TRAILER BRIDGE INC (TRBR)
Quarterly Report (SEC form 10-Q)

RESULTS OF OPERATIONS:

Three Months Ended June 30, 2002 and 2001 -

With the discontinuation of the Northeast service at the end of 2001, the Company had 28.1% less overall vessel capacity deployed in the Puerto Rico lane during the three months ended June 30, 2002 compared to the second quarter of 2001. With this capacity reduction, the Company's total volume of freight moving to and from Puerto Rico decreased 17.3% compared to the year earlier period. Operating revenues for the three months ended June 30, 2002 were $18,116,637 a decrease of $3,542,548 or 16.4%, compared to the second quarter of 2001. The Company's Puerto Rico deployed vessel capacity utilization overall during the three months ended June 30, 2002 was 75.5% to Puerto Rico and 21.3% from Puerto Rico significantly better than the 65.6% and 19.5%, respectively, during the second quarter of 2001. The Company had an average of 178 tractor units operating on the mainland during the three months ended June 30, 2002, generating 9,383 miles per month of which 82.1% were loaded.

Operating expenses decreased $7.2 million for the three months ended June 30, 2002 from $25.8 million for the same period in 2001 to $18.6 million. The termination of the Company's Northeast service resulted in significant decreases in operating expenses related to salary, wages and benefits; purchased transportation; fuel expense; and operation and maintenance expense. Salaries, wages and benefits expense decreased $814,085 primarily due to reductions in headcount, driver payroll and less workers compensation expense. Rent and purchased transportation decreased $2.0 million due to decreased tug charter hire expense and less equipment rent due to the termination of short-term leases on excess trailers. Fuel expense decreased $1.1 million due to less consumption from operating two less tugs and operating fewer company trucks. Operating and maintenance expense decreased $2.7 million resulting from less stevedoring, wharfage and vessel maintenance expense. Vessel maintenance expense decreased primarily due to a non-recurring charge for dry docking expense incurred the year earlier period. Depreciation expense decreased by $398,532 due to reductions in equipment fleet and less depreciation expense on tractors and vessels. All remaining operating expenses decreased a net amount of $219,761, consisting of decreases in depreciation and amortization, taxes and licenses, and other expenses, partially offset by increases in insurance, claims and communications. The total costs associated with the three laid-off triple- stack box carrier vessels during the three months ended June 30, 2002, net of charter income, were $478,687.

The operating loss for the three months ended June 30, 2002 was $461,949, as compared to an operating loss of $4,131,848 in the prior year period. Compared to the second quarter of 2001, operating loss improved by $3,669,899, due to discontinuing the Northeast service, reductions in headcount and equipment, and other cost-cutting initiatives. As a result of the above, the operating ratio was 102.5% during the three months ended June 30, 2002, compared to the 119.1% operating ratio during the year earlier period. Net interest expense of $806,489 was down minimally from the year earlier period due primarily to lower interest rates. The Company also realized a gain of $138,140 from non-operating items during three months ended June 30, 2002 compared to a loss of $218,419 in the year earlier period.

The Company's loss before income taxes for the second quarter ended June 30, 2002 was $1,130,298 compared to a pre-tax loss of $5,160,945 in the year earlier period. Due to the Company's continued losses a full valuation allowance is provided for its income tax asset. Therefore, the net loss for the first quarter remained at $1,130,298, or $.12 per share, as compared to a net loss of $5,160,945 or $.53 per share, for the year earlier period.

With the discontinuance of the Company's Northeast service at the end of 2001, the Company believes that volume and yield comparisons solely related to freight moving via Jacksonville are most relevant. For the three months ended June 30, 2002 compared to the same period a year earlier, total southbound volume over Jacksonville increase 3.0%. The Company's core southbound trailer volume from Jacksonville to Puerto Rico increased 3.1%, new and used cars moving to Puerto Rico increased 34.0% and 14.3% respectively, while shipper owned or leased equipment ("SOL") and freight not in trailers ("NIT") decreased 38.4% and 9.2%, respectively.

Northbound, total volume over Jacksonville decreased 7.5% for the three months ended June 30, 2002 compared to the same period a year earlier. The Company's northbound trailer volume from Puerto Rico to Jacksonville decreased 15.5% but was partially offset by increase in northbound movement of automobiles.

Due to rate decreases resulting from the hyper-competitive conditions in the second half of 2001, the effective yield of all the southbound and northbound freight moving via Jacksonville decreased 3.5% and 8.4%, respectively from the year earlier period.

During the three month period ending June 30, 2002 a competitor with a 27% market share which had been operating under Chapter 11 of the bankruptcy code since March 2001 sold its vessel assets to another competitor. Shortly after that transaction was finalized in mid-May, the purchaser began taking steps that effectively resulted in two-thirds of the capacity of the purchased vessels that were deployed being permanently removed from the Puerto Rico market. The Company believes this action represents 20% reduction of the overall capacity in the tradelane. The Company believes that this previous level of excess capacity has been the root cause of the hyper-competitive conditions in the Puerto Rico market in recent years, particularly in 2001. With this change, the Company believes it and the other remaining carriers in the lane will benefit from greater asset utilization and an unwinding of the unsustainable pricing characteristic of recent years. The Company's own effective yield on core southbound loads is down approximately 25% from five years ago.

Six Months Ended June 30, 2002 and 2001 -

With the discontinuation of the Northeast service at the end of 2001, the Company had 24.0% less overall vessel capacity deployed in the Puerto Rico lane compared to the year earlier period. The Company's total volume of freight moving to and from Puerto Rico decreased 17.5% compared to the year earlier period. Operating revenues for the six months ended June 30, 2002 were $35,596,763 a decrease of $6.7 million, or 15.8%, compared to the year earlier period.

The Company's Puerto Rico deployed vessel capacity utilization overall during the six months ended June 30, 2002 was 75.9% to Puerto Rico and 19.9% from Puerto Rico compared to 68.0% and 20.7%, respectively, during the year earlier period. The Company had an average of 179 tractor units operating on the mainland during the six months ended June 30, 2002, generating 9,189 miles per month of which 80.9% were loaded.

Largely resulting from the 24.0% decrease in overall vessel capacity to Puerto Rico, operating expenses decreased $14.4 million, 28.2%, for the six months ended June 30, 2002 from $51.0 million for the same period in 2001 to $36.6 million. The termination of the Company's Northeast service resulted in significant decreases in operating expenses related to salary, wages and benefits; purchased transportation, primarily due to decreased tug charter hire expense; fuel expense; depreciation; and operation and maintenance expense.

The operating loss for the six months ended June 30, 2002 was $980,974 compared to an operating loss of $8,664,022 in the prior year period. Compared to the six months ended June 30, 2001, operating loss improved by $7,683,048, due to discontinuing the Northeast service, reductions in headcount and equipment, and other cost-cutting initiatives. As a result of the above, the operating ratio was 102.8% during the six months ended June 30, 2002, compared to the 120.5% operating ratio during the year earlier period. Net interest expense of $1,529,636 was down from $1,684,540 in the year earlier period due primarily to lower interest rates. The Company also realized a gain of $69,778 from non-operating items during six months ended June 30, 2002 compared to a loss of $186,536 in the year earlier period. The total costs associated with the three laid-off vessels during the six months ended June 30, 2002, net of charter income, were $953,920.

The Company's loss before income taxes for the six months ended June 30, 2002 was $2,440,832 compared to a pre-tax loss of $10,535,098 in the year earlier period. Due to the Company's continued losses a full valuation allowance is provided for its income tax asset. Therefore, the net loss for the six months ended June 30 2002 remained at $2,440,832, or $.25 per share, as compared to a net loss of $10,535,098 or $1.08 per share, for the year earlier period.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used by operations was $5.7 million during the six months ended June 30, 2002 compared to net cash used by operations of $7.8 million during the same period in 2001. Net cash provided by investing activities of $168,457 during the six months ended June 30, 2002 reflects $512,507 in proceeds from the sale of equipment, partially offset by $423,065 of additions to and construction of property and equipment, which were primarily attributable to payments for trailers. Net cash provided from financing activities was $7.2 million during the six months ended June 30, 2002 compared to $7.1 million during the six months ended June 30, 2001.

At June 30, 2002, cash amounted to $2.1 million, working capital was negative $218,444, and stockholders' equity was negative $9.3 million. At June 30, 2002, the Company was in compliance with all financial and other covenants with all its lenders. As of June 30, 2002, the Company had $5.4 million drawn under the credit facility against a borrowing base of $5.5 million that is secured by net receivables of $7.5 million.

The Company has reduced its payables to non-affiliated vendors by $3.3 million since December 31, 2001.

During the quarter ended June 30, 2002 the Company borrowed $5 million from an affiliate, Transportation Receivables 1992, LLC. The proceeds of this borrowing were used to repay $3 million borrowed in the first quarter from a related affiliate, the Estate of M. P. McLean and to provide $2 million in working capital the proceeds of which were also available for working capital. In addition the same affiliate purchased Preferred series A convertible stock for $2 million. Separately, Kadampanattu Corp., also an affiliate of the Company, has agreed to allow Trailer Bridge to defer payment on certain amounts due under the charter of the two roll-on/roll-off vessels, through at least the end of 2002. Kadampanattu Corp. has also agreed to convert $20.3 million to non-convertible preferred stock, if such conversion would be sufficient to regain compliance with the applicable maintenance standards of the Nasdaq National Stock Market and result in the Company's continued listing thereon.

The Series A preferred stock, which has a liquidation preference of $2 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 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 entitled to 35.52 votes per share (or approximately 35% of the number of votes on an as-converted basis). For additional information concerning the issuance of the Series A preferred stock, see Item 4, "Changes in Securities and Use of Proceeds."

The Company's projected cash flows from operations combined with its revolving line of credit and maintenance of its vendor relationships are expected to produce sufficient available liquidity to maintain its current level of operations and service its debt obligations through calendar 2002 and the second quarter of 2003.

AFFILIATES OF THE COMPANY

The Estate of M. P. McLean is the majority shareholder of the Company. John D. McCown, Chairman and Chief Executive Officer of the Company, is a co-executor of the Estate of Malcom P. McLean. F. Duffield Meyercord, director of the Company, is the other co-executor of the Estate of Malcom P. McLean.

Two companies wholly owned by the Estate of Malcom P. McLean have entered transactions with the Company.

During the three month period ended June 30, 2002, Transportation Receivables 1992, LLC purchased the Series A convertible stock and provided $5 million in secured loans to the Company. The proceeds of the loan were partially used to repay a $3 million loan outstanding to the Estate of Malcom P. McLean. The Estate of Malcom P. McLean is the sole member of Transportation Receivables 1992, LLC. The Company's Audit Committee based upon a fairness opinion from an independent entity approved all transactions with Transportation Receivables 1992, LLC. The Company does not expect to enter into any further transactions with the Estate of Malcom P. McLean itself or Transportation Receivables 1992, LLC.

Kadampanattu Corp., a corporation wholly-owned by the Estate of Malcom P. McLean, charters the two roll-on roll-off vessels to the Company under fixed rate charters entered into with Kadampanattu Corp. at the time of the Company's inception. During the three months ended June 30, 2002 Kadampanattu Corp. deferred receipt of its charterhire and has agreed to such deferrals through the end of calendar year 2002. Kadampanattu Corp. has also advanced funds to the Company on an unsecured basis. At June 30, 2002 the outstanding amount of such indebtedness is $26.3 million. Kadampanattu Corp. has also agreed to convert $20.3 million to non-convertible preferred stock if such conversion would be sufficient to regain compliance with the applicable maintenance standards of the Nasdaq National Stock Market and result in the Company's continued listing thereon. John D. McCown and William G. Gotimer, Jr. are officers and directors of Kadampanattu Corp. Malcom P. McLean, Jr., a director of the Company, is a director of Kadampanattu Corp.

MARKET CONDITIONS.

The market in which the Company operates, the United States to Puerto Rico trade lane, remained hyper-competitive with significant over capacity through the first half of the three months ended June 30, 2002. Beginning in 2002, the Company reduced its capacity by ceasing to operate its Northeast Service. In mid-May 2002 the Company's competitors significantly reduced their capacity. One of the Company's competitors, NPR, which had operated under Chapter 11 bankruptcy protection since March 2001, ceased all of its operations by selling its vessel and other assets to another competitor. The purchaser has chosen not to operate any of the three sailings per week formerly operated by NPR. Another competitor, CSX Lines, announced it was adding a weekly sailing to its service. This net reduction of two sailings per week in the Puerto Rico trade lane has eased the over capacity in the trade resulting in better vessel utilization and more compensatory freight rates. The Company expects this change in market condition to result in increased capacity utilization and yield in the second half of 2002. Despite the reduction in capacity in the trade lane no assurance can be made that market conditions will improve or that competitive pressures will not increase.

NASDAQ LISTING REQUIREMENTS

Related to the previously disclosed appeal by the Company of the Nasdaq staff notification regarding the delisting of the Company's common stock from the Nasdaq National Stock Market, on June 27, 2002 the Company had a hearing before the listing qualification panel, where it proposed a course of action to attain full compliance with the applicable maintenance standard. The Company proposed to issue $20.3 million of non-convertible preferred stock in payment of an equal face amount of the Company's debt to its affiliate Kadampanattu Corp. This transaction has been approved by both the Company and Kadampanattu Corp. and will be consummated immediately upon a decision of the listing qualification panel that such transaction cures the Company's non-compliance with NASDAQ maintenance standards thereby permitting the Company's continued listing on the NASDAQ National Stock Market. The Company has not yet received the decision of the listing qualification panel.

FORWARD-LOOKING STATEMENTS

This report may contain statements that may be considered as forward-looking or predictions concerning future operations and market conditions. Such statements are based on management's belief or interpretation of information currently available. These statements and assumptions involve certain risks and uncertainties and management can give no assurance that such expectations will be realized. Among all the factors and events that are not within the Company's control and could have a material impact on future operating results are risk of economic recessions, severe weather conditions, changes in demand for transportation services offered by the Company, and changes in rate levels for transportation services offered by the Company.

©1998 Trailer Bridge, Inc.