu Corp. or any successor to Kadampanattu Corp. will agree to the any deferrals beyond 2002. During the first quarter of 2002, the Company entered in to a Loan and Security Agreement with the Estate of M. P. McLean under which the Company borrowed $3.0 million to be repaid in two years. The loan was secured primarily by unencumbered trailer equipment. The Estate of M. P. McLean owns approximately 54% of the outstanding shares of the Company's stock. In addition, it owns 100% of the common stock of Kadampanattu Corp. John D. McCown, Chairman and Chief Executive Officer of the Company, is a co- executor of the Estate of M. P. McLean. No assurance can be made that the Estate of M. P. McLean will provide additional support to the Company. During the first quarter of 2002, all officers of the Company entered into a voluntary salary reduction agreement with the Company whereby each pay period such officer's salary is reduced by 5% and treated as a loan to the Company. The CEO of the Company has agreed to a 50% reduction. Such amounts are to be repaid no later than December 20, 2002.
Due to the Company's financial performance during 2001 and the resulting lack of liquidity the Company is currently beyond its historical payment terms with many of its vendors and lessors. The Company expects to make continuing progress through the calendar year 2002. The loss of certain of these vendors would have a detrimental effect on the ability of the Company to conduct its operations.
Due to the Company's financial performance during 2001 and its current per share market price the Company is not in compliance with either of NASDAQ's maintenance standards necessary for continued listing on the NASDAQ National Market. The Company has been notified by NASDAQ that if it cannot demonstrate compliance with either of the maintenance standards by May 15, 2002 its staff will provide written notification that the Company's common stock will be delisted from the NASDAQ National Market. Upon such notification the Company could appeal such determination to the Listing Qualification Panel. Prior to May 15, 2002, the Company will work with NASDAQ to attain compliance or take additional necessary steps to move toward compliance. Alternatively, the Company could apply for listing on the NASDAQ SmallCap Market and if in compliance with its standards, continue trading on that market. No assurance can be given that the Company will be successful in either remaining on the NASDAQ National Market or transferring to the NASDAQ SmallCap Market. Failure to trade on either of those exchanges could result in adverse consequences to the Company and its shareholders, including but not limited to, reduced stock price and trading activity.
The market in which the Company operates, the United States to Puerto Rico trade lane, remains hyper-competitive with significant over capacity. Beginning in 2002, the Company reduced its capacity by ceasing to operate its Northeast Service. The Company's competitors have not reduced their capacity. One of the Company's competitors, NPR, has been under Chapter 11 bankruptcy protection since March 2001 and continues to operate its normal schedule of three sailings per week. Published reports indicate that CSX Lines, another of the Company's competitors, is actively being offered for sale. The over capacity in the Puerto Rico trade results in lower vessel utilization and lower freight rates. No assurance can be made that market conditions will improve or that competitive pressures will not increase.
The preparation of financial statements in conformity with accounting generally accepted in the United states of America principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates. Our accounting policies are more fully described in Note 1 to the financial statements. We have identified certain critical accounting policies which are described below. Revenue Recognition. Revenue is recognized on a percentage of completion basis. Long-lived assets. In evaluating the fair value and future benefits of long-lived asset, we perform an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. Due to the continued operating losses independent appraisals were used to determine the appropriateness of the carrying values. Derivative Financial Instrument. The Company has entered into an interest rate swap for interest rate risk exposure management that is accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, an amendment to SFAS No. 133. SFAS No. 133 and SFAS No. 138 are collectively referred to herein as "SFAS No. 133". The accounting for hedge effectiveness measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized immediately into earnings. The Company's interest rate swap does not qualify as an effective fair value hedge, therefore the ineffective portion of the hedged transaction has been recognized into earnings. The differential to be paid or received under these agreements is accrued consistently with the terms of the agreement and is recognized in interest expense over the term of the related debt. Income taxes. Generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is "more likely than not" that we will not be able to utilize it to offset future taxes. Due to the size of the Company's net operating loss carryforward in relation to our history of unprofitable operations, we have not recognized any of this net deferred tax asset. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and the federal alternative minimum tax) for current income. It is possible, however, that we could be profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates, which would approximate 38% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL is utilized. New Accounting Pronouncments. In 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was issued. Under the provisions of Statement 142, goodwill and other indefinite lived intangible assets are no longer amortized but are reviewed for impairment on a periodic basis. The company will adopt this standard in the first quarter of 2002. Its indefinite lived intangible assets relate to costs to obtain a trademark on the Vehicle Modular Transport "VTM". The company believes there to be no material effect as a result of SFAS 142. The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgement in their application. There are also areas in which management's judgement in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K which contain accounting policies and other disclosures required by generally accepted accounting principles.
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