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 for the first nine months of 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.

Three Months Ended September 30, 2005 Compared to the Three Months Ended
September 30, 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 2004 and has continued to abate in 2005.

The following table sets forth the indicated items as a percentage of net revenues for the three months ended September 30, 2005 and 2004:

Operating Statement - Margin Analysis (% of Operating Revenues) Three Months Ended September 30, ------------------------------------ 2005 2004 ---------------- ----------------- Operating Revenues 100% 100% Salaries, wages, and benefits 14.8 15.5 Rent and purchased transportation: Related Party - 7.7 Other 20.8 24.7 Fuel 14.4 10.4 Operating and maintenance (exclusive of depreciation shown separately below) 21.7 23.0 Taxes and licenses 0.1 0.2 Insurance and claims 3.0 3.4 Communications and utilities 0.4 0.5 Depreciation and amortization 4.3 2.5 (Gain) Loss on sale of equipment 0.7 (0.1) Other operating expenses 3.5 3.9 ---------------- ----------------- Total Operating Expenses 83.7 91.7 Operating income 16.3 8.3 Net interest expense (9.9) (3.5) Provision for Income taxes (0.3) 0.0 ---------------- ----------------- Net income 6.1% 4.8% ================ =================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 91.7% during the three months ended September 30, 2004 to 83.7% during the three months ended September 30, 2005, primarily as a result of the accretive results from the senior secured notes transaction completed in December 2004.

 

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 -1.5% 1.2% -9.7% Auto and other cargos -27.6% -24.4% -56.5% SOLs -16.8% -20.7% 20.7% Revenue Change ($millions): Core container & trailer $ 1.4 $ 1.5 $ (0.1) Auto and other cargos (0.9) (0.8) (0.1) SOLs 0.1 0.1 (0.0) Other Revenues 1.8 ---------------- Total Revenue Change $ 2.3 ----------------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 84.1% for the three months ended September 30, 2005, compared to 94.9% for the three months ended September 30, 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.

Revenue for the three months ended September 30, 2005 was $26.2 million, compared to $23.9 million for the three months ended September 30, 2004. The increase in revenue was primarily due to increased southbound trailer volume, freight rates and accessorial charges, including fuel surcharges. The Company's fuel surcharge is included in the Company's revenues and amounted to $3.1 million during the three months ended September 30, 2005 compared to $1.9 million in the three months ended September 30, 2004. This increase in the fuel surcharges results from increases in fuel costs that are passed onto customers. The Company's demurrage is included in the Company's revenues and amounted to $0.9 million during the three months ended September 30, 2005 compared to $0.6 million in the three months ended September 30, 2004. 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 $0.2 million during the three months ended September 30, 2005 compared to $0.1 million charterhire in the three months ended September 30, 2004. Charterhire is rental revenue for vessels not deployed in liner service.

Operating Expenses

Salaries, wages and benefits increased by $0.2 million or 4.28% primarily due to increases in salary and incentive base compensation combined with increased health care benefits cost, partially offset by lower workers compensation expenses. Purchased transportation related party decreased $1.8 million or 100% primarily due to the purchase of the RO/RO barges in December 2004 through the use of a portion the proceeds the senior secured notes. Purchased transportation other decreased $.4 million or 7.56% 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 $1.3 million or 52.41% due to increases in crude oil prices on the world market during the period, due to a lag effect in the imposition of fuel surcharges, the increase in fuel surcharge revenue did not fully offset this increase. Operating and Maintenance expenses increased by $.2 million or 3.23% due to vessel preventive maintenance measures undertaken during the period. Depreciation and Amortization increased by $.5 million or 86.98% 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. Loss on sale of assets increased by $.2 million primarily due to the sale of a portion of the Company's over the road equipment. As a result, the Company's operating ratio improved to 83.7% during the three months ended September 30, 2005 from 91.7% during the three months ended September 30, 2004.

INTEREST EXPENSE

Interest expense of $2,647,267 was up 220.70% 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.

DEFERRED 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.

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.

Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September
30, 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 2004 and has continued to abate in 2005.

The following table sets forth the indicated items as a percentage of net revenues for the nine months ended September 30, 2005 and 2004:

 

Operating Statement - Margin Analysis (% of Operating Revenues) Nine Months Ended September 30, ----------------------------------- 2005 2004 ---------------- ---------------- Operating Revenues 100% 100% Salaries, wages, and benefits 15.5 16.0 Rent and purchased transportation: Related Party - 7.8 Other 20.6 24.2 Fuel 12.7 10.1 Operating and maintenance (exclusive of depreciation shown separately below) 22.4 24.1 Taxes and licenses 0.3 0.2 Insurance and claims 3.0 3.4 Communications and utilities 0.5 0.5 Depreciation and amortization 4.1 3.2 (Gain) Loss on sale of equipment 0.6 (0.0) Other operating expenses 3.7 3.9 ---------------- ---------------- Total Operating Expenses 83.4 93.4 Operating income 16.6 6.6 Net interest expense (9.9) (3.1) Provision for Income taxes (0.2) 0.0 ---------------- ---------------- Net income 6.5% 3.5% ================ ================

The Company's operating ratio (operating expense stated as a percentage of operating revenues) improved from 93.4% during the three months ended September 30, 2004 to 83.4% during the nine months ended September 30, 2005, primarily as a result of the accretive results from the senior secured notes transaction completed in December 2004.

 

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 -2.5% 2.4% -16.0% Auto and other cargos -18.5% -13.5% -59.2% SOLs -25.6% -28.0% 6.8% Revenue Change ($millions): Core container & trailer $ 4.5 $ 4.9 $ (0.4) Auto and other cargos (1.6) (1.1) (0.5) SOLs (0.2) (0.2) (0.0) Other Revenues 4.1 ---------------- Total Revenue Change $ 6.8 ----------------

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 88.9% for the nine months ended September 30, 2005, compared to 93.9% for the nine months ended September 30, 2004. Southbound trailer and container volume grew consistently with the overall market, but vessel capacity utilization declined due to reduced demand in the auto and other cargo market, particularly used autos. The Company will monitor the auto and other cargo market and make adjustments as necessary to best utilize its vessel capacity.

Revenue for the nine months ended September 30, 2005 was $77.8 million, compared to $71.0 million for the nine months ended September 30, 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 $7.9 million during the nine months ended September 30, 2005 compared to $4.7 million in the nine months ended September 30, 2004. This increase in the fuel surcharges results from amounts that are passed onto customers. The Company's demurrage is included in the Company's revenues and amounted to $2.4 million during the nine months ended September 30, 2005 compared to $2.2 million in the nine months ended September 30, 2004. 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 $1.0 million during the nine months ended September 30, 2005 compared to $0.5 million charterhire in the nine months ended September 30, 2004. Charterhire is rental revenue for vessels not deployed in liner service.

Operating Expenses

Salaries, wages and benefits increased by $0.7 million or 6.17% due primarily to increases in incentive based compensation partially offset by lower driver payroll. Purchased transportation related party decreased $5.5 million or 100% primarily due to the purchase of the RO/RO barges in December 2004 through the use of a portion the proceeds the senior secured notes. Purchased transportation other decreased $1.1 million or 6.66% 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 $2.7 million or 38.03% due to increases in crude oil prices on the world market during the period. Operating and Maintenance expenses increased by $.3 million or 1.78% due to vessel preventive maintenance measures undertaken during the period. Taxes and licenses increased by $.1 million or 91.35% due primarily to a 2004 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. Depreciation and Amortization increased by $.9 million or 39.97% 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. 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. As a result, the Company's operating ratio improved to 83.4% during the nine months ended September 30, 2005 from 93.4% during the nine months ended September 30, 2004.
INTEREST EXPENSE

Interest expense of $7,870,855 was up 259.32% 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.

DEFERRED 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $12.0 million in the first nine months of 2005 compared to net cash provided by operations of $2.0 million in 2004. This represented an improvement of $10.0 million primarily from an increase in cash provided by trade receivables activity of $3.1 million. The company's improved collection efforts resulted in its ability to have better collection of our accounts receivable in comparison to the prior period. A $3.6 million increase in accrued liabilities activity between periods due to the accrued interest expense related to the senior secured notes. The senior secured notes agreement effective December 2004 requires interest to be payable biannually which resulted in an improvement of the Company's cash position for the period. The Company improved net income by $2.6 million in comparison to the prior period. Net cash used by investing activities was $5.5 million in the first nine months of 2005 compared to $.5 million net cash used by investing activities in 2004 resulting in a change of $5.0 million, which is due primarily to the purchase of tractors and reserve fund deposits related to the Title XI debt. Net cash used in financing activities was $2.1 million in the first nine months of 2005 compared to net cash used by financing activities of $.9 million in 2004 representing a change of $1.2 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 2004 Senior Secured Notes. At September 30, 2005, cash amounted to approximately $10.6 million, working capital was a positive $12.0 million, and the capital deficit was $2.0 million.

The Company's existing revolving credit facility is subject to a borrowing base formula (approximately $7.9 million at September 30, 2005) based on a percentage of eligible accounts receivable. At September 30, 2005 there were no advances drawn on this credit facility.

As of September 30, 2005 $1.9 million of related party debt is outstanding. This debt arose in a prior year 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 nine months ending September 30, 2005 totaled $.6 million.

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 September 30, 2005, the total amount held in deposit is $2.7 million. The Title XI debt agreement requires an annual deposit until an amount equal to fifty percent of the outstanding balance is reached which is approximately $10.5 million as September 30, 2005.

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 September 30, 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 nine 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 September 30, 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 nine months ended September 30, 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.