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 March 31, 2005 Compared to the Three Months Ended March 31,
2004

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 and 2005. The Company increased utilization of its vessels during 2003. The Company's utilization has been maintained over the last twenty-seven 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 March 31, 2005 and 2004:

 

Operating Statement - Margin Analysis (% of Operating Revenues) Three Months Ended March 31, ----------------------------------- 2005 2004 ---------------- ---------------- Operating Revenues 100% 100% Salaries, wages, and benefits 16.8 16.5 Rent and purchased transportation: Related Party - 8.0 Other 21.3 24.4 Fuel 12.1 10.6 Operating and maintenance (exclusive of depreciation shown separately below) 23.9 24.1 Taxes and licenses 0.5 0.7 Insurance and claims 2.8 3.5 Communications and utilities 0.6 0.5 Depreciation and amortization 4.2 3.5 (Gain) Loss on sale of equipment (0.1) 0.0 Other operating expenses 3.4 3.7 ---------------- ---------------- Total Operating Expenses 85.5 95.5 Operating income 14.5 4.5 Net interest expense (10.5) (2.9) ---------------- ---------------- Net income 4.0% 1.6% ================ ================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 95.5% during the three months ended March 31, 2004 to 85.5% during the three months ended March 31, 2005. The improvement in operating income and the resulting improved operating ratio are primarily due to significant reductions in rent expense on vessels and equipment, partially offset by the related increase in depreciation expense. Both of which were the result of assets purchased in the transaction completed in December 2004 with the proceeds of the $85 million note offering.

 

Revenues The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried: Volume & Revenue Changes 2005 compared to 2004 Overall Southbound Northbound ---------------- ----------------- ---------------- Volume Percent Change: Core container & trailer -5.4% 0.4% -22.3% Auto and other cargos -12.2% -1.3% -71.2% SOLs -36.1% -35.2% -50.0% Revenue Change ($millions): Core container & trailer $ 0.7 $ 1.0 $ (0.3) Auto and other cargos (0.6) (0.3) (0.3) SOLs (0.1) (0.1) (0.0) Other Revenues 1.5 ---------------- Total Revenue Change $ 1.5

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 92.2% for the three months ended March 31, 2005, compared to 91.8% for the three months ended March 31, 2004. Southbound volume showed a small increase in core container and trailer volume and decreases in auto and other cargo, as well as, SOL volume in the first quarter of 2005 as compared to the same period the year earlier. Auto and other cargo northbound showed a significant decrease in volume in the first quarter of 2005 compared to the year earlier period due to a significant drop in military movement in 2005.

Revenue for the three months ended March 31, 2005 was $24.4 million, compared to $22.9 million for the three months ended March 31, 2004. 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 $2.1 million during the three months ended March 31, 2005 compared to $1.2 million in the three months ended March 31, 2004. This increase in the fuel surcharges results from increases in the contractual customer obligations. The Company's demurrage is included in the Company's revenues and amounted to $0.6 million during the three months ended March 31, 2005 compared to $0.8 million in the three months ended March 31, 2004. Demurrage is a charge assessed for failure to return empty freight equipment on time. This decrease in demurrage relates to customers returning the containers on a more timely basis. The Company's charterhire is included in the Company's revenues and amounted to $0.5 million during the three months ended March 31, 2005 compared to $0.2 millions charterhire in the three months ended March 31, 2004. Charterhire is rental revenue for vessels not in use in liner service.

Operating Expenses

Salaries, wages and benefits increased by $0.3 million or 8.26% due primarily to increases in incentive based compensation partially offset by lower driver payroll. Purchased transportation related party decreased $1.8 million or 100% primarily due to the purchase of the RO/RO barges through the use of a portion the proceeds the senior secured notes. Purchased transportation other decreased $.4 million or 6.83% due to exercising lease purchase options in 2004 through the use of a portion of the proceeds of the senior secured notes. Fuel increased by $.5 million or 21.84% due to increases in crude oil prices on the world market during the period. Operating and Maintenance expenses increased by $.3 million or 5.51% due to higher stevedoring costs. Insurance and claims decreased by $.1 million or 17.04% due to audit related credits in 2005. Depreciation and Amortization increased by $.2 million or 28.75% due to 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. As a result, the Company's operating ratio improved to 85.5% during the three months ended March 31, 2005 from 95.5% during the three months ended March 31, 2004.

INTEREST EXPENSE

Net interest expense of $2,577,477 was up 274.7% from the year earlier period due to the issuance of the senior secured notes that funded the purchase of the previously leased vessels and equipment.

PREFERRED STOCK ACCRETION AND UNDECLARED DIVIDENDS

As a result of the preferred stock redemption in December 2004, the Company is no longer required to accrete the discount in accordance with Staff Accounting Bulletin No. 68 "Increasing Rate Preferred Stock" and is no longer obligated to record the undeclared dividends resulting from the contractual dividend rates.

DEFERRED TAXES

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 a net income of $1.0 million for the three months ended March 31, 2005 compared to $0.4 million in the same period in 2004.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $4.2 million in the first three months of 2005 compared to net cash provided by operations of $.9 million in 2004. This represented an improvement of $3.3 million primarily from a decrease in trade receivables by $1.7 million resulting from better collection efforts, which was offset by $1.2 million decrease in accounts payable between periods due to larger cash availability due to the working capital provided by the senior secured notes. Net cash used by investing activities was $.2 million in the first three months of 2005 compared to negligible net cash provided by investing activities in 2004. The change is due primarily to payments made for improvements to revenue equipment. Net cash used in financing activities was $.9 million in the first three months of 2005 compared to net cash used in financing activities of $.3 million in 2004 representing a change of $.6 million primarily the result of a decrease in borrowing from the Company's line of credit in 2005 due to the improvement in the Company's cash position between periods resulting from the increased profitability and available cash from the issuance of the December 2005 Senior Secured Notes. At March 31, 2005, cash amounted to approximately $9.3 million, working capital was a positive $11.5 million, and the capital deficit was $6.1 million.

The Company existing revolving credit facility is subject to a borrowing base formula (approximately $8.0 million at March 31, 2005) based on a percentage of eligible accounts receivable. At March 31, 2005 there were no advances drawn on this credit facility.

As of March 31, 2005 $2.3 million of related party debt is outstanding. This debt arose from deferred charterhire payments to K Corp., has an interest rate of 8.03% and is payable in 36 equal monthly installments beginning in January 2005. The receivable was assigned to the Estate of Malcom P. McLean prior to the Company acquisition of K Corp. The Company's principal payments during the period totaled $.2 million.

The default provisions of the Title XI covenants provide that, in the event of default of 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"). As of March 31, 2005, the Company was restricted from performing certain financial activities due to it not being in compliance with Title XI debt covenants. The Company may not take, without prior written approval, any of the following actions: (1) acquire any fixed assets other than those required for the normal maintenance of our 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 our 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 if the Company meets certain financial tests provided for in the agreement. As of March 31, 2005, the Company had not performed any such restricted financial activities and therefore, the Company was in compliance with such restrictions. Therefore, the debt was not in default, and the lender did not have the right to call the debt.

CRITICAL ACCOUNTING POLICIES

The Company believes that there have been no significant changes to its critical accounting policies during the three months ended March 31, 2005, as compared to those the Company disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2004.