Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS:

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. As a result of the reduction of vessel capacity in the trade lane in 2002, the Puerto Rico lane stabilized and competition became less intense during 2003 which has continued into 2004. The Company increased utilization of its vessels during 2003. The Company's utilization has been maintained over the last eighteen months while rates within the Puerto Rico lane have increased.

Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003

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The following table sets forth the indicated items as a percentage of net revenues for three months ended June 30, 2004 and 2003:

 

Operating Statement - Margin Analysis (% of Operating Revenues) Three Months Ended June 30, -------------------------------- 2004 2003 ---------------- ------------- Operating Revenues 100% 100% Salaries, wages, and benefits 16 17 Rent and purchased transportation: Related Party 8 8 Other 24 28 Fuel 9 10 Operating and maintenance (exclusive of depreciation shown separately below) 25 26 Taxes and licenses (0) 1 Insurance and claims 3 3 Communications and utilities 1 1 Depreciation and amortization 3 4 (Gain) Loss on sale of equipment 0 (0) Other operating expenses 4 3 ---------------- ---------- Total Operating Expenses 93 100 Operating income (loss) 7 0 Net interest expense (3) (3) ---------------- ---------- Net income (loss) 4% -3% ================ ==========

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 100% during the three months ended June 30, 2003 to 93% during the three months ended June 30, 2004. This improvement is more fully explained under the Operating Expense caption set forth below.

Revenues

The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried:

Revenue & Volume changes for Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003.

 

<CAPTION> Overall Southbound Northbound ---------------- ----------------- ---------------- <S> <C> <C> <C> Volume Percent Change: Core container & trailer 1.1% (6.1)% 23.8% Auto and other cargos 2.6% 10.1% (44.2)% SOLs (13.1)% (7.9)% (57.9)% Domestic linehaul (29.9)% Revenue Change ($millions): Core container & trailer $ 0.1 $ (0.2) $ 0.3 Auto and other cargos 0.5 0.5 (0.1) SOLs 0.0 0.0 (0.0) Domestic linehaul (0.3) Other Revenues 1.5 --------- Total Revenue Change $ 1.8 ---------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 91.5% for the three months ended June 30, 2004, compared to 94.9% for the three months ended June 30, 2003.

Revenue for the three months ended June 30, 2004 was $24.1 million, compared to $22.3 million for the three months ended June 30, 2003. The increase in revenue was primarily due to increased freight rates and increased assessorial charges. The Company's fuel surcharge is included in the Company's revenues and amounted to $1.5 million during the three months ended June 30, 2004 compared to $1.0 million in the three months ended June 30, 2003. The Company's demurrage is included in the Company's revenues and amounted to $0.8 million during the three months ended June 30, 2004 compared to $0.6 million in the three months ended June 30, 2003. Demurrage is a charge assessed for failure to return empty freight equipment on time. The increase in demurrage revenue was due to the strengthening of Puerto Rico market and better billing methods utilized in 2004. The Company's charterhire is included in the Company's revenues and amounted to $0.2 million during the three months ended June 30, 2004 compared to no charterhire in the three months ended June 30, 2003. Charterhire is rental revenue for vessels not in use in liner service. Southbound core container & trailer volume was lower during the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily due to lower volume from a specific customer.

Operating Expenses

Salary, wages and benefits increased by $0.1 million or 3.2% due to increased workers compensation expense and incentive related compensation partially offset by reductions in healthcare cost due to a change in the group healthcare insurance carrier and driver payroll due to how inland transportation requirements are serviced. Purchased transportation other than to a related party decreased $0.6 million or 8.8% primarily due to the increased use of rail transportation which is more cost effective than trucking. Taxes and licenses decreased $0.3 million or 133.6% due primarily to a ruling by the Puerto Rican Supreme Court in the Company's favor concerning a previously accrued and disputed Volume of Business Tax in the Guaynabo Municipality of Puerto Rico. Operating and maintenance expense increased $0.3 million or 5.8% principally due to $0.2 million in drydocking charges and $0.1 in transportation equipment repairs. The Company minimized the effect of higher fuel costs by replacing two tugs with more fuel-efficient tugs in the year and with more utilization of rail transportation versus trucking. As a result, the Company's operating ratio improved to 93% during the three months ended June 30, 2004 from 100% during the three months ended June 30, 2003.

As a result of the factors described above, the Company reported a net income of $1.0 million for the three months ended June 30, 2004 compared to net loss of $0.7 million in the same period in 2003.

Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

The following table sets forth the indicated items as a percentage of net revenues for three months ended June 30, 2004 and 2003:

 

Operating Statement - Margin Analysis (% of Operating Revenues) <CAPTION> Six Months Ended June 30, -------------------------------------- 2004 2003 ---------------- ---------------- <S> <C> <C> Operating Revenues 100% 100% Salaries, wages, and benefits 16 19 Rent and purchased transportation: Related Party 8 9 Other 24 28 Fuel 10 11 Operating and maintenance (exclusive of depreciation shown separately below) 25 25 Taxes and licenses 0 1 Insurance and claims 3 3 Communications and utilities 1 1 Depreciation and amortization 3 4 (Gain) Loss on sale of equipment 0 (0) Other operating expenses 4 4 ---------------- ---------------- otal Operating Expenses 94 104 Operating income (loss) 6 (4) Net interest expense (3) (3) ---------------- ---------------- Net income (loss) 3% (8%) ================ ================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 104% during the six months ended June 30, 2003 to 94% during the six months ended June 30, 2004. 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 by sailing route and freight carried:

Revenue & Volume changes for Six Months ended June 30, 2004 compared to Six Months Ended June 30, 2003.

 

<CAPTION> Overall Southbound Northbound ---------------- ----------------- ---------------- <S> <C> <C> <C> Volume Percent Change: Core container & trailer 6.1% (0.2)% 27.1% Auto and other cargos 3.4% 4.8% (6.2)% SOLs 3.4% 10.3% (50.0)% Domestic linehaul (35.9)% Revenue Change ($millions): Core container & trailer $ 1.9 $ 1.3 $ 0.6 Auto and other cargos 1.0 0.9 0.1 SOLs 0.2 0.2 (0.0) Domestic linehaul (0.5) Other Revenues 2.7 ---------- Total Revenue Change $ 5.3 ---------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 91.7% for the six months ended June 30, 2004, compared to 92.6% for the six months ended June 30, 2003.

Revenue for the six months ended June 30, 2004 was $47.0 million compared to $41.8 million for the six months ended June 30, 2003. The increase in revenue was primarily due to increased freight rates and increased assessorial charges. The Company's fuel surcharge is included in the Company's revenues and amounted to $2.7 million during the six months ended June 30, 2004 compared to $1.8 million during the six months ended June 30, 2003. The Company's demurrage is included in the Company's revenues and amounted to $1.7 million during the six months ended June 30, 2004 compared to $0.9 million during the six months ended June 30, 2003. 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 $0.4 million during the six months ended June 30, 2004 compared to no charterhire during the six months ended June 30, 2003. Charterhire is rental revenue for vessels not in use in liner service.

Operating Expenses

Purchased transportation other than to a related party decreased $0.3 million or
3.0% primarily due to the increased use of rail transportation which is more cost effective than trucking. Operating and maintenance expense increased $1.1 million or 10.4% principally due to $0.3 million in drydocking charges, $0.5 in transportation equipment repairs and $0.3 in cargo handling expense due to heavy volumes in the period. Taxes and licenses decreased $0.3 million or 76.9% due primarily to a ruling by the Puerto Rican Supreme Court in the Company's favor concerning a previously accrued and disputed Volume of Business Tax in the Guaynabo Municipality of Puerto Rico. As a result, the Company's operating ratio improved to 94% during the six months ended June 30, 2004 from 104% during the six months ended June 30, 2003.

As a result of the factors described above, the Company reported a net income of $1.3 million for the six months ended June 30, 2004 compared to a net loss of $3.2 million for the six months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $0.7 million in the first six months of 2004 compared to net cash used in operations of $30,920 in 2003. This represented an improvement of $0.7 million primarily resulting from an increase in net income to $1.3 million, partially offset by $1.9 million increase in accounts receivable between periods due to increased sales and $1.5 million decrease in accounts payable between periods due to larger cash availability as a result of the Company `s new line of credit. Net cash used by investing activities was $0.4 million in the first six months of 2004 compared to net cash provided by investing activities of $0.1 million in 2003. The change is due primarily from payments made towards the purchase of containers currently under lease by the Company. Net cash provided by financing activities was a positive $1.1 million in the first six months 2004 compared to net cash used in financing activities of negative $0.7 million in 2003 representing a difference of $1.8 million. The increase is due principally from the net proceeds of the revolver. At June 30, 2004, cash amounted to approximately $1.7 million, working capital was a positive $3.3 million, and stockholders' equity was approximately $6.0 million.

At March 31, 2004, the Company had $13.4 million due under its senior credit facility, which expired January 31, 2004. In addition, the Company had $8.1 million due to related parties, all of which was due in 2004. In April 2004, after receiving extensions from its then existing senior lender, the Company refinanced this debt with a new senior lender. The new 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 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 requires the Company maintain a minimum availability of $2.0 million. 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 March 31, 2004, the former senior credit facility was secured by net receivables of $13.0 million and revenue equipment of $13.8 million. Related Party debt of $4.9 million, due in October 2004, has been scheduled for payment in May 2007. Additionally, $0.7 million of the 2004 scheduled repayment of related party debt has been rescheduled for 36 monthly principal payments commencing January 2005. Effective March 1, 2004 the Company's affiliate, Kadampanattu Corp., agreed to defer $1.0 million of charterhire 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 vessel utilization, 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. As of June 30, 2004, the Company had $15.2 million drawn under the credit facility against a borrowing base of $15.7 million.

CRITICAL ACCOUNTING POLICIES

The Company believes that there have been no significant changes to our critical accounting policies during the three months ended June 30, 2004, as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.

SUBSEQUENT EVENTS

The Company announced in July 2004 that it had reached an agreement where it was able to purchase its affiliate, Kadampanattu Corp. for $32.0 million. Under the agreement, the Company has the ability until the end of 2004, to purchase Kadampanattu Corp., which owns roll-on/ roll-off vessels that the Company currently charters for $7.3 million per year and the $24.0 million in the Company's Series B Preferred Stock. The Company is currently exploring options to finance this purchase through a combination of debt and equity. The Company expects that such a purchase would be immediately accretive to the Company's earnings.

On July 23, 2004 the holder of the Company's Series A Preferred Stock exercised its right to convert such stock into 1,955,000 shares of common stock of the Company. The holder of preferred shares, Transportation Receivables 1992, LLC, is wholly-owned by the Estate of M. P. McLean an affiliate of the Company.

FORWARD-LOOKING STATEMENTS

This report, particularly the preceding discussion of "Liquidity and Capital Resources" and "Known Trends During Second Quarter of 2004" contain statements that may be considered as forward-looking or predictions concerning future operations. 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 the price of fuel, changes in demand for transportation services offered by the Company, changes in services offered by the Company's competitors, risks of transportation generally and changes in rate levels for transportation services offered by the Company.