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 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 Company believes that in addition to the GAAP based financial information provided below, which reflects the Company's operating results based on the Company's election to account for its dry-docking cost using the expense-as-incurred method, the operating results should also be adjusted to show the effect of utilizing the defer-and-amortize method of accounting so as not to distort the results of the periods in question due to a material expense that occurs once every five years. Due to its historical use of the expense-as-incurred method, the Company is not permitted to change to the standard used by its competitors. However, the Company believes this is a meaningful disclosure because: (i) During accounting periods where multiple dry-dockings are performed, operating results are distorted and not comparable to prior periods or to industry peers and Management and the Company's Board of Directors believe providing this measure to Shareholders will assist them in making meaningful industry comparisons. (ii) Both of the Company's RORO vessels will undergo a regulatory dry-docking in the first half of 2006, which will not be required again until 2011, the dry-docking costs related to the RORO vessels that have three decks, each 736' long are significantly more than the costs of dry-docking the TBC vessels that have a single deck that is 400' long which in addition to costing less are also spread out more evenly over their respective five-year recertification periods. (iii)The defer-and-amortize method of accounting for dry-docking cost is the predominant method used by the Company's industry peer group. (iv) The Company's board of directors and management team evaluates the Company's operating performance compared to the industry peer group.

Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005

During the first quarter of 2006, the Company had one of its RORO vessels in dry-dock. The Company replaced the RORO vessel with one its TBC vessels during the period. A RORO vessel offers more flexible capacity and has significant advantages in terms of loading and unloading cargo that is not containerized.

The following table sets forth the indicated items as a percentage of net revenues for three months ended March 31, 2006 and 2005:

                     Operating Statement - Margin Analysis
                           (% of Operating Revenues)
                                                Three Months
                                              Ended March 31,
                                            --------------------
                                               2006      2005
                                            ---------- ---------
Operating Revenues                            100 %      100 %
Salaries, wages, and benefits                  14 .6      16 .8
Rent and purchased transportation:
   Other                                       22 .8      21 .3
Fuel                                           13 .6      12 .1
Operating and maintenance (exclusive of        21 .4      22 .8
 depreciation shown separately below)
Dry-docking                                    12 .4       1 .1
Taxes and licenses                              0 .3       0 .5
Insurance and claims                            3 .2       2 .8
Communications and utilities                    0 .5       0 .6
Depreciation and amortization                   5 .2       4 .2
(Gain) Loss on sale of equipment                0 .1      (0 .1)
Other operating expenses                        4 .0       3 .4
                                            ---------- ---------
Total Operating Expenses                       98 .1      85 .5
Operating income                                1 .9      14 .5
Net interest expense                           (9 .1)    (10 .5)
(Provision) Benefit for income taxes           (0 .0)     --
                                            ---------- ---------
Net (loss) income                              (7 .2)%     4 .0%
                                            ---------- ---------

The Company's operating ratio, accounting for its dry-docking cost using the expense-as-incurred method, rather than the defer and amortize method, deteriorated from 85.5% during the three months ended March 31, 2005 to 98.1% during the three months ended March 31, 2006. The Company's operating ratio using the defer and amortize method resulted in a slight deterioration from 84.9% during the three months ended March 31, 2005 to 86.0% during the three months ended March 31, 2006.

The table below is presented accounting for dry-docking costs via the defer and amortize method using a 5 year amortization period while the Company accounts for dry-docking costs using the expense-as-incurred method.

               Operating Statement As Adjusted - Margin Analysis
                           (% of Operating Revenues)
                                                                   Three Months
                                                                 Ended March 31,
                                                               --------------------
                                                                  2006      2005
                                                               ---------- ---------
Operating Revenues                                                 100 %      100 %
Salaries, wages, and benefits                                     14.6       16.8
Rent and purchased transportation:
   Other                                                          22.8       21.3
Fuel                                                              13.6       12.1
Operating and maintenance (exclusive of depreciation shown
 separately below)                                                21.4       22.8
Dry-docking                                                         --         --
Dry-docking amortization                                           0.3        0.4
Taxes and licenses                                                 0.3        0.5
Insurance and claims                                               3.2        2.8
Communications and utilities                                       0.5        0.6
Depreciation and amortization                                      5.2        4.2
(Gain) Loss on sale of equipment                                   0.1       (0.1 )
Other operating expenses                                           3.9        3.4
                                                               ---------- ---------
Total Operating Expenses, as adjusted                             86.0       84.9
Operating income, as adjusted                                     14.0       15.1
Net interest expense                                              (9.1 )    (10.5 )
(Provision) Benefit for income taxes                              (0.0 )       --
                                                               ---------- ---------
Net income, as adjusted                                            4.8 %      4.6 %
                                                               ---------- ---------
Reconciling Item to Presented Financial Statement
Dry-docking as recorded                                          (12.4 )     (1.1 )
Dry-docking as adjusted for the defer-and-amortize method          0.3        0.4
                                                               ---------- ---------
Difference                                                       (12.1 )     (0.7 )
Net (loss) Income                                                 (7.2 )%     4.0 %

 

Revenues The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried: 9 -------------------------------------------------------------------------------- Volume & Revenue Changes 2006 compared to 2005 Overall Southbound Northbound --------- ------------ ------------- Volume Percent Change: Core container & trailer -3.8 % -6.8 % 7.3 % Auto and other cargos -16. 4% -17. 6% 6.6 % SOLs -15. 1% -31. 9% 333.3 % Revenue Change ($millions): Core container & trailer $ 0.1 $ (0. 1) $ 0.3 Auto and other cargos (0.5 ) (0.5 ) 0.0 SOLs (0.2 ) (0.2 ) 0.0 1.5 Other Revenues ---- Total Revenue Change $ 0.9

Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 87.9% for the first three months ended March 31, 2006 compared to 92.2% for the three months ended March 31, 2005, primarily due to softened overall market conditions and the loss of one account. Trade data published by PIERS (Port Import Export Reporting Service) a division of "The Journal of Commerce" for January and February indicates the southeast trailer/container market volume decreased 5.3% and the southeast Used Auto market volume decreased 54.1% during this same period. The dry docking of one RO/RO vessel has also resulted in the temporary loss of some trailer/SOL RO/RO cargos that were unable to wait for our every other week RO/RO sailing. This volume is expected to return when our scheduled dry dockings are complete during 2006.

Revenue for the three months ended March 31, 2006 was $25.3 million, compared to $24.4 million for the three months ended March 31, 2005. 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 $3.8 million during the three months ended March 31, 2006 compared to $2.1 million in the three months ended March 31, 2005. This increase in the fuel surcharges results from increases in bunker fuel costs incurred. The Company's demurrage is included in the Company's revenues and amounted to $0.5 million during the three months ended March 31, 2006 compared to $0.6 million in the three months ended March 31, 2005. 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 $0.1 million during the three months ended March 31, 2006 compared to $0.5 millions charterhire in the three months ended March 31, 2005. Charterhire is rental revenue for vessels not in use in liner service.

Operating Expenses

Salaries, wages and benefits decreased by $0.4 million or 9.8% due primarily to decreases in incentive based compensation. Purchased transportation other increased $.6 million or 11.1% due to an increased use of and increased rates for third party over-the-road transportation. Fuel increased by $.5 million or 16.6% due to increases in crude oil prices on the world market during the period. Operating and Maintenance expenses decreased by $.1 million or 2.6%, primarily due to lower maintenance costs. Dry-docking expense increased by $2.9 million due to the scheduled regulatory Dry-docking of on of the two RORO vessels during the current period. In 2005, a smaller TBC was in Dry-dock for its scheduled regulatory inspection. Insurance and claims increased by $.1 million or 21.9% due to insurance related credits received in 2005, no such credits were received in 2006. Depreciation and amortization expense increased by $.3 million or 28.3%, primarily due to the upgrade of the Company's tractor fleet. The Company's operating ratio accounting for its dry-docking cost using the expense-as-incurred method deteriorated from 85.5% during the three months ended March 31, 2005 to 98.1% during the three months ended March 31, 2006. The Company's operating ratio, as adjusted, deteriorated slightly from 84.9% during the three months ended March 31, 2005 to 86.0% during the three months ended March 31, 2006.

As a result of the factors described above, the Company reported a net loss of $1.8 million or $.15 per share for the three months ended March 31, 2006 compared to net income of $1.0 or $.08 per share million in the same period in 2005. The Company would have reported a net income of $1.2 million or $.10 per share for the three months ended March 31, 2006 compared to net income of $1.1 million or $.10 per share in the same period in 2005 accounting for its dry-docking cost under the defer and amortize method.

 

Three Months Ended March 31, ------------------------------- 2006 2005 ----------------- ------------- Operating income, expense-as-incurred method, as reported $ 490,838 $ 3,529,791 add back: dry docking - expense-as-incurred method 3,121,962 257,520 subtract: dry docking - defer and amortize method (75,588 ) (105,013 ) ----------------- ------------- Operating income, defer and amortize method, as adjusted $ 3,537,212 $ 3,682,298 ----------------- ------------- Operating ratio, expense-as-incurred method 98.1 % 85.5 % Operating ratio, defer and amortize method 86.0 % 84.9 % Net (loss) income, expense-as-incurred mehtod, as reported $ (1,824,091 ) $ 975,801 add back: dry docking - expense-as-incurred method 3,121,962 257,520 subtract: dry docking - defer and amortize method (75,588 ) (105,013 ) ----------------- ------------- Net income, defer and amortize method, as adjusted $ 1,222,283 $ 1,128,308 ----------------- -------------

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $4.2 million in the first three months of 2006 compared to a similar amount in the first three months of 2005. Net cash used by investing activities was $.6 million in the first three months of 2006 compared net cash used in investing activities of $.2 million in 2005. The change is due primarily to increased payments made for improvements to revenue equipment. Net cash used in financing activities was $.8 million in the first three months of 2006 compared to net cash used in financing activities of $.9 million in 2005 primarily the result of a decrease in the amount of loan costs incurred during the period. At March 31, 2006, cash amounted to approximately $14.2 million, working capital was a positive $13.8 million, and the capital deficit was $1.0 million.

The Company existing revolving credit facility is subject to a borrowing base formula (approximately $8.0 million at March 31, 2006) based on a percentage of eligible accounts receivable. At March 31, 2006 there were no advances drawn on this credit facility.

The Company will complete the regulatory Dry-docking of its two RORO barges in 2006, this process began in January 2006 and is expected to be completed by June 30, 2006. In addition to the $3.1 million of Dry-docking expense incurred to date, the remaining Dry-docking expense is estimated to range between $6.0 and $7.0 million.

The Title XI debt provides for certain financial tests, that if not met, restrict the Company 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, 2006, the Company did not met these financial tests and was therefore, restricted from performing certain financial activities without the Secretary's consent. During the period the Company did not perform any prohibited activities and no consent of the Secretary was sought. In the past the Company has sought and received the permission of the Secretary as needed. While these financial tests remain unmet, 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.

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, 2006, 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, 2005.