March 31, 2006
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
The Company earns 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 earns 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 Company's improvement in operating income and the resulting operating ratio during 2005 are primarily due to significant reductions in rent expense on vessels and equipment, partially offset by the related increase in depreciation expense and interest expense, which result from the assets purchased in the transaction completed in December 2004, in addition to an increase in revenue primarily resulting from increased rates in the Puerto Rico trade lane in which the Company operates.
RESULTS OF OPERATIONS
The following table sets forth the indicated items as a percentage of net revenues for the years ended December 31, 2005, 2004 and 2003.
Operating Statement - Margin Analysis
(% of Operating Revenues)
2005 2004 2003
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Operating Revenues 100% 100% 100%
Salaries, wages, and benefits 15 15 18
Rent and purchased transportation:
Related Party - 7 8
Other 21 24 28
Fuel 13 10 10
Operating and maintenance (exclusive of
depreciation shown separately below) 22 24 25
Taxes and licenses 0 0 1
Insurance and claims 3 3 3
Communications and utilities 1 1 1
Depreciation and amortization 4 3 4
(Gain) Loss on sale of assets 1 (0) (0)
Other operating expenses 3 4 4
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Total Operating Expenses 83 91 103
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Operating income (loss) 17 9 (3)
Net interest expense (10) (5) (3)
Provision for Income taxes (0) - -
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Net income (loss) 7% 4% (6)%
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The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 91% in 2004 to 83% in 2005. 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:
Volume & Revenue Changes 2005 compared to 2004
Overall Southbound Northbound
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Volume Percent Change:
Core container & trailer -3.4% -0.4% -12.2%
Auto and other cargos -22.9% -17.1% -67.3%
SOLs (Shipper owned equipment loads) -25.7% -27.8% -1.1%
Domestic linehaul -66.5%
Revenue Change ($millions):
Core container & trailer $ 3.3 $ 3.7 $ (0.4)
Auto and other cargos (2.8) (2.1) (0.7)
SOLs (0.3) (0.3) (0.0)
Domestic linehaul (0.5)
Other Revenues 7.4
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Total Revenue Change $ 7.1
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The increase in core container and trailer revenue, and other revenue is primarily due to increases in accessorial charges and freight rates, offset by volume decreases.
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 88.9% during 2005, compared to 96.5% during 2004. Southbound trailer and container volume remained relatively stable but vessel capacity utilization decreased due to a decrease in the auto and other cargo volume southbound. The Company will monitor the auto and other cargo market and make adjustments as necessary to best utilize its vessel capacity.
Domestic line haul revenue is generated for moves that originate and terminate within the continental United States. The decrease in domestic line haul revenue was primarily the result of less domestic linehaul within the continental United States, as our land based revenue equipment was reallocated to service the primary continental United States to Puerto Rico lane.
The increase in other revenues is primarily attributable to an increase in fuel surcharges, demurrage, security charges and charterhire. The Company's fuel surcharge is included in the Company's revenues and amounted to $11.9 million in 2005 and $7.0 million in 2004. Demurrage, a charge assessed for failure to return empty freight equipment on time, is also included in the Company's revenues and amounted to $3.1 million in 2005 in comparison to $2.9 million in 2004. During 2005 total charterhire revenue amounted to $1.0 million in 2005 and $0.7 million in 2004. Charterhire is rental revenue for vessels not in use in a liner service. Security Charges are charges to cover the Company's expenses beyond the normal security required to ensure the safety of the Shipper's cargo. These charges amounted to $1.8 million in 2005 in comparison to $1.3 million in 2004.
Operating expenses
Operating expenses decreased by $2.6 million, or 2.8% from $90.2 million in 2004 to $87.6 million for 2005. This decrease was due primarily to the purchase of primarily leased fixed assets in late 2004 resulting in a lower rent and purchased transportation expense and offset partially by higher depreciation expense. This change was also offset by higher fuel expenses. Salaries and benefits increased by $.8 million or 5.3 % primarily due to increases in salary and incentive based compensation as a result of operating performance combined with increased health care benefits cost, partially offset by lower workers compensation expenses. The Related party purchased transportation decrease of $6.7 million was the result of the purchase of the Ro/Ro Barges in December of
2004. Rent and purchased transportation decreased by $1.4 million or 5.8% due to the Company purchasing equipment in December 2004 that was previously leased and the increased usage of rail transportation instead of truck transportation. Fuel expense increased $3.6 million or 35.6% as a result of a $3.0 million increase in tug fuel and a $.6 million increase in truck fuel expense due to market price increases. Operating and maintenance expense decreased $.5 million or 2.3% primarily due a $.6 million decrease in tire expenses in 2005 due to 2004 Tire Replacement Program. Depreciation and amortization expense increased by $1.3 million or 43.4% due to the Company's purchase of property, plant and equipment, including the RO/RO barges and revenue equipment purchased with the proceeds of the senior secured notes issued December 2004. Loss on sale of assets increased by $.5 million primarily due to the sale of a portion of the Company's over the road equipment. Other operating expenses decreased $0.2 million due to lower professional fees in 2005. As a result, the Company's operating ratio improved to 83% during 2005 from 91% during 2004.
During 2004, the Company had an appraisal performed on its vessels, containers and chassis, which included a review of the useful lives. The results of this appraisal indicated an increase in the useful life of these assets, from the lives originally estimated by the Company. As such, management revised its estimate of the remaining useful lives of chassis, VTMs (Specialized containers for carrying vehicles), vessels and containers to extend the useful live by approximately 6 to 10 years. During 2004, a change in accounting estimate was recognized to reflect this decision, resulting in a decrease of depreciation expense for 2004 by approximately $409,000 and as an increase in net income of approximately $409,000 or $.03 per basic and diluted share.
Interest Expense
Interest expense increased to $10.5 million in 2005 from $4.2 million in 2004 primarily due to the senior secured debt, which was only outstanding for a portion of the Fourth Quarter of 2004 compared with the entire year in 2005
Income taxes
Income taxes are calculated using the liability method specified by SFAS No. 109 "Accounting for Income Taxes". Valuation allowances are provided against deferred tax assets if it is considered "more likely than not" that some portion or the entire deferred tax asset will not be realized.
During 2005, the Company realized a reversal of approximately $10.9 million of its' deferred tax asset valuation allowance. As of December 31, 2005, management has recorded approximately $10.0 million as a valuation allowance on its deferred tax asset. Management is continuously evaluating the deferred tax valuation allowance, to determine what portion of the deferred tax asset, if any, may be realized in the future. Management's evaluation includes, among other things, such factors as a history of profitability, a substantial history of operations upon which to base a forecast and a history of accurately forecasting future results of operations.
For the year ended December 2005, while the Company had sufficient Net Operating Loss carryforwards to offset its taxable income, for Alternative Minimum Tax purposes, a corporation is only allowed to reduce (through available NOLs) its AMTI (alternative minimum taxable income) by 90%. The remaining 10% is taxed at a 20% AMT rate. The majority of the current tax expense is related to AMT Tax Due for 2005 and 2004. See Note 9 to the financial statements.
As a result of the factors described above the Company reported net income of $7.8 million for 2005 compared to net income of $4.4 million in 2004.
Preferred Stock Series "B"
Undeclared Cumulative Dividends - In 2004, the Company recorded undeclared dividends on preferred stock series "B" of $1,115,796. These dividends were recorded because they were contractual obligations, the obligation to pay the dividend was waived in 2004.
Preferred Stock Accretion -. In 2004, the Company recorded Preferred Stock Series "B" accretion of $515,845.
Excess Consideration Transferred to the Holders of the Preferred Stock Over the Carrying Amount - In connection with the acquisition of K-Corp on December 1, 2004, the Company redeemed the Series "B" Preferred Stock for $24 million. In connection with the redemption, the Company recorded the excess of the consideration transferred ($24 million) to the holders of the preferred stock over the carrying amount of the preferred stock, ($23.5 million), and reflected as a subtraction of $0.5 million from net earnings available to common shareholders. This transaction was recorded in accordance with Emerging Issues Task Force D-42 "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock"
As a result of the acquisition of K-Corp and the redemption of the Series "B' Preferred Stock, the Company did not have these transactions in 2005 and will not in subsequent years.
Vessels
The Company owns five TBCs and two ROROs. The Company's regular liner service between San Juan, Puerto Rico and Jacksonville, Florida includes two of the TBCs and the ROROs.
Management continues to evaluate the use of the three vessels not currently used in the liner service and no determination has been made as to their final use. As an alternative to their current use management has used one vessel as a ready spare, relieving the other vessels in the fleet during periods dry-docking in order to protect market share and keep established shipping routes open, and has chartered the other vessels on a short term basis to third parties. Ultimately management intends to use all of these vessels in its current liner service or on expanded trade routes.
It is the management's belief that based on the current cash flows derived from the TBC vessels and their current market value as determined by an independent appraiser, that the current excess capacity of the two vessels, available for charter, does not indicate an impairment. In the first half of 2006, a TBC vessel is replacing a RORO vessel in the Jacksonville to San Juan trade lane while the RORO vessels complete their Dry-Docking / Recertification process.
Year ended December 31, 2004 Compared to Year ended December 31, 2003
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:
Page 17
Volume & Revenue Changes 2004 compared to 2003
Overall Southbound Northbound
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Volume Percent Change:
Core container & trailer 4.1% 0.2% 17.5%
Auto and other cargos 15.4% 16.0% 11.5%
SOLs 16.0% 19.2% (11.7)%
Domestic linehaul (54.3)%
Revenue Change ($millions):
Core container & trailer $ 4.2 $ 3.4 $ 0.8
Auto and other cargos 3.3 3.1 0.2
SOLs 0.4 0.4 (0.0)
Domestic linehaul (1.2)
Other Revenues 5.6
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Total Revenue Change $ 12.3
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The increase in core container and trailer revenue, auto and other revenue is due to increased vessel capacity utilization and increased rates per equivalent units.
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 96.5% during 2004, compared to 93.3% during 2003.
Domestic line haul revenue is for moves that originate and terminate within the continental United States. The decrease in domestic line haul revenue was primarily the result of less domestic linehaul within the continental United States, because of increased demand in the Puerto Rico shipping lane. This change in demand resulted in less equipment available for Domestic linehaul.
The increase in other revenues is primarily attributable to an increase in fuel surcharges, demurrage, security charges and charterhire. The Company's fuel surcharge is included in the Company's revenues and amounted to $7.0 million in 2004 and $4.0 million in 2003. Demurrage, a charge assessed for failure to return empty freight equipment on time, is also included in the Company's revenues and amounted to $2.9 million in 2004 in comparison to $2.2 million in 2003. During 2004 total charterhire revenue amounted to $0.7 million in 2004 and $0.4 million in 2003. Charterhire is rental revenue for vessels not in use in a liner service. Security Charges are charges to cover the Company's expenses beyond the normal security required to ensure the safety of the Shipper's cargo. These charges amounted to $1.3 million in 2004 in comparison to $.3 million in 2003.
Operating expenses
Operating expenses increased by $1.2 million, or 2.1% from $89.0 million in 2003 to $90.2 million for 2004. This increase was due to volume-related increases in substantially all areas other than salaries and benefits, related party purchase transportation, other purchase transportation and taxes and licenses which decreased 3.5%, 8.5%, 4.5% and 60.0%, respectively. The decrease in salaries and benefits was due to lower driver payroll due to fewer miles driven by Company drivers. The decrease in related party purchase transportation was the result of the purchase of the Ro/Ro Barges in December. The decrease in rent of other purchase transportation was the result of the Company purchasing equipment that was previously leased and the increased usage of rail transportation instead of truck transportation. The decrease in taxes and license is associated with a favorable legal determination in Puerto Rico, which resulted in the reversal of a $.3 million accrual recorded in 2001. Fuel expense increased $1.2 million or 13.8% primarily as a result of a $1.4 million increase in tug fuel from increased fuel prices partially offset by a decrease of $0.2 million in truck
fuel expense resulting from increased use of rail transportation. Operating and maintenance expense increased $1.8 million or 8.3% due to $1.2 million in higher cargo handling costs related to increased volume; $0.3 million increase in repairs and maintenance due to a detailed survey of revenue equipment and increased dry docking and vessel maintenance expense and marine terminal expenses. Other operating expenses increased $0.8 million due to professional fees during 2004; an increase in the provision for doubtful accounts is primarily due to the increase in revenues during 2004. Depreciation expense declined $0.3 million or 10% to $3.1 million in 2004 from $3.4 million in 2003, primarily due to a change in estimated lives of depreciable property as further discussed below, partially off-set by an increase in depreciable assets. And as a result, the Company's operating ratio improved to 92% during 2004 from 103% during 2003.
In August 2004, the Company extended the estimated remaining life for its TBC barges by twelve years and its containers, VTMs and chassis by seven and nine years respectively, to more accurately reflect the remaining useful life of its equipment. This change in estimate was recorded prospectively and resulted in reduction in depreciation expense of approximately $409,000 or $0.03 per common share for 2004.
Interest Expense
Interest expense increased to $4.2 million in 2004 from $2.9 million in 2003 primarily due to higher interest rates on the Company's floating rate indebtedness and the write-off of approximately $0.5 million in deferred loan costs associated with the Company's prior term loan with a variable interest rate. In December of 2004, the term loan indebtedness was satisfied with the proceeds of the $85 million in senior secured debt.
Income taxes
Income taxes are calculated using the liability method specified by SFAS No. 109 "Accounting for Income Taxes". Valuation allowances are provided against deferred tax assets if it is considered "more likely than not" that some portion or the entire deferred tax asset will not be realized.
During 2004 the Company realized a reversal of approximately $1.7 million of its deferred tax asset, from which the management has recorded approximately $21.0 million as a valuation allowance for the current year. Management is continuously evaluating the deferred tax valuation allowance, to determine what portion of the deferred tax asset, if any, may be realized in the future. Management's evaluation includes, among other things, such factors as a history of profitability, a substantial history of operations upon which to base a forecast and a history of accurately forecasting future results of operations.
As a result of the factors described above the Company reported net income of $4.4 million for 2004 compared to net loss of $5.5 million in 2003.
Preferred Stock Series "B"
Undeclared Dividends - The undeclared dividends on the preferred stock series "B" increased to $1,115,796 in 2004 from $846,385 in 2003, primarily due to increases in the contractual dividend rate from 2003. These dividends will never be paid and are recorded because they were contractual obligations.
Preferred Stock Accretion - The Preferred Stock Series "B" accretion decreased to $515,845 in 2004 from $980,745 in 2003, due to the recognition of the implied discount rate, which was applicable to the Series "B" Preferred Stock in accordance with the Staff Accounting Bulletin No. 68 "Increasing Rate Preferred Stock", through December 1, 2004.
Excess Consideration Transferred to the Holders of the Preferred Stock Over the Carrying Amount - In connection with the acquisition of K-Corp on December 1, 2004, the Company redeemed the Series "B" Preferred Stock for $24 million. In connection with the redemption, the Company recorded the excess of the consideration transferred ($24 million) to the holders of the preferred stock over the carrying amount of the preferred stock, ($23.5 million), and reflected as a subtraction of $0.5 million from net earnings available to common shareholders. This transaction was recorded in accordance with Emerging Issues Task Force D-42 "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock"
As a result of the acquisition of K-Corp and the redemption of the Series "B' Preferred Stock, the Company will not have these transactions in 2005 and subsequent years.
DIVIDENDS
The Company has not declared or paid dividends on its common stock during the past five years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $13.6 million in 2005 compared to net cash provided by operations of $3.1 million in 2004. This represented an increase of $10.5 million from 2004. $9.2 million of the improvement was attributable to increased net income, an improvement in collection activity and timing of payments related to accounts payable. The decrease in accounts payable was facilitated by the Company's improved profitability. Net cash used in investing activities was $6.1 million in 2005 compared to net cash used in investing activity in 2004 of $23.6 million in 2004. This represented a change of $17.4 million from 2004. $19.8 million of the decrease is directly related to the purchase of equipment primarily the Ro/Ro vessels and revenue equipment from the proceeds of the senior secured notes in December 2004 which was offset by the $6.3 million of additions added in 2005. Net cash used in financing activities was $2.3 million in 2005 compared to net cash provided by financing activities of $26.2 million in 2004 representing a change of $28.5 million. In December 2004, the Company issued $85 million of Senior Secured notes, using $24 million to redeem the outstanding preferred shares and $14.3 million to pay down the line of credit. At December 31, 2005, cash amounted to $11.4 million, working capital was a $15.4 million, and stockholders' equity was a $.8 million.
The Company anticipates capital expenditures of approximately $3.1 million during 2006, primarily consisting of $1.7 million for container betterments and $1.4 million to replace two container handling vehicles. The Company will also complete the regulatory dry docking for both of the RORO barges, which began in January and is estimated to be completed by the end of the second quarter. The dry docking cost is estimated to range between $6.0 and $7.0 million. Upon completion, both RORO barges will be certified for a period of five years.
The Company has issued two series of Ship Financing Bonds designated as its 7.07% Sinking Fund Bonds Due September 30, 2022 and 6.52% Sinking Fund Bonds Due March 30, 2023. These bonds are guaranteed by the U.S. government under Title XI of the Merchant Marine Act of 1936, as amended. The aggregate principal amount of the Title XI Bonds outstanding at December 31, 2005 was $20.9 million. In addition, in connection with obtaining the consent of the Secretary of Transportation of the United States of America to offer and sell the notes, in December 2004 the Company deposited approximately $2.0 million into a reserve fund that secures the Title XI Bonds. In 2005 the Company placed an additional $.7 million in this reserve fund.
As of December 31, 2005, the Company was restricted from performing certain financial activities due to it not being in compliance with Title XI debt covenants relating to certain leverage ratios. The provisions of the Title XI
covenants provide that, in the event of noncompliance with the covenants, the Company is restricted from conducting certain financial activities without obtaining the written permission of the Secretary of Transportation of the United States (the "Secretary "). If such permission is not obtained and the Company enters into any of the following actions it will be considered to be in default of the Title XI covenants and the lender will have the right to call the debt. These actions are as follows: (1) acquire any fixed assets other than those required for the normal maintenance of its existing assets; (2) enter into or become liable under certain charters and leases (having a term of six months or more); (3) pay any debt subordinated to the Title XI Bonds; (4) incur any debt, except current liabilities or short term loans incurred in the ordinary course of business; (5) make investments in any person, other than obligations of U.S. government, bank deposits or investments in securities of the character permitted for money in the reserve fund; or (6) create any lien on any of its assets, other than pursuant to loans guaranteed by the Secretary of Transportation of the United States under Title XI and liens incurred in ordinary course of business. However, none of the foregoing covenants will apply at any time if the Company meets certain financial tests provided for in the agreement and the Company has satisfied its obligation to make deposits into the reserve fund. As of December 31, 2005, the Company was in compliance with such restrictions. The debt was not in default, and the lender did not have the right to call the debt.
According to the Title XI debt agreement, the Company is required to deposit a portion of net income into a reserve fund that secures the Title XI Bonds. As of December 31, 2005, the total amount held in deposit is $2.7 million and its current deposit requirement based on earnings through December 2005 is approximately $1.6 million, such amount will be paid in 2006. The Title XI debt . . .