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

RESULTS OF OPERATIONS:

Three Months Ended September 30, 2002 and 2001

With the discontinuation of the Northeast service at the end of 2001, the Company had 20.4% less overall vessel capacity deployed in the Puerto Rico lane during the three months ended September 30, 2002 compared to the third quarter of 2001. With this capacity reduction, the Company's total volume of freight moving to and from Puerto Rico decreased 9.0% compared to the year earlier period. Operating revenues for the three months ended September 30, 2002 were $18.5 million, a decrease of $1.6 million or 7.8%, compared to the third quarter of 2001. The Company's Puerto Rico deployed vessel capacity utilization overall during the three months ended September 30, 2002 was 79.3% to Puerto Rico and 22.6% from Puerto Rico significantly better than the 69.5% and 19.1%, respectively, during the third quarter of 2001. The Company had an average of 198 tractor units operating on the mainland during the three months ended September 30, 2002, generating 9,349 miles per month of which 80.2% were loaded.

Operating expenses decreased $4.9 million for the three months ended September 30, 2002 from $24.9 million for the same period in 2001 to $20.0 million. The termination of the Company's Northeast service resulted in significant decreases in operating expenses related to salaries, wages and benefits; purchased transportation; fuel expense; and operation and maintenance expense. Salaries, wages and benefits expense decreased $552,716 primarily due to reductions in headcount, driver payroll and less workers compensation expense. Rent and purchased transportation decreased $1.3 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 $779,428 million due to less consumption from operating two less tugs and operating fewer company trucks. Operating and maintenance expense decreased $1.6 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 and amortization expense decreased by $324,688 due to reductions in equipment fleet and less depreciation expense on tractors and vessels. All remaining operating expenses decreased a net amount of $366,898, consisting of decreases in depreciation and amortization, taxes and licenses, communications and utilities and other expenses, partially offset by increases in insurance and claims. The total costs associated with the three laid-off triple-stack box carrier vessels during the three months ended September 30, 2002, net of charter income, were $349,869.

Operating loss for the three months ended September 30, 2002 was $1.5 million an improvement of $3.3 million from operating loss of $4.9 million for the three months ended September 30, 2001. Compared to the third quarter of 2001, operating loss improved by $3.4 million, 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 108.2% during the three months ended September 30, 2002, compared to the 124.2% operating ratio during the year earlier period. Net interest expense of $757,869 was down $49,415 from the year earlier period due primarily to lower interest rates. The Company also realized a gain of $14,923 from non-operating items during three months ended September 30, 2002 compared to a gain of $38,157 in the year earlier period. Net loss for the three months ended September 30, 2002 included a tax expense of $3,305 compared to a tax benefit of $22,129 during the same period in the preceding year.

The Company's loss before income taxes for the three months ended September 30, 2002 was $2.3 million compared to a pre-tax loss of $5.6 million 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 third quarter remained at $2.3 million, as compared to a net loss of $5.6 million , for the year earlier period. The net loss applicable to common shares for the quarter ended September 30, 2002 after accretion of preferred stock discount was equivalent to $.25 per share as compared to $.57 per share for the year earlier period. The accretion of preferred stock discount is a non-cash item as no actual dividends accrue and no liability will be recognized until 2003. As a result, this non-cash accretion item does not impact overall stockholders' equity.

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 September 30, 2002 compared to the same period a year earlier, total southbound volume over Jacksonville increased 8.1%. The Company's core southbound trailer volume from Jacksonville to Puerto Rico increased 3.3%, new and used cars moving to Puerto Rico increased 6.9% and 85.7% respectively, shipper owned or leased equipment ("SOL") increased 44.4 %, while freight not in trailers ("NIT") decreased 1.1%.

Northbound, total volume over Jacksonville increased 5.2% for the three months ended September 30, 2002 compared to the same period a year earlier. The Company's northbound trailer volume from Puerto Rico to Jacksonville increased 6.2%, used car volume increased 22.9%, NIT increased 55.6%, while SOL volume decreased 50.0%.

Nine Months Ended September 30, 2002 and 2001 -

With the discontinuance of the Northeast service at the end of 2001, the Company had 22.8% 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 14.7% compared to the year earlier period. Operating revenues for the nine months ended September 30, 2002 were $54.1 million, a decrease of $8.3million, or 13.3%, compared to the year earlier period.

The Company's Puerto Rico deployed vessel capacity utilization overall during the nine months ended September 30, 2002 was 77.0% to Puerto Rico and 20.8% from Puerto Rico compared to 68.5% and 20.2%, respectively, during the year earlier period. The Company had an average of 185 tractor units operating on the mainland during the nine months ended September 30, 2002, generating 9,387 miles per month of which 81.0% were loaded.

Largely resulting from the 22.8% decrease in overall vessel capacity to Puerto Rico, operating expenses decreased $19.3 million, or 25.4%, for the nine months ended September 30, 2002 from $75.9 million for the same period in 2001 to $56.6 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 nine months ended September 30, 2002 was $2.5 million compared to an operating loss of $13.5 million in the prior year period. Compared to the nine months ended September 30, 2001, operating loss improved by $11.0 million, due to discontinuing the Northeast service, reductions in headcount and equipment, and other cost-cutting initiatives. The operating loss for the nine months ended September 30, 2001 was further impacted by the expenses related to the dry- docking of both of the ro/ro vessels operated by the Company under charter from an affiliate of $1.3 million. As a result of the above, the operating ratio was 104.6% during the nine months ended September 30, 2002, compared to the 121.7% operating ratio during the year earlier period. Net interest expense of $2.3 million was down from $2.5 million in the year earlier period due primarily to lower interest rates. The Company also realized a gain of $84,701 from non- operating items during nine months ended September 30, 2002 compared to a loss of $148,379 in the year earlier period. The total costs associated with the three laid-off vessels during the nine months ended September 30, 2002, net of charter income, were $1,303,790.

The Company's loss before income taxes for the nine months ended September 30, 2002 was $4.7 million compared to a pre-tax loss of $16.2 million in the year earlier period. Due to the Company's continued losses, a full valuation allowance is provided for its deferred income tax asset. Therefore, the net loss for the nine months ended September 30, 2002 remained at $4.7 million, as compared to a net loss of $16.1 million for the year earlier period. The net loss applicable to common shares for the nine months ended September 30, 2002 after accretion of preferred stock discount was equivalent to $.50 per share as compared to $1.65 per share for the year earlier period.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used by operations was $3.4 million during the nine months ended September 30, 2002 compared to net cash used by operations of $8.9 million during the same period in 2001. Net cash provided by investing activities of $336,865 during the nine months ended September 30, 2002 reflects $647,409 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 $6.8 million during the nine months ended September 30, 2002 compared to $9.1 million during the nine months ended September 30, 2001.

At September 30, 2002, cash amounted to $1.3 million, working capital was negative $768,558, and stockholders' equity was $10.6 million. As of September 30, 2002, the Company had $4.6 million drawn under the credit facility against a borrowing base of $5.0 million that is secured by net receivables of $9.7 million.

The Company has reduced its payables to non-affiliated vendors by $2.6 million since December 31, 2001.

During the three months ended September 30, 2002, the Company issued a total of 22,102.448 shares of Series B preferred stock in exchange for $22,102,448 principal amount of debt owed to the Company's affiliate, Kadampanattu Corp. The Series B preferred stock is not convertible into common stock.

During the three months ended 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 30, 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 nor change in interest rate due to this rescheduling.

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 third quarter of 2003.

AFFILIATES OF THE COMPANY

The Estate of M. P. McLean (the "Estate") 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. F. Duffield Meyercord, director of the Company, is the other co-executor of the Estate. Malcom P. McLean, Jr. a director of the Company and the spouse of Greggory B. Mendenhall are beneficiaries of the Estate.

Two companies wholly owned by the Estate have entered into transactions with the Company.

During the nine month period ended September 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. The Estate 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.

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 at the time of the Company's inception. During the nine months ended September 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. During the three month period ended September 30, 2002, Kadampanattu Corp. converted $22.1 million of indebtedness of the Company, arising from both charter deferrals and advanced funds, to non-convertible series B preferred stock. Beginning April 1, 2003, cumulative preferential dividends will accrue on the purchase price 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 was non-interested bearing until it was due and provided for interest on overdue amounts at a rate of 90 day Libor plus two and one-half percent. The company's Board of Directors and Audit Committee approved this conversion.

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 mid-summer 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 Sea Star Line, LLC. The purchaser has chosen not to operate any of the three sailings per week formerly operated by NPR. Another competitor, CSX Lines, added a weekly sailing to its service. The Company expects this change in market condition to result in increased capacity utilization and freight rates in the fourth quarter of 2002 and into 2003. 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.

CURE OF NASDAQ LISTING REQUIREMENTS NON-COMPLIANCE

Through the issuance of non-convertible preferred stock, in payment of an equal face amount of the Company's debt to its affiliate Kadampanattu Corp., the Company has cured its previous non-compliance with NASDAQ maintenance standards thereby permitting the Company's continued listing on the NASDAQ National Stock Market.

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.