April 14, 2003
EXECUTIVE SUMMARY
The Company produces revenue by the movement of freight by water to and from Puerto Rico from the continental United States through its terminal facility in Jacksonville, Florida. The Company also generates revenue from the movement of freight within the continental United States by truck when such movement complements its core business of moving freight to and from Puerto Rico. The Company's operating expenses consists of the cost of the equipment, labor, facilities, fuel and administrative support necessary to move freight to and from Puerto Rico and within the continental United States as well as interest costs related to its borrowings. The Puerto Rico lane in which the Company operates has been subjected to overcapacity and intense competition over the past five years. During 2002 the Puerto Rico tradelane experienced continued overcapacity and intense competition during the first half of the year. Following the cessation of operations by a competitor of the Company -NPR, Inc. - that had been operating in Chapter 11 bankruptcy, the Puerto Rico tradelane stabilized and competition became less intense. The Puerto Rico tradelane continues to undergo changes resulting from NPR, Inc.'s cessation of operations. The Company has seen increased utilization of its vessels during the fourth quarter of 2002 and the first quarter of 2003. During 2002 the Company experienced decreased revenues as a result of ceasing its Northeast service at the end of 2001, however the decrease in operating expenses was more pronounced than the reduction in revenues resulting in significantly improved performance for 2002 when compared to 2001.
RESULTS OF OPERATIONS
Year ended December 31, 2002 Compared to Year ended December 31, 2001
Operating revenues decreased $7.8 million, or 9.6%, to $73.8 million during 2002 from $81.6 million during 2001. This decrease in operating revenues was due to a $6.5 million or 8.8% decrease in total Puerto Rico revenue to $67.4 million due to decreased volume resulting from the Company's cessation of its Northeast service and a decrease of $1.3 million in non-Puerto Rico domestic revenue and other revenue. As a result of terminating the Northeast service, the Company offered 22.2% less capacity in the Puerto Rico trade lane and operated four vessels to Puerto Rico in 2002 compared to six vessels in 2001. Core container and trailer volume to Puerto Rico decreased 10.7% in 2002 compared to 2001, while total car and other volume increased 19.9% compared to 2001. As a result, container and trailer revenue to Puerto Rico decreased 11.7% and car and other revenue increased 7.3% compared to 2001. Revenue from shipper owned or leased equipment moving to Puerto Rico decreased 1.7% from 2001. Revenue from northbound shipments from Puerto Rico decreased 14.6% from 2001 primarily as a result of the cessation of the Northeast service. 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 during the first half of 2002 and more stable market conditions after the cessation of operations by a competitor of the Company in mid-year. The Company's fuel surcharge is included in the Company's revenues and amounted to $2.6 million in 2002 and $3.4 million in 2001.
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 79.4% during 2002, compared to 67.9% during 2001.
The Company decreased its overall market share of freight moving in trailers or containers in both directions to 11.4% in 2002 from 12.9% in 2001, as a result of the termination of the Company's Northeast service. For 2002, the Company's market share was 11.4% southbound and 11.3% northbound compared to 12.7% southbound and 13.4% northbound in 2001. 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%.
Operating expenses decreased $30.0 million, or 27.8% from $107.8 million in 2001 to $77.9 million for 2002. This decrease was due to significant decreases in all areas other than insurance and claims that increased $386,377 or 14.6% due to higher insurance premium rates. Salary, wages and benefits decreased $2.4 million due to the reduction of personnel mainly attributable to the termination of the Company's Northeast service; reduced driver payroll due to a decrease in Company truck miles by approximately 1.7 million miles and a reimbursement of $222,832 workers compensation insurance premium due to an adjustment of rates from prior years. Purchased transportation decreased $6.1 million or 22.6% primarily due to decreased tug charter hire expense of $3.5 million related to elimination of the tug required for the Northeast service; an increase of $646,360 in charter revenue of idle vessels from $47,600 in 2001 that acts as a contra-expense to vessel expense and a decrease of $2.8 million in equipment expense, partially offset by an increase of $793,156 in truck and rail purchased transportation as a result of operating fewer owned tractors. Fuel expense decreased $3.4 million or 31.2% primarily as a result of termination of the Northeast service resulting in a $2.8 million decrease in tug fuel and a decrease of $530,850 in truck fuel expense resulting from a decrease in truck miles of approximately 1.7 million miles. Operation and maintenance expense decreased $8.3 million or 33.6% due to $4.4 million in lower marine terminal expenses because of reduced sailings and lower volumes as a result of the termination of the Company's Northeast service; the absence of any dry docking expenses as compared to $1.3 million in 2001; a $1.4 million decrease in truck maintenance due to a reduction in tractors; and an increase in net demurrage of $1.0 million. Taxes and licenses expense decreased $519,450 or 46.3% primarily as a result of reduction in volume related to the termination of the Company's Northeast service and a successful legal challenge to ad valorem taxes that Duval County, Florida sought to impose on the Company. Communications and utilities expense decreased $99,923 or 14.8% as a result of the termination of the Company's Northeast service and generally lower telephone rates. Depreciation and amortization expense decreased $1.5 million or 31.4% primarily as a result of the Company's tractor fleet being fully depreciated compared to $1.0 million in depreciation in 2001; the reduction in equipment associated with the Northeast service and lower depreciation of vessels following an asset impairment charge of $3.0 million in 2001. Other operating expense decreased $2.9 million, primarily as a result of a $2.1 million decrease in bad debt. Operating expenses also decreased $4.9 million in 2002 as compared with 2001 that included asset impairments charges of $3.8 million and restructuring charges for the Northeast service shutdown of $1.1 million. As a result, the Company's operating ratio decreased to 105.5% during 2002 from 132.0% during 2001.
Interest expense (net) decreased to $3.0 million in 2002 from $3.2 million in 2001 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 $7.1 million for 2002 compared to net loss of $29.4 million in 2001.
Known Trends During First Quarter of 2003
During January and February overall vessel utilization was 87.8% and 20.1% southbound and northbound, respectively, figures slightly above but similar to fourth quarter 2002 levels. The Company has experienced a noteworthy increase in volume in March. For the three weeks ending March 28, 2003, overall vessel utilization was 95.8% and 26.4% southbound and northbound, respectively. Based upon increased volume from specific accounts, increased customer commitments and actual booking levels and trends, the Company believes that the actual March volume and utilization performance is more indicative of business levels for the remainder of 2003 than any actual experience during 2002. The flat vessel utilization levels in January and February will impact operating results for the first quarter but the vessel utilization experienced for the three weeks ending March 28, 2003 results in significantly improved operating performance on a run-rate basis.
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 container and 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 container and 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 throughout 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 $12.1 million, or 12.7% from $95.7 million in 2000 to $107.8 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operations was $3.7 million in 2002 compared $11.0 million in 2001. This represented an improvement of $7.3 million from 2001. Net cash provided by investing activities of $839,286 in 2002 primarily reflects proceeds from the sale of older trailer equipment. Net cash provided from financing activities was $4.6 million compared to $10.3 million in 2001 representing a decrease of $5.7 million. Net cash provided from financing activities of $4.6 million consisted of $1.9 million for issuance of preferred stock to affiliates, borrowings of $4.9 million from an affiliate, borrowings of $102,623 on notes payable under the Company's borrowing facility, partially offset by payments of $1.8 million on notes payable and $531,672 payments on capital lease obligations.
At December 31, 2002, cash amounted to $2.1 million, working capital was a negative $387,376, and stockholders' equity was $9.0 million.
As of December 31, 2002, the Company had $6.1 million drawn under the credit facility against a borrowing base of $7.3 million that is secured by net receivables of $9.9 million.
During 2002, the Company issued to the Company's affiliate, Kadampanattu Corp., $24 million of Series B Preferred Stock as payment for indebtedness, amounts deferred under long-term charters of the Company and an advance portion of the 2003 charterhire. The Series B Preferred Stock is not convertible into common stock.
On September 30, 2002 the Company rescheduled its principal payments under each of its two Title XI bond issues. The combined interest payment due on September 30, 2002 totaling $805,010 was paid on its scheduled date. The Company had previously rescheduled the principal payments of $210,300 and $338,360, respectively, due on each of its Title XI bond issues September 30, 2001 and March 31, 2002 for payment on September 30, 2002 and March 31, 2003. This resulted in total scheduled principal payments for the Company's two Title XI issues of $420,600 and $676,720, respectively, for both September 30, 2002 and March 31, 2003. During the three months ended September 30, 2002, the Company rescheduled the full double principal payments due September 30, 2002 and one half of the double principal payments due March 31, 2003. As a result, commencing March 31, 2003, these rescheduled principal payments will be paid equally over the remaining scheduled principal payment periods of each Title XI issue. As rescheduled, the Company's semi- annual principal payments shall increase to $226,073 and $363,118 until fully paid September 30, 2022 and March 30, 2023, respectively. There was no fee paid or change in interest rate due to this rescheduling. The Company has received the consent of the Maritime Administration and the holder of both of the Title XI bond issues to defer the principal payments of $226,073 and $363,118 due March 31, 2003 until March 31, 2004. The Company will therefore defer such principal payments. The Company expects to pay the interest on each of the bond issues upon the earlier of the completion of the documentation regarding the deferral or the expiration of the grace period contained in each issue.
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 business plan for 2003 is to continue its effort to attract increased volume and manage operating costs in order to attain profitable operations. During the first quarter of 2003, the Company has commenced new contracts with both new and existing customers resulting in a significantly improved revenue level over the five-week period ended April 12, 2003. Revenue levels for the five week period ended April 12, 2003 are in excess of plan. The Company believes that if planned revenue levels can be maintained, attaining successful operations is expected. However, no assurance can be made that the Company will be successful in maintaining the improved revenue levels and accomplishing its other business plans. If the Company is unsuccessful in meeting its projections, there is no assurance that financial assistance from its affiliates similar to that received in the past would be made available. Therefore, there is substantial doubt as to the Company's ability to continue as a going concern.
INFLATION
Inflation has had a minimal effect upon the Company's operating results 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.
SEASONALITY
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 2002, 2001 and 2000 as it had been in previous years.
For the three months ending December 31, 2002, operating revenues increased $509,667 or 2.6% from $19.2 million in 2001 to $19.7 million in 2002 as a result of higher southbound trailer and auto volumes compared to previous quarter. The $2.6 million decrease in southbound revenue resulting from the termination of the Company's Northeast service was more than offset by an increase of $3.2 million in revenue from additional Jacksonville southbound volume partially offset by decreases in northbound and domestic revenue. Total operating expenses for the three months ended December 31, 2002, decreased $10.4 million to $21.4 million in 2002 from $31.8 million in 2001. Salary, wages and benefits decreased $568,212 as a result of a reduction in force as a result of the termination of the Company's Northeast service and lower driver payroll due to reduced miles driven by Company tractors. Purchased transportation decreased $411,675 or 6.3% primarily due to decreased tug charter hire expense of $846,833 related to elimination of the tug required for the Northeast service partially offset by an increase in truck and rail purchased transportation as a result of operating fewer tractors. Fuel expense decreased $258,752 primarily as a result of termination of the Northeast service resulting in a $269,987 decrease in tug fuel partially offset by higher fuel prices. Operating and maintenance expense decreased $1.9 million or 29.8% due to $761,838 in lower marine terminal expenses because of reduced sailings and lower volumes as a result of the termination of the Company's Northeast service; a $512,826 decrease in truck maintenance due to a reduction in tractors; and an increase in net demurrage of $674,931. Taxes and licenses decreased significantly from $507,629 in 2001 to $205,779 in 2002 as a result of a reversal of certain accruals in 2001 and due to an accrual for a tax settlement in Puerto Rico in 2001; Depreciation and amortization expense decreased $444,657 or 35.3% primarily as a result of the Company's tractor fleet being fully depreciated in 2002 compared to $201,917 in depreciation expense related to the tractor fleet in 2001; the reduction in equipment associated with the Northeast service and lower depreciation of vessels due to an asset impairment charge of $3.0 million in 2001. Other operating expense decreased $1.7 million, primarily as a result of a $1.5 million decrease in bad debt expense that had been negatively affected in 2001 by specific account write-offs and certain over accruals. Operating expenses also decreased $4.9 million in 2002 as compared with 2001 by the absence of asset impairments consisting of $3.8 million and restructuring charges for the Northeast service shutdown of $1.1 million that occurred in 2001.
The Company's overall volume to and from Puerto Rico for the fourth quarter of 2002 increased 0.6% despite 20.5% less capacity offered due to the termination of the Northeast service. Core southbound volume and related revenue to Puerto Rico increased 2.1% and 6.7% respectively in the fourth quarter of 2002 compared to the similar period of 2001. Utilization of vessel capacity deployed on the core continental U.S. to Puerto Rico traffic lane increased to 86.6% during the fourth quarter of 2002 from 66.1% during the same period in 2001.
For the three months ended December 31, 2002 the Company's net loss was $2.4 million compared to the same period in 2001 when the Company had a net loss of $13.3 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):
2001 2002
---- ----
By Quarter
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Operating revenues........... $20,637 $21,659 $20,052 $19,220 $17,480 $18,117 $18,488 $19,725 Operating loss............... (4,500) (4,350) (4,813) (12,579) (587) (324) (1,496) (1,630) Net loss applicable to common shares.............. (5,374) (5,161) (5,598) (13,286) (1,311) (1,130) (2,488) (2,818)
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 following table summarizes the Company's contractual obligations and commitments. See Notes 4, 5 and 6 of the Notes to Financial Statements for additional information regarding transactions with related parties, long-term debt and operating leases.
Payments due by period
Less than 1 More than 5
Contractual obligations Total year 1-3 years 3-5 years years
----------------------- ----- ---- --------- --------- -----
Long-Term Debt Obligations $39,693,944 $2,969,668 $15,855,378 $2,832,864 $18,036,034
[Operating Lease Obligations 48,679,009 19,730,556 17,098,563 5,773,725 6,076,165
Total $88,372,953 $22,700,224 $32,953,941 $8,606,588 $24,112,199
RISKS
COMPANY LIQUIDITY
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 business plan for 2003 is to continue its effort to attract increased volume and manage operating costs in order to attain profitable operations. During the first quarter of 2003, the Company has commenced new contracts with both new and existing customers resulting in a significantly improved revenue level over the five-week period ended April 12, 2003. Revenue levels for the five week period ended April 12, 2003 are in excess of plan. The Company believes that if planned revenue levels can be maintained, attaining successful operations is expected. However, no assurance can be made that the Company will be successful in maintaining the improved revenue levels and accomplishing its other business plans. If the Company is unsuccessful in meeting its projections, there is no assurance that financial assistance from its affiliates similar to that received in the past would be made available. Therefore, there is substantial doubt as to the Company's ability to continue as a going concern.
ASSISTANCE FROM AFFILIATES
The Company has engaged and continues to engage in transactions with certain affiliates - Kadampanattu Corp., Transportation Receivables 1992, LLC and the Estate of M. 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 been forgiven charterhire. For the year ended December 31, 2002, the Company expensed $7.3 million in charterhire. During 2002, Kadampanattu Corp. deferred such charterhire and in August, September and December accepted shares of Series B Preferred Stock in payment.
Kadampanattu Corp., a corporation wholly-owned by the Estate of M. P. McLean, has in previous years also advanced funds to the Company on an unsecured basis. During 2002, Kadampanattu Corp. converted $24.0 million of indebtedness, and advanced portion of the charterhire for 2003 under the long-term charters of the Company to non-convertible Series B Preferred Stock. Beginning April 1, 2003, cumulative preferential dividends will accrue on the outstanding amount of the Series B preferred stock at a rate equal to 90-day LIBOR plus 350 basis points. Starting in 2004, the dividend rate will increase 25 basis points per quarter up to a maximum dividend rate of 90-day LIBOR plus 650 basis points. The notes that the Series B Preferred Stock was exchanged for were non-interest bearing until due and provided for interest on overdue amounts at a rate of 90 day Libor plus 250 basis points. The Company's Audit Committee, comprised of independent directors, and the Company's full board of directors approved this conversion.
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. The loan was secured primarily by unencumbered trailer equipment. During the second quarter of 2002, the Company borrowed $5.0 million from an affiliate, Transportation Receivables 1992, LLC secured primarily by the same unencumbered trailer equipment. The proceeds of this borrowing were used to repay $3.0 million borrowed in the first quarter of 2002 from a related affiliate, the Estate of M. P. McLean and to provide $2.0 million in working capital. In addition the same affiliate purchased $2.0 million of Series A Preferred Stock. The Series A Preferred Stock, which has a liquidation preference of $2.0 million, does not bear preferential dividends but participates with the common stock on an as- converted basis in any common dividends. Shares of Series A Preferred Stock are convertible into common stock at a price of $1.022330179 per common share, which was a 23.3% discount of the 30 day average closing price as of March 28, 2002 of $1.33. Except where class voting is required by law, the Series A Preferred Stock votes together with the common stock as a single class, with each share of Series A Preferred Stock entitled to 35.52 votes per share (or approximately 35% of the number of votes on an as-converted basis). The Estate of M. P. McLean is the sole member of Transportation Receivables 1992, LLC. The Company's Audit Committee, comprised of independent directors, and the Company's full board of directors, based upon a fairness opinion from an independent entity, approved all transactions with Transportation Receivables 1992, LLC.
The Estate of M. P. McLean, or its affiliates, owns approximately 50.6% of the outstanding shares of the Company's Common Stock and 100% of the Series A Preferred Stock, resulting in 53.9% of the voting stock of the Company. Upon conversion of the Series A Preferred Stock the Estate of M. P. McLean would control approximately 58.8% of the voting interest. 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, or other affiliate will provide additional support to the Company. John D. McCown and William G. Gotimer, Jr. are officers and directors of Kadampanattu Corp. M. P. McLean, Jr., a director of the Company, is a director of Kadampanattu Corp.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which requires the Company to make estimates and assumptions about future events and their impact on amounts reported in these 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.
Management believes the 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, management has found the application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
The Company's accounting policies are more fully described in Note 1 to the financial statements. Certain critical accounting policies 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 assets, the Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. Due to the continued operating losses independent appraisals are used to determine the appropriateness of the carrying values.
Income taxes. Generally accepted accounting principles require that the Company record a valuation allowance against the deferred tax asset associated with the its net operating loss carry forward (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 NOL in relation to the Company's history of unprofitable operations, we have not recognized any of this net deferred tax asset. The Company currently provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes and the federal alternative minimum tax) for current income.
It is possible, however, that the Company could operate 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. Upon reaching such a conclusion, the Company would 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 its 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 the provision for income taxes to vary significantly from period to period, although cash tax payments would remain unaffected until the benefit of the NOL is utilized.
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 judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. See the Company's audited 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.
New Accounting Pronouncements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 54, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." Additionally, his Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale- leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or describe their applicability under changed conditions. This Statement will be effective for the year ended December 31, 2003 and for transactions entered into after May 15, 2002. It does not appear that this Statement will have a material effect on the financial position, operations or cash flows of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement nullifies Emerging Issued Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. It does not appear that this Statement will have a material effect on the financial position, operations or cash flows of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends SFAS No. 123 (same title) and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements in both annual and interim financial statements related to the methods of accounting for stock-based employee compensation and the effect of the method on reported results. The Statement also prohibits the use of the prospective method of transition, as outlined in SFAS No. 123, when beginning to expense stock options and change to the fair value based method in fiscal years beginning after December 15, 2003. As required, the Company adopted the disclosure requirements of SFAS No. 148 on December 31, 2002.
In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), which requires a guarantor to recognize a liability for the fair value of the obligation at the inception of the guarantee. The Company adopted the disclosure requirements of FIN 45 as of December 31, 2002. The adoption of the measurement requirements of FIN 45 will not have a material impact on the Company's financial position or results of operation.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," which clarified the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created after January 31, 2003. The provisions of FIN 46 are applicable for variable interest entities created prior to January 31, 2003 no later than July 1, 2003. The adoption of FIN 46 will not have an impact on the Company's financial position or results of operations.