May 10, 2004
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 consist 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. The Puerto Rico lane in which the Company operates had been subjected to overcapacity and intense competition over the five years prior to 2003. During 2003, the Puerto Rico lane stabilized and competition became less intense. The Company has increased utilization of its vessels during 2003 and in the second half of 2003 saw the severe rate compression that had occurred since 1998 begin to unwind.
RESULTS OF OPERATIONS
The following table sets forth the indicated items as a percentage of net revenues for the years ended December 31, 2003, 2002 and 2001.
Operating Statement - Margin Analysis
(% of Operating Revenues)
2003 2002 2001
---------------- ---------------- -----------------
Operating Revenues 100% 100% 100%
Salaries, wages, and benefits 18 20 21
Rent and purchased transportation:
Related Party 8 10 9
Other 28 28 33
Fuel 10 10 13
Operating and maintenance (exclusive of
depreciation shown separately below) 25 23 31
Taxes and licenses 1 1 1
Insurance and claims 3 4 3
Communications and utilities 1 1 1
Depreciation and amortization 4 4 6
Other operating expenses 5 4 8
Asset impairment - - 5
Restructuring expenses - - 1
---------------- ---------------- -----------------
Total Operating Expenses 103 105 131
---------------- ---------------- -----------------
Operating Loss (3) (5) (32)
Net interest expense (3) (4) (4)
---------------- ---------------- -----------------
Net loss (6)% (9)% (36)%
================ ================ =================
Year ended December 31, 2003 Compared to Year ended December 31, 2002
The Company operating ratio (operating expense stated as a percentage of operating revenues) decreased from 105% in 2002 to 103% in 2003. This improvement is more fully explained under operating expense caption set forth below.
Revenues
The following table sets forth by percentage and dollar, the changes in the Company's revenue and volume by sailing route and freight carried:
Revenue & Volume Changes 2003 compared to 2002
Overall Southbound Northbound
---------------- ----------------- ----------------
Volume Percent Change:
Core container & trailer 17.2% 18.3% 13.5%
Auto and other cargos 0.1% (1.4)% 26.2%
SOLs (3.1)% (8.5)% 54.5%
Domestic linehaul (53.9)%
Revenue Change ($millions):
Core container & trailer 7.6 7.2 0.4
Auto and other cargos 1.7 1.2 0.5
SOLs 0.4 0.3 0.1
Domestic linehaul (1.6)
Other Revenues 2.4
----------------
Total Revenue Change 10.5
----------------
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic
lane was 92.0% during 2003, compared to 79.4% during 2002.
The Company increased its overall market share of freight moving in trailers or containers in both directions to 13.0% in 2003 from 11.4% in 2002, as a result of the cessation of operations in mid-2002 of a competitor of the Company. For 2003, the Company's market share was 13.3% southbound and 12.1% northbound compared to 11.4% southbound and 11.3% northbound in 2002. 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 Company's fuel surcharge is included in the Company's revenues and amounted to $4.0 million in 2003 and $2.6 million in 2002. The Company's demurrage is included in the Company's revenues and amounted to $2.3 million in 2003 and $1.3 million in 2002. Demurrage is a charge assessed for failure to return empty freight equipment on time. The Company's charterhire is included in the Company's revenues and amounted to $.4 million in 2003 and $.7 million in 2002. Charterhire is rental revenue for vessels not in use in a liner service.
The decrease in domestic line haul revenue was primarily as a result of increased southbound volumes resulting in less available domestic equipment capacity and the loss of a particular domestic linehaul customer. Domestic revenue is for moves that originate and terminate within the continental United States.
Operating expenses
Operating expenses increased $9.0 million, or 11.3% from $80.0 million in 2002 to $89.0 million for 2003. This increase was due to volume-related increases in substantially all areas other than insurance and claims, communications and utilities that decreased 1.6% and 12.0%, respectively, due primarily to lower claims volume and premiums as well as entering into a contract with a new telephone company. Salary, wages and benefits increased 4.1% due to increased workers compensation insurance premiums of $.7 million that was partially offset by a $.2 million decrease in salary and employee benefits. Purchased transportation other than to a related party increased $2.9 million or 13.2% primarily due to increased volume resulting in additional inland miles and increased fuel costs increasing the rate per mile. Fuel expense increased $1.6 million or 21.2% primarily as a result of a $1.3 million increase in tug fuel from increased fuel prices and an increase of $.2 million in truck fuel expense resulting from increased fuel prices. Operation and maintenance expense increased $3.9 million or 21.9% due to $1.3 million in higher stevedoring costs related to increased volume and increased stevedoring rates in Jacksonville; $1.4 million in truck maintenance due to increased tire, parts and repair expense and increased dry docking and vessel maintenance expense and marine terminal expenses. As a result, the Company's operating ratio decreased to 103% during 2003 from 105% during 2002.
Interest Expense
Interest expense decreased to $2.9 million in 2003 from $3.1 million in 2002 primarily due to lower interest rates on the Company's floating rate indebtedness and lower loan balances.
Income taxes
Reference is made to Note 9 in the Notes to Financial Statements.
As a result of the factors described above the Company reported a net loss of $5.5 million for 2003 compared to net loss of $7.1 million in 2002.
Known Trends During First Quarter of 2004
During First Quarter of 2004, vessel utilization was 91.8% and 26.3% southbound and northbound, respectively. The Company has increased its rates and other customer charges during the first quarter of 2004. The Company has decreased purchase transportation expense by relying more on rail transportation on longer hauls. The Company has also reduced health insurance expense by changing policies in regards to employee benefits as well as switching providers. The Company has experienced higher fuel costs in 2004. The Company expects to report a profitable first quarter of 2004.
Year ended December 31, 2002 Compared to Year ended December 31, 2001
Operating revenues decreased $6.1 million, or 7.5%, to $76.0 million during 2002 from $82.1 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. 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 $28.4 million, or 26.2% from $108.4 million in 2001 to $80.0 million for 2002. This decrease was due to significant decreases in all areas other than insurance and claims that increased $.4 million 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 $.2 million workers compensation insurance premium due to an adjustment of rates from prior years. Purchased transportation other than to a related party decreased $5.5 million or 20.2% primarily due to decreased tug charter hire expense of $3.5 million related to elimination of the tug required for the Northeast service; a decrease of $2.8 million in equipment expense, partially offset by an increase of $.8 million 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 $.5 million in truck fuel expense resulting from a decrease in truck miles of approximately 1.7 million miles. Operation and maintenance expense decreased $7.4 million or 29.2% 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. Taxes and licenses expense decreased $.5 million 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 $.1 million 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% during 2002 from 131% during 2001.
Interest expense (net) decreased to $3.1 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.
DIVIDENDS
The Company has not declared or paid dividends on its common stock during the past five years. Certain agreements of the Company restrict its ability to declare and pay dividends. Contractual accumulated dividends on the Company's Series B Preferred Stock amounted to $846,385 at December 31, 2003. Such dividends have not been declared, accrued or paid.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $.9 million in 2003 compared to net cash used in operations of $3.7 million in 2002. This represented an improvement of $4.6 million from 2002. $3.0 million dollars of the improvement was attributable to changing payment cycles to vendors to better fit the Company's cash position offset by approximately $2.8 million from increased accounts receivable due to increased volume. Net cash used in financing activities was $2.6 million in 2003 compared to net cash provided by financing activities of $4.6 million in 2002 representing a difference of $7.2 million. Net cash used in financing activities consisted primarily of $2.4 million of payments on notes payable. At December 31, 2003, cash amounted to $.4 million, working capital was a negative $2.0 million, and stockholders' equity was $4.6 million.
During 2003 the Company deferred its semi-annual Title XI payments due March 31, 2003 of $226,073 and $363,118 until March 31, 2004. The deferred payments were added to the normal semi-annual principal payments due on March 31, 2004 resulting in scheduled double principal payments on that date. 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 spread the deferred principal payments over the remaining life on the Title XI bond issues, expiring on September 30, 2022 and March 30, 2023, respectively. The Company will therefore have rescheduled principal payments of $232,022 and $372,429 due March 30, 2004 and each semi-annual period until fully paid on September 30, 2022 and March 30, 2023, respectively. In 2003, the Company paid the semi-annual principal payments due September 30, 2003 of $226,073 and $363,118. In 2004, the Company paid the semi-annual payments due March 30, 2004 of $232,022 and $372,429.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company operated in a trade lane that was characterized by significant over capacity and fierce competition from 1998 until mid-2002. The over capacity and competition resulted in significant and prolonged rate decreases throughout that period. Similarly, the Company's ability to pass on certain expenses to customers, through surcharges and other customer charges was severely hampered due to competition. As a result, during the years ended December 31, 2003, 2002 and 2001, the Company incurred net losses applicable to common shares of $7,282,220, $7,746,644 and $29,419,936, respectively and had cash flows from (used by) operating activities of $860,093, $(3,704,325) and $(11,036,755), respectively and had a working capital deficiency of $2,040,623 and $6,451,866 at December 31, 2003 and 2002 respectively.
The Company's continuation as a going concern was 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. During this period, as a result of competitive pressure, one of the trade lane's largest participant filed bankruptcy and after operating in bankruptcy for approximately 18 months sold its vessel assets to another competitor in the trade. With a realignment of capacity and demand in the trade lane, 2003 resulted in a redistribution of freight volume among the remaining four participants which resulted in increased volume and capacity utilization to the Company. During the fourth quarter of 2003, the Company began to implement increases in customer rates and surcharges. In addition to the revenue increases, the Company also implemented several changes to reduce cost. The most notable changes were made in purchased transportation, healthcare costs and tug fuel consumption. During the fourth quarter of 2003, the Company began utilizing lower cost rail transportation in certain lanes effectively lowering the unit cost per mile of inland transportation. In January 2004 the Company implemented a change in policy and healthcare providers reducing benefit costs and started chartering tugs with more fuel-efficient engines. The Company has entered into written contracts with customers that reflect the increased rates and additional surcharges and improved market conditions. Based upon the foregoing, the Company believes that it will be able to maintain its increased vessel capacity utilization at these increased rates. For the first quarter of 2004, the Company expects to generate positive cash flow from operations. The Company believes that if planned revenue levels can be maintained, 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.
The trade lane in which the Company operates is protected by a number of barriers to entry, the most formidable of which is the Jones Act that requires that vessels serving the trade lane be built in the United States, owned by United States Citizens and crewed by United States Citizens. Other barriers to entry include limited port space in San Juan. Both act as major constraints to the addition of new capacity. The Company believes that its capacity utilization and rate levels can be maintained. The trade lane in which the Company operates is a mature lane that typically sees modest yet stable growth in demand and has not historically seen dramatic fluctuation in demand. The Company expects this to continue through the upcoming years resulting in a stable trade environment.
At December 31, 2003, the Company had $13.1 million due to a bank under its senior credit facility, which expired January 31, 2004. In addition, the Company had $6.3 million due to related parties, all of which was due to be paid in 2004. In April 2004, after receiving extensions from its then existing senior lender, the Company refinanced this bank debt with a new senior lender. The new bank debt consists of a revolving line of credit in the amount of $20.0 million and a term loan in the amount of $3.0 million, both of which are due in April 2007. The new bank debt provides for interest at prime plus 1.5% for the revolving line of credit and prime plus 7.5% for the term loan and is payable monthly. The revolving line of credit is subject to a borrowing base calculation but the bank requires the Company to maintain a minimum availability of $2,000,000. The borrowing base is based on a percentage of eligible accounts receivable and revenue equipment, as defined. On April 23, 2004, the Company received $3.0 million in proceeds from the term loan and borrowed $11.0 million under the credit facility against a borrowing base of $14.5 million. Both obligations are secured by net receivables of $13.2 million and revenue equipment of $13.8 million. As of December 31, 2003, the former senior credit facility was secured by net receivables of $11.0 million and revenue equipment of $14.3 million. Related Party debt of $4.9 million, originally scheduled for payment in October 2004, has been rescheduled for payment in May 2007. Additionally, $1 million of the 2004 scheduled repayment of related party debt has been rescheduled for monthly principal payments commencing January 2005. Effective March 1, 2004 the Company's affiliate, Kadampanattu Corp., agreed to defer $1.0 million of charter hire to be paid by the Company in 2004. This deferred amount is payable in 36 monthly payments beginning in January 2005. These factors along with increased rates and market share, are expected to allow the Company to meet its working capital requirements in 2004 and through December 31, 2005. The Company's business plan does not require the full utilization of the revolving credit facility.
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 third and fourth calendar quarter of each year. This seasonality is not as pronounced in recent years.
For the three months ended December 31, 2003, operating revenues increased $1.8 million or 9% from $20.2 million in 2002 to $22.0 million in 2003 as a result of higher southbound trailer and auto volumes compared to the previous year's quarter. The Company had an increase of $1.3 million in revenue from additional southbound volume, $.1 million in increased northbound volume and $.4 million increase in demurrage related revenue partially offset by decreased domestic revenue. Total operating expenses for the three months ended December 31, 2003, increased $.9 million to $22.7 million in 2003 from $21.8 million in 2002 primarily related to an increase in volume. Salary, wages and benefits increased $.2 million or 4.0% as a result of increased fringe benefit costs and worker's compensation insurance premiums. Fuel expense increased $.2 million primarily as a result of higher tug fuel prices. Operating and maintenance expense increased $1.1 million or 21.72% due to an increase of $.3 million of stevedoring costs due to higher volumes, $.2 million related to a vessel drydocking and $.4 of higher equipment maintenance cost.
The Company's overall volume to and from Puerto Rico for the fourth quarter of 2003 increased 6.5% from the same period last year. Core southbound volume and related revenue to Puerto Rico increased 9.7% and 8.9% respectively in the fourth quarter of 2003 compared to the similar period of 2002. Utilization of southbound vessel capacity increased to 89.4% during the fourth quarter of 2003 from 86.6% during the same period in 2002.
For the three months ended December 31, 2003 the Company's net loss was $1.4 million compared to the same period in 2002 when the Company had a net loss of $2.4 million
The following table sets forth certain unaudited financial information for the Company for each of the last eight quarters (in thousands):
2002 2003
---- ----
By Quarter
--------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Operating revenues $ 18,017 $ 18,757 $ 18,969 $ 20,210 $ 19,419 $ 22,333 $ 22,619 $ 22,062
Operating (loss) income (583) (328) (1,496) (1,629) (1,819) 79 (152) (703)
Net loss $ (1,311) $ (1,130) $ (2,266) $ (2,396) $ (2,516) $ (665) $ (863) $ (1,411)
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 changes in demand for transportation services offered by the Company, any changes in rate levels for transportation services offered by the Company, the Company maintaining or securing sufficient liquidity to operate its business, continued support of its lenders, vendors and employees, economic recessions and severe weather.
RISKS
COMPANY LIQUIDITY
The Company's business plan for 2004 is to continue its effort to attract increased volume, increase rates and manage operating costs in order to attain profitable operations. During the first quarter of 2004, the Company has commenced new contracts with increased rates for both new and existing customers resulting in significantly improved rate levels and increased other charges over 2003 levels. 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.
The following table adjusted for April 2004 refinancing, summarizes the Company's contractual obligations and commitments. See Notes 5, 6 and 7 of the Notes to Financial Statements for additional information regarding transactions with related parties, long-term debt and operating leases.
Contractual obligations Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------------------------------------------------------------------------------------------------
Long-term Debt Obligations $ 37,031,292 $ 1,683,953 $ 2,904,312 $ 14,993,387 $ 17,449,640
Due to affiliates 6,308,768 386,127 660,000 5,262,641
Operating Lease Obligations 99,734,763 22,764,881 38,024,356 18,598,242 20,347,284
------------ ----------- ----------- ----------- -----------
Total $ 143,074,823 $ 24,834,961 $ 41,588,668 $ 38,854,270 $ 37,796,924
The Company has no commitments to make any capital purchases in 2004. Purchase obligations are reflected in accounts payable and accrued liabilities on the balance sheet and are not reflected in the above table. Other purchase obligations are not material.
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, 2003, the Company expensed $7.3 million in charterhire of which $1.1 million was paid with Series B Preferred Stock.
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 an advance 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 accrued 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.
The Company received a secured loan of approximately $5 million from an affiliate, Transportation Receivables 1992. This loan was made to the Company in May 2002. In 2004 the repayment date of such loan was extended to April 1, 2005. In addition, the same affiliate holds $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 $1.02 per common share, which was a 23.3% discount off 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 Each share of Series A Preferred Stock is convertible into 100 shares of common stock. 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 50.5% of the outstanding shares of the Company's Common Stock and 100% of the Series A Preferred Stock, resulting in 53.8% 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 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. Voyage revenue is recognized ratably over the duration of a voyage based on the relative transit time in each reporting period; commonly referred to as the "percentage of completion" method. Voyage expenses are recognized as incurred.
Useful Life and Salvage Values. The Company reviews the selections of estimated useful lives and salvages values for purposes of depreciating its property and equipment. Depreciable lives of property and equipment range from 2 to 40 years. Estimates of salvage value at the expected date of trade-in or sales are based on the expected values of equipment at the time of disposal. The accuracy of these estimates affects the amount of depreciation expense recognized in a period and ultimately, the gain or losses on the disposal of the asset.
Impairment Of Long-Lived Assets. The Company evaluates the carrying amounts and periods over which long-lived assets are depreciated to determine if events have occurred which would require modification to their carrying values or useful lives. In evaluating useful lives and carrying values of long-lived assets, the Company reviews certain indicators of potential impairment, such as undiscounted projected operating cash flows, replacement costs of such assets, business plans and overall market conditions. The Company determines undiscounted projected net operating cash flows and compares it to the carrying value. In the event that impairment occurred, the Company would determine the fair value of the related asset and record a charge to operations calculated by comparing the asset's carrying value to the estimated fair value. The Company estimates fair value primarily through the use of third party valuations. In 2001, the Company recorded an impairment charge on the Company's TBC barges amounting to approximately $3.8 million. There were no impairments in 2002 or 2003.
Uncollectible Accounts. The Company records an allowance for doubtful accounts primarily based on historical uncollectible amounts. The Company also takes into account known factors surrounding specific customers and overall collection trends. The Company's process involves performing ongoing credit evaluations of customers, including the market in which they operate and the overall economic conditions. The Company continually reviews historical trends and makes adjustments to the allowance for doubtful accounts as appropriate. The Company's allowance for doubtful accounts totaled $683,914 and $895,772 as of December 31, 2003 and 2002, respectively. The change in the allowance for doubtful accounts from 2002 to 2003 resulted primarily from improved market condition with respect to the Puerto Rico trade.
Income taxes. Generally accepted accounting principles require that the Company record a valuation allowance against deferred tax assets, if it is "more likely than not" that the Company will not be able to utilize it to offset future taxes. Due to the Company's history of unprofitable operations, the Company has 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) 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 net deferred tax asset, including deferred tax assets associated with net operating loss carryforwards ("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 less management 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 July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities," ("Statement 146"). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues 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") ("Issue 94-3"). The principal difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in Statement 146 is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, Statement 146 eliminates the definition and requirements for recognition of exit costs in Issue 94-3. Statement 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of Statement 146 did not have a material impact on the Company's financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.5, 57, and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies 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 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003 the FASB issued FASB Staff Position No. FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities," which defers the implementation date for public entities that hold an interest in a variable interest entity or potential variable interest entity from the first fiscal year or interim period beginning after June 15, 2003 to the end of the first interim or annual period ending after December 15, 2003. This deferral applies only if 1) the variable interest entity was created before February 1, 2003 and 2) the public entity has not issued financial statements reporting that variable interest entity in accordance with FIN 46, other than disclosures required by paragraph 26 of FIN 46. In December 2003, the FASB issued a revision to FIN 46 ("FIN 46R"), which clarifies and interprets certain provisions of FIN 46, without changing the basic accounting model of FIN 46. The Company is currently evaluating the impact, if any on the Company's financial position, liquidity, or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." It is effective for contracts entered into or modified after September 30, 2003, except as stated within the statement, and should be applied prospectively. SFAS No. 149 did not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable noncontrolling (minority) interests which on October 29, 2003, the FASB decided to defer indefinitely. The adoption of SFAS No. 150 did not have a material impact on the Company's financial statements.