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.

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

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 and has continued to abate in 2004. The Company increased utilization of its vessels during 2003. The Company's utilization has been maintained over the last twenty-one months while rates within the Puerto Rico lane have increased.

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

 

Operating Statement - Margin Analysis (% of Operating Revenues) Three Months Ended September 30, ----------------------------------- 2004 2003 ---------------- ---------------- Operating Revenues 100% 100% Salaries, wages, and benefits 15.5 17.1 Rent and purchased transportation: Related Party 7.7 8.2 Other 24.7 29.9 Fuel 10.4 9.6 Operating and maintenance (exclusive of depreciation shown separately below) 23.0 23.8 Taxes and licenses 0.2 0.7 Insurance and claims 3.4 3.5 Communications and utilities 0.5 0.6 Depreciation and amortization 2.8 3.8 (Gain) Loss on sale of equipment (0.1) (0.1) Other operating expenses 4.0 4.0 ---------------- ---------------- Total Operating Expenses 92.1 101.1 Operating income (loss) 7.9 (0.7) Net interest expense (3.1) (3.1) ---------------- ---------------- Net income (loss) 4.8% (3.8)% ================ ================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 101% during the three months ended September 30, 2003 to 92% during the three months ended September 30, 2004.

 

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 September 30, 2004 compared to Three Months Ended September 30, 2003. Overall Southbound Northbound ---------------- ----------------- ---------------- Volume Percent Change: Core container & trailer -2.8% -3.7% 0.0% Auto and other cargos 26.9% 29.1% 10.0% SOLs 0.2% -1.2% 16.0% Revenue Change ($millions): Core container & trailer $ 0.1 $ 0.2 $ (0.1) Auto and other cargos 0.9 1.0 (0.1) SOLs (0.1) (0.1) 0.0 Other Revenues 0.4 --------- Total Revenue Change $ 1.3 ---------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 94.9% for the three months ended September 30, 2004, compared to 93.3% for the three months ended September 30, 2003.

Revenue for the three months ended September 30, 2004 was $23.9 million, compared to $22.6 million for the three months ended September 30, 2003. The increase in revenue was primarily due to increased freight rates and increased accessorial charges. The Company's fuel surcharge is included in the Company's revenues and amounted to $1.9 million during the three months ended September 30, 2004 compared to $1.1 million in the three months ended September 30, 2003. The Company's demurrage is included in the Company's revenues and amounted to $0.6 million during the three months ended September 30, 2004 compared to $0.7 million in the three months ended September 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 $0.1 million during the three months ended September 30, 2004 compared to $0.2 millions charterhire in the three months ended September 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 September 30, 2004 compared to the three months ended September 30, 2003 primarily due to hurricane related delays in the sailing schedule.

This past hurricane season was unusually active with four hurricanes striking various parts of Florida during August and September. As a result of port closings and weather resulting from these hurricanes, the Company's schedules were affected and the timing of certain sailings was delayed. Two northbound sailings that were originally scheduled for September did not occur until early October, resulting in approximately $200,000 less revenue in September. In addition, volume and revenue in September was less than what it would have been as the operations of various customers, particularly certain customers located in Florida, were disrupted. The Company has now caught up on its schedule and no sailings were actually lost. We believe that the effect of these hurricanes will primarily be one of timing in terms of when revenue occurs rather than any meaningful actual lost revenue.

Operating Expenses

Salary, wages and benefits decreased by $0.2 million or 4.1% due to lower company driver miles due to a shift to rail transportation within our intermodal model. Purchased transportation other than to a related party decreased $0.8 million or 12.56% primarily due to the increased use of rail transportation which is more cost effective than trucking and also decreased as a result of our August and September 2004 container purchase. Taxes and licenses decreased $0.1 million or 68.91% 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. Fuel cost increased by $0.3 million or 14.3% primarily due to the increases on the world market for crude oil which minimized the effect of the Company use of more fuel efficient tugs. As a result, the Company's operating ratio improved to 92% during the three months ended September 30, 2004 from 101% during the three months ended September 30, 2003.

In August and September of 2004, the Company purchased a group of containers. The containers were part of an operating lease that was due to expire in 2004. The purchase price for the equipment was $1.8 million and the Company obtained financing for $1.4 million related to the transaction. In connection with the purchase, the Company had an appraisal performed, which included a review of the useful lives of its containers and chassis. The results of the appraisal indicated an increase in the useful life of these assets. As such, management revised its estimate of the remaining useful lives of chassis, VTMs (Specialized containers for carrying vehicles) and containers to extend the useful life by approximately 6 years. During the quarter ended September 30, 2004, a change in accounting estimate was recognized to reflect this decision, resulting in an increase in net income of $133,277, or $.01 per basic and diluted share.

In the quarter in which the Kadampanattu transaction discussed in Note 2 to the Financial Statements concludes and in accordance with Topic D-42, "the effect on the calculation of earnings per share for the redemption or induced conversion of preferred stock," the $0.5 million excess of the consideration transferred to holders of the preferred stock over the carrying amount on our books will be subtracted from net income to arrive at net income attributable to common shareholders in the calculation of earnings per share.

If completed, the Company expects that such purchase and refinancing would be immediately accretive to the Company's earnings. In this regard-, on a annual basis purchased transportation expense from a related party of $7.4 million would be eliminated and rent would decrease by $4.1 million. In addition on a annual basis, Interest and Depreciation expense will increase by $6.2 million and $3.3 million respectively, resulting in an estimated favorable impact of $2.0 million.

No tax expense has been recorded by the Company for the period due to its deferred tax asset having a valuation allowance recorded at 100% of the deferred tax asset value. At September 30, 2004 the Company has a net deferred tax asset of approximately $22.0 million which is offset by a 100% valuation allowance. The Company expects to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained.

As a result of the factors described above, the Company reported a net income of $1.2 million for the three months ended September 30, 2004 compared to net loss of $0.9 million in the same period in 2003.

Nine months Ended September 30, 2004 Compared to the Nine months Ended
September 30, 2003

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

 

Operating Statement - Margin Analysis (% of Operating Revenues) Nine Months Ended September 30, -------------------------------------- 2004 2003 ---------------- ---------------- Operating Revenues 100.0% 100.0% Salaries, wages, and benefits 16.0 18.3 Rent and purchased transportation: Related Party 7.8 8.5 Other 24.2 28.6 Fuel 10.1 10.4 Operating and maintenance (exclusive of depreciation shown separately below) 24.1 25.0 Taxes and licenses 0.2 0.8 Insurance and claims 3.4 3.5 Communications and utilities 0.5 0.6 Depreciation and amortization 3.3 4.0 (Gain) Loss on sale of equipment (0.0) (0.0) Other operating expenses 3.8 3.2 ---------------- ---------------- Total Operating Expenses 93.4 102.9 Operating income (loss) 6.6 (2.9) Net interest expense (3.1) (3.4) ---------------- ---------------- Net income (loss) 3.5% (6.3)% ================ ================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 103% during the nine months ended September 30, 2003 to 93% during the nine months ended September 30, 2004.

 

Revenues The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried: 11 Revenue & Volume changes for Nine Months ended September 30, 2004 compared to Nine Months Ended September 30, 2003. Overall Southbound Northbound ---------------- ----------------- ---------------- Volume Percent Change: Core container & trailer 3.0% -1.4% 17.2% Auto and other cargos 5.0% 5.9% -1.9% SOLs 2.2% 5.9% -30.6% Revenue Change ($millions): Core container & trailer $ 2.0 $ 1.5 $ 0.5 Auto and other cargos 1.9 1.9 0.0 SOLs 0.1 0.1 0.0 Other Revenues 2.6 ----------- Total Revenue Change $ 6.6 -----------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 93.9% for the nine months ended September 30, 2004, compared to 94.1% for the nine months ended September 30, 2003.

Revenue for the nine months ended September 30, 2004 was $71.0 million compared to $64.4 million for the nine months ended September 30, 2003. The increase in revenue was primarily due to increased freight rates and increased accessorial charges. The Company's fuel surcharge is included in the Company's revenues and amounted to $4.7 million during the nine months ended September 30, 2004 compared to $2.9 million during the nine months ended September 30, 2003. The Company's demurrage is included in the Company's revenues and amounted to $2.2 million during the nine months ended September 30, 2004 compared to $1.6 million during the nine months ended September 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 $0.5 million during the nine months ended September 30, 2004 compared to $.2 million charterhire during the nine months ended September 30, 2003. Charterhire is rental revenue for vessels not in use in liner service.

This past hurricane season was unusually active with four hurricanes striking various parts of Florida during August and September. As a result of port closings and weather resulting from these hurricanes, the Company's schedules were affected and the timing of certain sailings was delayed. Two northbound sailings that were originally scheduled for September did not occur until early October, resulting in approximately $200,000 less revenue in September. In addition, volume and revenue in September was less than what it would have been as the operations of various customers, particularly certain customers located in Florida, were disrupted. The Company has now caught up on its schedule and no sailings were actually lost. We believe that the effect of these hurricanes will primarily be one of timing in terms of when revenue occurs rather than any meaningful actual lost revenue.

Operating Expenses

Purchased transportation other than to a related party decreased $1.2 million or 6.49% primarily due to the increased use of rail transportation which is more cost effective than trucking and also decreased as a result of our August and September 2004 container purchase. Operating and maintenance expense increased $1.2 million or 7.75% principally due to $0.3 million in drydocking charges, $0.6 in transportation equipment repairs and $0.2 in cargo handling expense due to heavy volumes in the period. Taxes and licenses decreased $0.4 million or 74.5% 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 93% during the nine months ended September 30, 2004 from 103% during the nine months ended September 30, 2003.

In August and September of 2004, the Company purchased a group of containers. The containers were part of an operating lease that was due to expire in 2004. The purchase price for the equipment was $1.8 million and the Company obtained financing for $1.4 million related to the transaction. In connection with the purchase, the Company had an appraisal performed, which included a review of the useful lives of its containers and chassis. The results of the appraisal indicated an increase in the useful life of these assets. As such, management revised its estimate of the remaining useful lives of chassis, VTMs (Specialized containers for carrying vehicles) and containers to extend the useful live by approximately 6 years. During the quarter ended September 30, 2004, a change in accounting estimate was recognized to reflect this decision, resulting in an increase in net income of $133,277, or $.01 per basic and diluted share.

In the quarter in which the Kadampanattu transaction discussed in Note 2 to the Financial Statements concludes and in accordance with Topic D-42, "the effect on the calculation of earnings per share for the redemption or induced conversion of preferred stock," the $0.5 million excess of the consideration transferred to holders of the preferred stock over the carrying amount on our books will be subtracted from net income to arrive at net income attributable to common shareholders in the calculation of earnings per share.

If completed, the Company expects that such purchase and refinancing would be immediately accretive to the Company's earnings. In this regards, on a annual basis purchased transportation expense from a related party of $7.4 million would be eliminated and rent would decrease by $4.1 million. In addition on a annual basis, Interest and Depreciation expense will increase by $6.2 million and $3.3 million respectively, resulting in an estimated favorable impact of $2.0 million.

No tax expense has been recorded by the Company for the period due to its deferred tax asset having a valuation allowance recorded at 100% of the deferred tax asset value. At September 30, 2004 the Company has a net deferred tax asset of approximately $22.0 million which is offset by a 100% valuation allowance. The Company expects to maintain a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained.

As a result of the factors described above, the Company reported a net income of $2.5 million for the nine months ended September 30, 2004 compared to a net loss of $4.0 million for the nine months ended September 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $2.0 million in the first nine months of 2004 compared to net cash used in operations of $.5 million in 2003. This represented an improvement of $2.5 million primarily resulting from an increase in net income of $6.5 million, partially offset by $1.7 million increase in accounts receivable between periods due to increased sales and $2.5 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 $.5 million in the first nine 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 under operating leases by the Company. Net cash used in financing activities was $.9 million in the first nine months of 2004 compared to net cash used in financing activities of $1.3 million in 2003 representing a change of $.4 million. During the second quarter of 2004, the Company's refinanced its term loan and revolving line of credit facility with new lender. The refinancing is reflected as both an increase in proceeds of $8.4 million and principal payments of $7.2 million. At September 30, 2004, cash amounted to approximately $1.0 million, working capital was a positive $3.2 million, and stockholders' equity was $7.2 million.

In April 2004, the Company refinanced its term loan and revolving line of credit with a new senior lender. The facility 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 to maintain a minimum availability of $2.0 million. As of September 30, 2004, the Company had $14.3 million drawn under the credit facility. The borrowing base is based on a percentage of eligible accounts receivable and revenue equipment, as defined. Both obligations are secured by receivables and revenue equipment. Related party debt maturities in the amount of $4.9 million has been rescheduled from October 2004 to May 2007. During 2004, the Company's affiliate, Kadampanattu Corp. has agreed to defer certain charterhire payments to be paid by the Company. The total deferred amount at September 30, 2004 is $2.6 million and is payable in 36 monthly payments commencing January 2005. The Company expects to defer $.3 million in the fourth quarter of 2004.

In August and September of 2004, the Company purchased a group of containers. The containers were part of an operating lease that was due to expire in 2004. The purchase price for the equipment was $1.8 million and the Company obtained financing for $1.4 million related to the transaction.

The Company announced in July 2004 that it had reached an agreement 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 attempting to finance this purchase with borrowed funds aggregating $80.0 million, and also payoff certain of its debt facilities. If completed, the Company expects that such purchase and refinancing would be immediately accretive to the Company's earnings and have a positive effect on cash flow by reducing lease payments to related party by $7.4 million and rent payments by $4.1 million partially offset by higher interest payments of $6.2 million annually.

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.

CRITICAL ACCOUNTING POLICIES

The Company believes that there have been no significant changes to our critical accounting policies during the three months ended September 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.

FORWARD-LOOKING STATEMENTS

This report, particularly the preceding discussion of "Liquidity and Capital Resources" contains 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, and the Company's ability to borrow funds to close the K-Corp acquisition.