SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended Commission file number
September 30, 2002 0-22837
TRAILER BRIDGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3617986
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10405 New Berlin Road E.
Jacksonville, FL 32226 (904) 751-7100
(address of principal (Zip Code) (Registrant's telephone number)
executive offices)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
YES [ ] NO [X]
As of November 14, 2002, 9,777,500 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial statements contained herein reflect all
adjustments that, in the opinion of management, are necessary for a fair
statement of the financial condition and results of operations for the periods
presented. They have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.
Operating results for the three and nine month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. In the opinion of management, the information
set forth in the accompanying balance sheet is fairly stated in all material
respects.
These interim financial statements should be read in conjunction with
the Company's audited financial statements for the three years ended December
31, 2001 that appear in the Company's Annual Report on Form 10-K.
Statements of Operations for the Three and
Nine Months Ended September 30, 2002 and 2001 (unaudited) Page 3
Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001 Page 4
Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 (unaudited) Page 5
Notes to Financial Statements Page 6
2
TRAILER BRIDGE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------- -------------------------------
2002 2001 2002 2001
----------------- --------------- ---------------- ---------------
OPERATING REVENUES $ 18,488,328 $ 20,052,136 $ 54,085,091 $62,348,033
OPERATING EXPENSES:
Salaries wages, and benefits ................ 3,824,346 4,377,062 11,338,926 13,167,791
Rent and purchased transportation:
Related Party ............................ 1,849,200 1,849,200 5,487,300 5,487,300
Other .................................... 5,586,815 6,857,226 14,794,016 20,495,392
Fuel ........................................ 1,841,771 2,621,199 5,325,933 8,421,989
Operating and maintenance
(exclusive of depreciation shown
separately below) ........................ 4,186,873 5,788,434 11,822,377 18,192,884
Taxes and licenses .......................... 120,115 195,926 396,962 614,562
Insurance and claims ........................ 750,583 679,423 2,214,978 1,936,712
Communications and utilities................. 142,628 187,586 467,351 515,340
Depreciation and amortization ............... 821,154 1,145,842 2,567,420 3,668,253
Other operating expenses .................... 884,228 1,201,658 2,170,187 3,363,254
------------------ ---------------- ----------------- ------------------
20,007,713 24,903,557 56,585,450 75,863,475
------------------ ---------------- ----------------- ------------------
OPERATING (LOSS) INCOME......................... (1,519,385) (4,851,420) (2,500,359) (13,515,442)
NONOPERATING INCOME
(EXPENSE):
Interest expense, net ....................... (758,010) (807,284) (2,287,646) (2,491,824)
Other, net .................................. (8,880) - (8,566) -
Gain on sale of equipment.................... 23,803 38,157 93,267 (148,379)
------------------ ---------------- ----------------- ------------------
(743,087) (769,127) (2,202,945) (2,640,203)
------------------ ---------------- ----------------- ------------------
(LOSS) INCOME BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES (2,262,472) (5,620,547) (4,703,304) (16,155,645)
BENEFIT (PROVISION) FOR INCOME TAXES ........... (3,305) 22,129 (3,305) 22,129
------------------ ---------------- ----------------- ------------------
NET LOSS........................................ $ (2,265,777) $ (5,598,418) $ (4,706,609) $(16,133,516)
ACCRETION OF PREFERRED STOCK DISCOUNT........... (221,775) (221,775)
NET LOSS APPLICABLE TO COMMON SHARES............ (2,487,552) (5,598,418) (4,928,384) (16,133,516)
================== ================ ================= ==================
LOSS PER COMMON SHARE........................... $ (0.25) $ (0.57) $ (0.50) $ (1.65)
================== ================ ================= ==================
WEIGHTED AVERAGE
SHARES OUTSTANDING .......................... 9,777,500 9,777,500 9,777,500 9,777,500
================== ================ ================= ==================
See notes to the financial statements
3
TRAILER BRIDGE, INC.
BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited)
---------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,312,548 $ 441,320
Marketable securities 52,836 61,403
Trade receivables, less allowance for doubtful
accounts of $823,020 and $1,118,083 10,147,377 10,547,863
Other receivables 18,815 34,272
Prepaid expenses 1,420,733 1,258,125
Assets held for sale - 305,873
---------------- -----------------
Total current assets 12,952,309 12,648,856
Property and equipment, net 50,918,168 53,616,664
Other assets 1,345,704 1,458,225
---------------- -----------------
TOTAL ASSETS $ 65,216,181 $ 67,723,745
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,017,564 $ 9,622,215
Accrued liabilities 2,816,963 4,824,789
Current portion of long-term debt 3,053,442 18,742,140
Unearned revenue 832,898 832,898
---------------- -----------------
Total current liabilities 13,720,867 34,022,042
Due to Related Parties 5,169,355 19,577,513
Long-term debt, less current obligations 35,754,467 22,833,420
Derivative financial instrument - 35,952
---------------- -----------------
TOTAL LIABILITIES 54,644,689 76,468,927
---------------- -----------------
Stockholders' Equity:
Preferred stock series A, $.01 par value, 1,000,000 shares
authorized; 19,550 shares issued and outstanding 196 -
Preferred stock series B, $.01 par value, 1,000,000 shares
authorized; 22,102 shares issued and outstanding
(liquidation value $22,102,448) 20,188,832 -
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,777,500 shares issued and
outstanding 97,775 97,775
Additional paid-in capital 43,847,848 39,791,818
Accumulated deficit (53,563,159) (48,634,775)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 10,571,492 (8,745,182)
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,216,181 $ 67,723,745
================ =================
See notes to the financial statements
4
TRAILER BRIDGE, INC.
STATEMENTS OF CASH FLOWS
For the Nine months ended September 30, 2002 and September 30, 2001
(Unaudited)
September 30, September 30,
2002 2001
----------------- ------------------
Operating activities:
Net loss $ (4,706,609) $ (16,133,516)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,567,420 3,668,253
Provision for doubtful accounts 670,012 2,216,757
Gain (loss) on sale of fixed assets (93,267) 148,379
Unrealized gain on marketable securities 8,567 -
Decrease (increase) in:
Trade receivables (269,526) (1,929,793)
Other receivables 15,457 70,552
Prepaid expenses (162,608) (59,449)
Assets held for sale 305,873 -
Increase (decrease) in:
Accounts payable (2,604,651) 2,168,980
Accrued liabilities (2,007,826) 992,283
Due to related party 2,906,296 2,007
----------------- ------------------
Net cash used in operating activities (3,370,862) (8,855,547)
----------------- ------------------
Investing activities:
Additions to and construction of property and equipment (423,065) (883,997)
Proceeds from sale of property and equipment 647,409 1,042,344
Decrease in other assets 112,521 86,000
----------------- ------------------
Net cash provided by investing activities 336,865 244,347
----------------- ------------------
Financing activities:
Net (repayments) borrowing on revolving line of credit (1,314,310) 1,774,715
Proceeds from borrowing from related parties 4,787,994 9,536,980
Proceeds from borrowing under capital lease obligations 375,006 -
Issuance of Preferred Series A Convertible Stock 1,920,835 -
Principal payments on notes payable (1,380,449) (2,156,069)
Principal payments under capital lease obligations (447,898) (66,634)
Derivative instrument payment (35,953) -
Debt issue costs - (29,294)
----------------- ------------------
Net cash provided by financing activities 3,905,225 9,059,698
----------------- ------------------
Net increase in cash and cash equivalents 871,228 448,498
Cash and cash equivalents, beginning of the period 441,320 865,167
----------------- ------------------
Cash and cash equivalents, end of period $ 1,312,548 $ 1,313,665
================= ==================
Supplemental cash flow information and non-cash investing and financing
activities:
Related party debt forgiveness $ - $ 1,809,000
================= ==================
Cash paid for interest $ 3,346,756 $ 2,023,678
================= ==================
Conversion of subordinated debt $ 22,102,448 $ -
================= ==================
See notes to the financial statements
5
TRAILER BRIDGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results of operations for the
periods shown. The financial statements have been prepared in accordance with
the instructions to Form 10-Q and, therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the Company's audited financial statements for the three
years ended December 31, 2001 that appear in the Form 10-K.
Recent Accounting Pronouncements - In June 2001, the FASB issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. SFAS No. 142 requires that
goodwill and certain intangibles no longer be amortized, but instead must be
tested for impairment at least annually. SFAS No. 142 is required to be applied
starting with fiscal years beginning after December 15, 2001, with early
application permitted in certain circumstances. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a material impact on the Company's financial position
and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and requires that the amount recorded as a liability be capitalized by
increasing the carrying amount of the related long-lived asset. Subsequent to
initial measurement, the liability is accreted to the ultimate amount
anticipated to be paid, and is also adjusted for revisions to the timing or
amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002, with earlier application encouraged. The Company
has not yet determined the impact, if any, the adoption of SFAS No. 143 will
have on the Company's financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121
6
for (a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 will not have a material impact on the
Company's financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. In addition, SFAS 145
amends Statement 13 on leasing to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions. Provisions of SFAS 145 related
to the recission of Statement 4 are effective for financial statements issued by
the Company after January 1, 2003. The provisions of the statement related to
sale-leaseback transactions were effective for any transactions occurring after
May 15, 2002. All other provisions of the statement were effective as of the end
of the second quarter of 2002. The adoption of the provisions of SFAS 145 did
not have a material impact on the Company's financial condition or results of
operations, nor does the Company expect the future adoption of the other
provisions of SFAS 145 to have a material impact on the Company's financial
results.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 requires companies to recognize costs
associated with the exit or disposal of activities as they are incurred rather
than at the date a plan of disposal or commitment to exit is initiated. Types of
costs covered by SFAS 146 include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, facility closing, or other exit or disposal activity. The Company
will apply SFAS 146 to exit or disposal activities initiated on or after January
1, 2003.
2. COMPANY LIQUIDITY
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liabilities in
the normal course of business. As shown in the financial statements, the Company
incurred a net loss for the nine months ended September 30, 2002 of $4,706,609.
As of September 30, 2002, current liabilities exceeded current assets by
$768,558. These factors among others may indicate that the Company may be unable
to continue as a going concern for a sufficient period of time to realize the
value of its assets.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
During the three months ended September 30, 2002 the Company issued
22,102.448 shares of Series B preferred stock in exchange for $22,102,448
principal amount of debt owed to the Company's affiliate, Kadampanattu Corp.
Previously, Kadampanattu Corp., an affiliate of the Company, agreed to allow
Trailer Bridge to defer payment on certain amounts due under the charter of the
two roll-on/roll-off vessels, through at least the end of 2002.
During the three months ended September 30, 2002 the Company
rescheduled its principal payments under each of its two Title XI bond issues.
The combined interest payment due on September 30, 2002 totaling
7
$805,010 was paid on its scheduled date. The Company had previously rescheduled
the principal payments of $210,300 and $338,360, respectively, due on each of
its Title XI bond issues September 30, 2001 and March 31, 2002 for payment on
September 30, 2002 and March 31, 2003. This resulted in total scheduled
principal payments for the Company's two Title XI issues of $420,600 and
$676,720, respectively, for both September 30, 2002 and March 31, 2003. During
the three months ended September 30, 2002, the Company rescheduled the full
double principal payments due September 30, 2002 and one half of the double
principal payments due March 31, 2003. As a result, commencing March 30, 2003,
these rescheduled principal payments will be paid equally over the remaining
scheduled principal payment periods of each Title XI issue. As rescheduled, the
Company's semi-annual principal payments shall increase to $226,073 and $363,118
until fully paid September 30, 2022 and March 30, 2023, respectively. There was
no fee paid nor change in interest rate due to this rescheduling.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain refinancing as may be required, and ultimately to attain
successful operations. The Company's projected cash flows from operations
combined with its revolving line of credit and maintenance of its vendor
relationships are expected to produce sufficient available liquidity to maintain
its current level of operations at least through the third quarter of 2003.
3. PREFERRED STOCK
Series A Preferred Stock - In May 2002, the Company issued 19,550
shares of series A preferred stock for a total purchase price of $2 million. The
Series A preferred stock has a liquidation preference equal to its original
purchase price. In the event of the liquidation of the Company, unless the
holders of of series A preferred stock elected to convert their shares to common
stock, the holders of common stock would not be entitled to receive any
distributions after the payment or provision for the Company's liabilities until
the liquidation preference had been paid in full.
The Company is prohibited from paying any dividend on or redeeming or
acquiring any shares of its common stock without prior written consent of the
holders of a majority of the outstanding shares of Series A preferred stock.
Each share of Series A preferred stock is convertible into 100 shares
of common stock at any time, at the holder's election, subject to customary
anti-dilution protection. The series A preferred stock votes together with the
common stock, as a single class, except where class voting is required by
Deleware law, with each share of Series A preferred stock entitled to 35.52
votes per share.
The company sold the Series A preferred stock described above on May
23, 2002, to Transportation Receivables 1992, LLC, an entity wholly-owned by the
estate of M. P. McLean, which is the majority shareholder of the Company.
Series B Preferred Stock - During the three months ended September
2002, the Company issued a total of 22,102.448 shares of Series B preferred
stock in exchange for $22,102,448 principal amount of debt owed to the Company's
affiliate, Kadampanattu Corp. The Series B preferred stock, which has a
liquidation preference
8
of $1,000 per share, is pari passu with the Company's Series A preferred stock
as to liquidation. In the event of the liquidation of the Company, the holders
of common stock would not be entitled to receive any distributions after the
payment or provision for the Company's liabilities unless the liquidation
preferences of the Series A and B preferred stock have been paid in full.
Beginning April 1, 2003, cumulative preferential dividends will accrue
on the purchase price of the Series B preferred stock at a rate equal to 90-day
LIBOR plus 350 basis points. Starting in 2004, the dividend rate will increase
25 basis points per quarter up to a maximum dividend rate of 90-day LIBOR plus
650 basis points. The notes that the Series B preferred stock was exchanged for
was non-interested bearing until it was due and provided for interest on overdue
amounts at a rate of 90 day Libor plus two and one-half percent. No dividends
may be declared or paid on the Series A preferred stock or any common stock
unless (1) all accrued dividends on the Series B preferred stock have been paid
in full and (2) the holders of a majority of the outstanding shares of Series B
preferred stock consent to such payment.
The Series B preferred stock is not convertible into common stock. The
Company, at its option, may redeem the Series B preferred stock in whole or in
part if after giving effect to the redemption the Company will have at least $10
million in stockholders' equity and, in the event such shares are held by
affiliates of the Company, such redemption has been approved by the holders of a
majority of disinterested shares voting on the redemption at a meeting of
shareholders.
Kadampanattu Corp. is an affiliate wholly-owned by the estate of
M. P. McLean, which is the majority shareholder of the Company.
4. SEGMENTS
The Company's primary business is to transport freight from its origination
point in the continental United States to San Juan, Puerto Rico and from San
Juan, Puerto Rico to its destination point in the continental United States. The
Company provides a domestic trucking system and a barge vessel system, which
work in conjunction with each other to service its customers. The Company would
not employ either system separately; therefore segment reporting is not
necessary.
5. LONG-TERM DEBT
Following is a summary of long-term debt at September 30, 2002 and December 31,
2002:
September 30, December 31,
2002 2001
Ship-financing bonds and notes (Title XI) maturing on
March 30, 2023; payable in semi-annual installments
of principal and interest; interest is fixed at 6.52%;
collateralized by vessels with a carrying value of
$15,831,141 at September 30, 2002; amount is
guaranteed by The United States of America
under the Title XI Federal Ship Financing Program $ 14,887,840 $ 14,887,840
9
Ship-financing bonds and notes (Title XI) maturing on
September 30, 2022; payable in semi-annual installments
of principal and interest; interest is fixed at 7.07%;
collateralized by vessels with a carrying value of
$10,237,464 at September 30, 2002; amount is
guaranteed by The United States of America
under the Title XI Federal Ship Financing Program 9,042,900 9,042,900
Term loan under $29 million credit facility maturing
between April 1, 2001 and January 31, 2004; payable
in monthly installments of principal and interest;
interest at a rate of 4.25% above the 30-day dealer
commercial paper rate (5.96% at September 30, 2002);
collateralized by trailers with a carrying value of
$16,401,872 at September 30, 2002 9,428,571 10,714,286
Revolving line of credit under $29 million credit facility;
interest at a rate of 3.75% above the 30-day dealer
commercial paper rate (5.46% at September 30, 2002);
collateralized by accounts receivable 3,862,892 5,123,129
Revolving line of credit under $29 million credit facility;
interest at a rate of 6.00% above the 30-day dealer
commercial paper rate (7.71% at September 30, 2002);
collateralized by accrued receivable 784,666 838,738
Note payable to bank maturing October 2006; payable
in monthly installments of principal and interest; interest
at a rate of 2.00% above the LIBOR market index rate
(3.82% at September 30, 2002); collateralized by land
and buildings and structures with a carrying value of
$2,106,122 at September 30, 2002 717,265 812,000
Capital lease obligations maturing in 2002; payable in
monthly installments of principal and interest; interest
at 10.00%; collateralized by computer equipment 3,686
Capital lease obligations maturing in 2002; payable in
monthly installments of principal and interest; interest
at 4.90%; collateralized by trailers 83,775 152,981
------------------ -------------------
38,807,909 41,575,560
Less current portion (3,053,442) (18,742,140)
------------------ -------------------
$ 35,754,467 $ 22,833,420
================== ===================
10
During the nine months ended September 30, 2002 the Company renegotiated the
financial covenants in its various loan agreements. The Company is in compliance
with such renegotiated financial covenantsaccordingly, such loans have been
classified as long-term debt on September 30, 2002.
Certain of these loans were classified as current as of December 31, 2001 as a
result of the non-compliance with the then-existing financial covenants.
As of September 30, 2002, the Company did not meet certain financial covenants
contained in the Title XI debt agreements and as a result is prohibited from
certain financial activities none of which the Company has engaged in or is
contemplating, accordingly, such debt is not subject to acceleration and the
debt continues to be classified as long term.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS:
Three Months Ended September 30, 2002 and 2001
- ----------------------------------------------
With the discontinuation of the Northeast service at the end of 2001,
the Company had 20.4% less overall vessel capacity deployed in the Puerto Rico
lane during the three months ended September 30, 2002 compared to the third
quarter of 2001. With this capacity reduction, the Company's total volume of
freight moving to and from Puerto Rico decreased 9.0% compared to the year
earlier period. Operating revenues for the three months ended September 30, 2002
were $18.5 million, a decrease of $1.6 million or 7.8%, compared to the third
quarter of 2001. The Company's Puerto Rico deployed vessel capacity utilization
overall during the three months ended September 30, 2002 was 79.3% to Puerto
Rico and 22.6% from Puerto Rico significantly better than the 69.5% and 19.1%,
respectively, during the third quarter of 2001. The Company had an average of
198 tractor units operating on the mainland during the three months ended
September 30, 2002, generating 9,349 miles per month of which 80.2% were loaded.
Operating expenses decreased $4.9 million for the three months ended
September 30, 2002 from $24.9 million for the same period in 2001 to $20.0
million. The termination of the Company's Northeast service resulted in
significant decreases in operating expenses related to salaries, wages and
benefits; purchased transportation; fuel expense; and operation and maintenance
expense. Salaries, wages and benefits expense decreased $552,716 primarily due
to reductions in headcount, driver payroll and less workers compensation
expense. Rent and purchased transportation decreased $1.3 million due to
decreased tug charter hire expense and less equipment rent due to the
termination of short-term leases on excess trailers. Fuel expense decreased
$779,428 million due to less consumption from operating two less tugs and
operating fewer company trucks. Operating and maintenance expense decreased $1.6
million resulting from less stevedoring, wharfage and vessel maintenance
expense. Vessel maintenance expense decreased primarily due to a non-recurring
charge for dry docking expense incurred the year earlier period. Depreciation
and amortization expense decreased by $324,688 due to reductions in equipment
fleet and less depreciation expense on tractors and vessels. All remaining
operating expenses decreased a net amount of $366,898, consisting of decreases
in depreciation and amortization, taxes and licenses, communications and
utilities and other expenses, partially offset by increases in insurance and
claims. The total costs associated with the three laid-off triple-stack box
carrier vessels during the three months ended September 30, 2002, net of charter
income, were $349,869.
Operating loss for the three months ended September 30, 2002 was $1.5
million an improvement of $3.3 million from operating loss of $4.9 million for
the three months ended September 30, 2001. Compared to the third quarter of
2001, operating loss improved by $3.4 million, due to discontinuing the
Northeast service, reductions in headcount and equipment, and other cost-cutting
initiatives. As a result of the above, the operating ratio was 108.2% during the
three months ended September 30, 2002, compared to the 124.2% operating ratio
during the year earlier period. Net interest expense of $757,869 was down
$49,415 from the year earlier period due primarily to lower interest rates. The
Company also realized a gain of $14,923 from non-operating items during three
months ended September 30, 2002 compared to a gain of $38,157 in the year
earlier period. Net
12
loss for the three months ended September 30, 2002 included a tax expense of
$3,305 compared to a tax benefit of $22,129 during the same period in the
preceding year.
The Company's loss before income taxes for the three months ended
September 30, 2002 was $2.3 million compared to a pre-tax loss of $5.6 million
in the year earlier period. Due to the Company's continued losses a full
valuation allowance is provided for its income tax asset. Therefore, the net
loss for the third quarter remained at $2.3 million, as compared to a net loss
of $5.6 million , for the year earlier period. The net loss applicable to common
shares for the quarter ended September 30, 2002 after accretion of preferred
stock discount was equivalent to $.25 per share as compared to $.57 per share
for the year earlier period. The accretion of preferred stock discount is a
non-cash item as no actual dividends accrue and no liability will be recognized
until 2003. As a result, this non-cash accretion item does not impact overall
stockholders' equity.
With the discontinuance of the Company's Northeast service at the end
of 2001, the Company believes that volume and yield comparisons solely related
to freight moving via Jacksonville are most relevant. For the three months ended
September 30, 2002 compared to the same period a year earlier, total southbound
volume over Jacksonville increased 8.1%. The Company's core southbound trailer
volume from Jacksonville to Puerto Rico increased 3.3%, new and used cars moving
to Puerto Rico increased 6.9% and 85.7% respectively, shipper owned or leased
equipment ("SOL") increased 44.4 %, while freight not in trailers ("NIT")
decreased 1.1%.
Northbound, total volume over Jacksonville increased 5.2% for the three
months ended September 30, 2002 compared to the same period a year earlier. The
Company's northbound trailer volume from Puerto Rico to Jacksonville increased
6.2%, used car volume increased 22.9%, NIT increased 55.6%, while SOL volume
decreased 50.0%.
Nine Months Ended September 30, 2002 and 2001
- ---------------------------------------------
With the discontinuance of the Northeast service at the end of 2001,
the Company had 22.8% less overall vessel capacity deployed in the Puerto Rico
lane compared to the year earlier period. The Company's total volume of freight
moving to and from Puerto Rico decreased 14.7% compared to the year earlier
period. Operating revenues for the nine months ended September 30, 2002 were
$54.1 million, a decrease of $8.3million, or 13.3%, compared to the year earlier
period.
The Company's Puerto Rico deployed vessel capacity utilization overall
during the nine months ended September 30, 2002 was 77.0% to Puerto Rico and
20.8% from Puerto Rico compared to 68.5% and 20.2%, respectively, during the
year earlier period. The Company had an average of 185 tractor units operating
on the mainland during the nine months ended September 30, 2002, generating
9,387 miles per month of which 81.0% were loaded.
Largely resulting from the 22.8% decrease in overall vessel capacity to
Puerto Rico, operating expenses decreased $19.3 million, or 25.4%, for the nine
months ended September 30, 2002 from $75.9 million for the same period in 2001
to $56.6 million. The termination of the Company's Northeast service resulted in
significant decreases in operating expenses related to salary, wages and
benefits; purchased transportation, primarily due to decreased tug charter hire
expense; fuel expense; depreciation; and operation and maintenance expense.
The operating loss for the nine months ended September 30, 2002 was
$2.5 million compared to an operating loss of $13.5 million in the prior year
period. Compared to the nine months ended September 30, 2001, operating loss
improved by $11.0 million, due to discontinuing the Northeast service,
reductions in headcount and equipment, and other cost-cutting initiatives. The
operating loss for the nine months ended
13
September 30, 2001 was further impacted by the expenses related to the dry-
docking of both of the ro/ro vessels operated by the Company under charter from
an affiliate of $1.3 million. As a result of the above, the operating ratio was
104.6% during the nine months ended September 30, 2002, compared to the 121.7%
operating ratio during the year earlier period. Net interest expense of $2.3
million was down from $2.5 million in the year earlier period due primarily to
lower interest rates. The Company also realized a gain of $84,701 from non-
operating items during nine months ended September 30, 2002 compared to a loss
of $148,379 in the year earlier period. The total costs associated with the
three laid-off vessels during the nine months ended September 30, 2002, net of
charter income, were $1,303,790.
The Company's loss before income taxes for the nine months ended
September 30, 2002 was $4.7 million compared to a pre-tax loss of $16.2 million
in the year earlier period. Due to the Company's continued losses, a full
valuation allowance is provided for its deferred income tax asset. Therefore,
the net loss for the nine months ended September 30, 2002 remained at $4.7
million, as compared to a net loss of $16.1 million for the year earlier period.
The net loss applicable to common shares for the nine months ended September 30,
2002 after accretion of preferred stock discount was equivalent to $.50 per
share as compared to $1.65 per share for the year earlier period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operations was $3.4 million during the nine months
ended September 30, 2002 compared to net cash used by operations of $8.9 million
during the same period in 2001. Net cash provided by investing activities of
$336,865 during the nine months ended September 30, 2002 reflects $647,409 in
proceeds from the sale of equipment, partially offset by $423,065 of additions
to and construction of property and equipment, which were primarily attributable
to payments for trailers. Net cash provided from financing activities was $6.8
million during the nine months ended September 30, 2002 compared to $9.1 million
during the nine months ended September 30, 2001.
At September 30, 2002, cash amounted to $1.3 million, working capital
was negative $768,558, and stockholders' equity was $10.6 million. As of
September 30, 2002, the Company had $4.6 million drawn under the credit facility
against a borrowing base of $5.0 million that is secured by net receivables of
$9.7 million.
The Company has reduced its payables to non-affiliated vendors by $2.6
million since December 31, 2001.
During the three months ended September 30, 2002, the Company issued a
total of 22,102.448 shares of Series B preferred stock in exchange for
$22,102,448 principal amount of debt owed to the Company's affiliate,
Kadampanattu Corp. The Series B preferred stock is not convertible into common
stock.
During the three months ended September 30, 2002 the Company
rescheduled its principal payments under each of its two Title XI bond issues.
The combined interest payment due on September 30, 2002 totaling $805,010 was
paid on its scheduled date. The Company had previously rescheduled the principal
payments of $210,300 and $338,360, respectively, due on each of its Title XI
bond issues September 30, 2001 and March 31, 2002 for payment on September 30,
2002 and March 31, 2003. This resulted in total scheduled principal payments for
the Company's two Title XI issues of $420,600 and $676,720, respectively, for
both September 30, 2002 and March 31, 2003. During the three months ended
September 30, 2002, the Company rescheduled the full double principal payments
due September 30, 2002 and one half of the double principal payments due
14
March 31, 2003. As a result, commencing March 30, 2003, these rescheduled
principal payments will be paid equally over the remaining scheduled principal
payment periods of each Title XI issue. As rescheduled, the Company's semi-
annual principal payments shall increase to $226,073 and $363,118 until fully
paid September 30, 2022 and March 30, 2023, respectively. There was no fee paid
nor change in interest rate due to this rescheduling.
The Company's projected cash flows from operations combined with its
revolving line of credit and maintenance of its vendor relationships are
expected to produce sufficient available liquidity to maintain its current level
of operations and service its debt obligations through calendar 2002 and the
third quarter of 2003.
AFFILIATES OF THE COMPANY
The Estate of M. P. McLean (the "Estate") is the majority shareholder
of the Company. John D. McCown, Chairman and Chief Executive Officer of the
Company, is a co-executor of the Estate. F. Duffield Meyercord, director of
the Company, is the other co-executor of the Estate. Malcom P. McLean, Jr. a
director of the Company and the spouse of Greggory B. Mendenhall are
beneficiaries of the Estate.
Two companies wholly owned by the Estate have entered into transactions
with the Company.
During the nine month period ended September 30, 2002, Transportation
Receivables 1992, LLC purchased the Series A convertible stock and provided $5
million in secured loans to the Company. The proceeds of the loan were partially
used to repay a $3 million loan outstanding to the Estate. The Estate is the
sole member of Transportation Receivables 1992, LLC. The Company's Audit
Committee, based upon a fairness opinion from an independent entity, approved
all transactions with Transportation Receivables 1992, LLC.
Kadampanattu Corp., a corporation wholly-owned by the Estate of Malcom
P. McLean, charters the two roll-on roll-off vessels to the Company under fixed
rate charters entered into at the time of the Company's inception. During the
nine months ended September 30, 2002 Kadampanattu Corp. deferred receipt of its
charterhire and has agreed to such deferrals through the end of calendar year
2002. Kadampanattu Corp. has also advanced funds to the Company on an unsecured
basis. During the three month period ended September 30, 2002, Kadampanattu
Corp. converted $22.1 million of indebtedness of the Company, arising from both
charter deferrals and advanced funds, to non-convertible series B preferred
stock. Beginning April 1, 2003, cumulative preferential dividends will accrue on
the purchase price of the Series B preferred stock at a rate equal to 90-day
LIBOR plus 350 basis points. Starting in 2004, the dividend rate will increase
25 basis points per quarter up to a maximum dividend rate of 90-day LIBOR plus
650 basis points. The notes that the Series B preferred stock was exchanged for
was non-interested bearing until it was due and provided for interest on overdue
amounts at a rate of 90 day Libor plus two and one-half percent. The company's
Board of Directors and Audit Committee approved this conversion.
John D. McCown and William G. Gotimer, Jr. are officers and directors
of Kadampanattu Corp. Malcom P. McLean, Jr., a director of the Company, is a
director of Kadampanattu Corp.
MARKET CONDITIONS.
The market in which the Company operates, the United States to Puerto
Rico trade lane, remained hyper-competitive with significant over capacity
through mid-summer 2002. Beginning in 2002, the Company
15
reduced its capacity by ceasing to operate its Northeast Service. In mid-May
2002 the Company's competitors significantly reduced their capacity. One of the
Company's competitors, NPR, which had operated under Chapter 11 bankruptcy
protection since March 2001, ceased all of its operations by selling its vessel
and other assets to Sea Star Line, LLC. The purchaser has chosen not to operate
any of the three sailings per week formerly operated by NPR. Another competitor,
CSX Lines, added a weekly sailing to its service. The Company expects this
change in market condition to result in increased capacity utilization and
freight rates in the fourth quarter of 2002 and into 2003. Despite the reduction
in capacity in the trade lane no assurance can be made that market conditions
will improve or that competitive pressures will not increase.
CURE OF NASDAQ LISTING REQUIREMENTS NON-COMPLIANCE
Through the issuance of non-convertible preferred stock, in payment of
an equal face amount of the Company's debt to its affiliate Kadampanattu Corp.,
the Company has cured its previous non-compliance with NASDAQ maintenance
standards thereby permitting the Company's continued listing on the NASDAQ
National Stock Market.
FORWARD-LOOKING STATEMENTS
This report may contain statements that may be considered as
forward-looking or predictions concerning future operations and market
conditions. 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 demand for transportation services offered by the Company, and
changes in rate levels for transportation services offered by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has had no material change in market risk in the first nine
months of 2002. For a discussion of the Company's exposure to market risk see
Item 7A of the Company's Annual Report on Form 10-K.
Item 4. Controls And Procedures
(a)
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on their
evaluation, our principal executive officer and principal accounting
officer concluded that Trailer Bridge, Inc.'s disclosure controls and
procedures are effective.
(b)
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.
16
PART II
OTHER INFORMATION
Item 5. Changes in Securities and Use of Proceeds
During the three months ended September 2002, the Company issued
22,102.448 shares of Series B preferred stock in exchange for $22,102,448
principal amount of debt owed to the Company's affiliate, Kadampanattu Corp. The
Series B preferred stock, which has a liquidation preference of $1,000 per
share, is pari passu with the Company's Series A preferred stock as to
liquidation. In the event of the liquidation of the Company, the holders of
common stock would not be entitled to receive any distributions after the
payment or provision for the Company's liabilities unless the liquidation
preferences of the Series A and B preferred stock have been paid in full.
Beginning April 1, 2003, cumulative preferential dividends will accrue
on the purchase price of the Series B preferred stock at a rate equal to 90-day
LIBOR plus 350 basis points. Starting in 2004, the dividend rate will increase
25 basis points per quarter up to a maximum dividend rate of 90-day LIBOR plus
650 basis points. No dividends may be declared or paid on the Series A preferred
stock or any common stock unless (1) all accrued dividends on the Series B
preferred stock have been paid in full and (2) the holders of a majority of the
outstanding shares of Series B preferred stock consent to such payment.
The Series B preferred stock is not convertible into common stock. The
Company, at its option, may redeem the Series B preferred stock in whole or in
part if after giving effect to the redemption the Company will have at least $10
million in stockholders' equity and, in the event such shares are held by
affiliates of the Company, such redemption has been approved by the holders of a
majority of disinterested shares voting on the redemption at a meeting of
shareholders.
The Company did not pay any underwriting discounts or commissions in
connection with the sale of the Series B preferred stock. The sale of the shares
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) of the Act as a transaction not involving any public offering.
17
Item 6. Exhibits and Reports on Form 8-K.
Description of Exhibit
----------------------
3.1.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.1.2 Certificate of Designations of Series A Preferred Stock
3.1.3 Certificate of Designations of Series B Preferred Stock
3.1.4 Amendment No. 1 to Certificate of Designations of Series B
Preferred Stock
3.1.5 Amendment No. 2 to Certificate of Designations of Series B
Preferred Stock
10.8.12 Trust Indenture, Second Supplement to Special Provisions
10.8.13 United States Government Guaranteed Ship Financing Bond, 1997
Series, Amended and Restated September 30, 2002, in the amount of
$10,515,000
10.8.14 Trust Indenture, Second Supplement to Special Provisions
10.8.15 United States Government Guaranteed Ship Financing Bond, 1997
Series II, Amended and Restated September 30, 2002, in the amount
of $16,918,000
99.1 Certification of Trailer Bridge, Inc.'s Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of
the Sarbanes-Oxley Act of 2002)
99.2 Certification of Trailer Bridge, Inc.'s Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of
the Sarbanes-Oxley Act of 2002)
(b) The Company filed a report on Form 8-K dated August 13, 2002 on
August 13, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
TRAILER BRIDGE, INC.
Date: November 14, 2002 By: /s/ John D. McCown
--------------------------------------
John D. McCown
Chairman and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Mark A. Tanner
--------------------------------------
Mark A. Tanner
Vice President of Administration
and Chief Financial Officer
19
CERTIFICATIONS
I, John D. McCown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trailer Bridge, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John D. McCown
----------------------------------------
John D. McCown
Chief Executive Officer
20
CERTIFICATIONS
I, Mark A. Tanner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Trailer Bridge, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Mark A. Tanner
----------------------------------------
Mark A. Tanner
Chief Financial Officer
21
TRAILER BRIDGE, INC. FORM 10-Q
EXHIBIT INDEX
Description of Exhibit
----------------------
3.1.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.1.2 Certificate of Designations of Series A Preferred Stock
3.1.3 Certificate of Designations of Series B Preferred Stock
3.1.4 Amendment No. 1 to Certificate of Designations of Series B
Preferred Stock
3.1.5 Amendment No. 2 to Certificate of Designations of Series B
Preferred Stock
10.8.12 Trust Indenture, Second Supplement to Special Provisions
10.8.13 United States Government Guaranteed Ship Financing Bond, 1997
Series, Amended and Restated September 30, 2002, in the amount of
$10,515,000
10.8.14 Trust Indenture, Second Supplement to Special Provisions
10.8.15 United States Government Guaranteed Ship Financing Bond, 1997
Series II, Amended and Restated September 30, 2002, in the amount
of $16,918,000
99.1 Certification of Trailer Bridge, Inc.'s Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of
the Sarbanes-Oxley Act of 2002)
99.2 Certification of Trailer Bridge, Inc.'s Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of
the Sarbanes-Oxley Act of 2002)
22