SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission file number 0-15087
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 and telephone number of Principal executive offices)
Securities Registered Pursuant to section 12(b) of the Act: None
Securities Registered Pursuant to section 12(g) of the Act:
$0.01 Par Value
Common Stock
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the registrant's definitive proxy statement
incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___ No X
The aggregate market value of the shares of the registrant's $0.01 par value
common stock held by non-affiliates of the registrant as of June 30, 2004, the
last business day of the registrant's most recently completed second fiscal
quarter was $19,858,928 (based upon $5.01 per share being the price at which the
common equity was last sold). In making this calculation the issuer has assumed,
without admitting for any purpose, that all executive officers and directors of
the registrant are affiliates.
As of February 28, 2005 11,763,230 shares of the registrant's common stock, par
value $.01 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 10, 11, 12, 13, and 14 of this Report is incorporated by reference from
the registrant's definitive proxy statement for the 2005 annual meeting of
stockholders that will be filed no later than 120 days after the end of the year
to which this report relates.
PART I
Item 1. Business
BUSINESS OVERVIEW
Trailer Bridge, headquartered in Jacksonville, Florida, is an integrated
trucking and marine freight carrier that provides truckload freight
transportation primarily between the continental U.S. and Puerto Rico. Founded
in 1991 as a Delaware corporation by transportation pioneer Malcom P. McLean,
the Company combines an efficient and dedicated motor carrier with a low cost
barge and tug marine transportation system. Mr. McLean died in May 2001. Trailer
Bridge was the first, and remains the only company serving markets governed by
the Jones Act to exclusively operate marine vessels fully configured to carry
48' and 53' long, 102" wide, "high-cube" equipment. This configuration enables
the Company to achieve equipment utilization rates and other operating
efficiencies not readily available to traditional ocean carriers that primarily
use smaller capacity equipment, such as 40' containers.
Trailer Bridge's differentiated service quickly gained the acceptance of U.S. to
Puerto Rico shippers, leading to rapid growth and high equipment utilization. In
1996 the Company increased its vessel capacity by 56% by inserting midsections
("mid-bodies") into its two existing barges, increasing the capacity of each
barge to 405 53' equivalent truckload units.
Trailer Bridge increased its vessel capacity again in 1998 and 1999 when it took
delivery of five 403' long container carrying barges designed specifically for
the Company's integrated truckload marine transportation system and bearing the
Company's Triplestack Box Carrier(R) trade name. The Triplestack Box Carriers
are versatile, low-draft vessels that have a capacity of 272 53' containers,
stacked three-high on a single deck. During the fourth quarter of 2000 and
throughout 2001, the Company provided a weekly sailing directly between Newark,
New Jersey and San Juan, Puerto Rico. This service was discontinued in December
2001. The Company currently utilizes two mid-bodied roll-on roll-off vessels and
two Triplestack Box Carriers to provide twice weekly sailings directly between
Jacksonville, Florida and San Juan, Puerto Rico. Three Triplestack Box Carriers
are currently available for short or long term charter. During 2004, 2003 and
2002 one Triplestack Box Carrier was chartered for a portion of the year under
short-term charters agreements. At March 1, 2005 one Triplestack Box Carrier is
under short-term charter.
OPERATIONS
At December 31, 2004, Trailer Bridge operated a fleet of 113 tractors, 548
high-cube trailers, 2,797 53' high cube containers and 2,174 53' chassis that
transport truckload freight between the Company's San Juan, Puerto Rico port
facility, its Jacksonville port facility and inland points in the US and Puerto
Rico. The Company provides full truckload service between inland points within
the continental U.S., primarily to streamline the final delivery of goods to
maximize revenues. The Company maintains a centralized dispatch and customer
service center at its Jacksonville headquarters to coordinate the movement of
customer freight throughout our system. The operations center features a fully
integrated computerized dispatch and customer service network. Customer service
representatives solicit and accept freight, quote freight rates and serve as the
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primary contact with customers. Dispatch and customer service personnel work
together to coordinate Puerto Rico and non-Puerto Rico freight to achieve the
most optimum load balance and minimize empty miles within the Company's
truckload operation.
At December 31, 2004, Trailer Bridge owned and operated two 736' triple-deck,
roll-on/roll-off (ro/ro) ocean-going barges and two 403' Triplestack Box
Carriers. Loading of the ro/ro barges is performed with small maneuverable yard
tractors operated by stevedores hired by an outside contractor. Each ro/ro
vessel is towed at approximately 9 knots by one 7,200 horsepower diesel-powered
tug. Each Triplestack Box Carrier is towed at approximately 9 knots by one 5,000
horsepower diesel-powered tug. The tugs are time-chartered and are manned by
employees of an unaffiliated tug owner. Compared to a self-propelled vessel, a
towed barge has reduced Coast Guard manning requirements and higher fuel
efficiency compared to the steam turbine vessels operated by competitors.
Similarly, the large number of U.S. tugs available for charter provides the
Company with a reliable source for towing services
MARKETING AND CUSTOMERS
Senior management leads the Company's sales and marketing function and sales
professionals based in Jacksonville, San Juan and other key U.S. cities. These
sales personnel aggressively market Trailer Bridge to shippers as a
customer-oriented provider of value-priced and dependable service. The Company
targets major shippers with high volume, repetitive shipments whose freight
lends itself to integrated trucking and marine service.
The Company believes that price is the primary determinant in the freight lanes
in which it is involved. However, the Company also believes that it provides
enhanced service that results from its use of an intermodal model (Intermodal is
a term used to represent the variety of transportation services the Company
provides to move products from one location to another, including but not
limited to air, water, land and rail). This intermodal service frees the
customer from the operational complexities of coordinating the interface between
over-the-road, rail and marine service. This customer service philosophy has
generated increased demand from existing customers and has led to ongoing
relationships with customers such as DaimlerChrysler, General Motors, K Mart, JC
Penney, Home Depot, Georgia Pacific, General Electric, Procter & Gamble,
Whirlpool, SC Johnson, Walgreen's and Toys `R' Us.
Because the Company has a diversified customer base, typical shipments to Puerto
Rico include furniture, consumer goods, raw materials for manufacturing,
electronics, new and used automobiles, and apparel, whereas, the typical
shipments from Puerto Rico normally include healthcare products,
pharmaceuticals, electronics, shoes and recyclables. Management intends to
continue the Company's efforts both to increase business with existing customers
and add new core relationships.
The Company maintains written contracts with the majority of its customers.
These contracts generally specify service standards and rates, eliminating the
need for negotiating the rate for individual shipments. A contract typically
requires a minimum tender of cargo during a specified term in return for a set
rate during the period.
The continental United States/Puerto Rico trade lane in which the Company
operates is imbalanced with approximately 80% of the freight moving southbound.
The Company's core business is southbound containers and trailers but it also
moves new automobiles, used automobiles, non-containerized, or freight not in
trailers ("NITs") and freight moving in shipper owned or leased equipment
("SOLs").
VESSELS
Ro/Ro Barges
Page 3
At December 31, 2004, the Company owned and operated two 736' by 104'
triple-deck roll-on/roll-off barges. Each deck has ten lanes that are accessed
from the stern of the vessel via ramp structures in Jacksonville and San Juan
that have been built specifically for the Company. Eight lanes on each vessel
have been converted to carry new and used automobiles on car decks that allow up
to 11 cars to fit in the space previously used for one 53' unit. The trailers
are secured on the vessel by attachment to pullman stands that are engaged and
disengaged with specially configured yard tractors used to pull the trailers
into position on the vessel.
Triplestack Box Carriers
At December 31, 2004, the Company owned and operated two Triplestack Box
Carriers ("TBC") that are single deck barges designed to carry 53' containers in
a liner trade between Jacksonville, Fl. and San Juan Puerto Rico. These vessels
utilize the same port facilities as the ro/ro barge vessels in Jacksonville and
San Juan. Wheeled vehicles, known as reach-stackers, carry and load the
containers onto the vessels. These highly maneuverable vehicles are also used by
railroads to load containers on rail cars for intermodal transportation. The
reach-stackers are significantly less expensive than the cranes typically
required for loading and unloading containers from the holds of large cargo
ships and instead directly access the deck of the vessel via simple and movable
linear planks. The Company has filed for patent protection for its unique system
consisting of the vessels and their related loading and unloading method.
Currently, three of the TBC are not used in regular service but are available
for short or long-term charter, of these one is currently chartered under a
short-term lease agreement.
VESSELS OWNED BY THE COMPANY
VESSEL NAME TYPE CAPACITY SERVICE
----------- ---- -------- -------
SAN JUAN JAX BRIDGE Ro/Ro 405 53' units Jax/San Juan
JAX SAN JUAN BRIDGE Ro/Ro 405 53' units Jax/San Juan
ATLANTA BRIDGE TBC 272 53' units Laid up
CHARLOTTE BRIDGE TBC 272 53' units Laid up
MEMPHIS BRIDGE TBC 272 53' units Jax/San Juan
CHICAGO BRIDGE TBC 272 53' units Chartered
BROOKLYN BRIDGE TBC 272 53' units Jax/San Juan
RAMP STRUCTURES
The loading and unloading of the Company's two 736' by 104' triple-deck
roll-on/roll-off barges is accomplished through the use of ramp structures at
both locations. The Company owns a floating ramp structure in San Juan for the
two 736' by 104' triple-deck roll-on/roll- off barges. In Jacksonville, the
Company has the preferential right to use a land-base ramp structure built and
owned by the Jacksonville Port Authority.
REVENUE EQUIPMENT
At December 31, 2004, the Company had 108 line haul tractors and 5-day cabs. The
line haul power units are conventional tractors. The day cabs are used for local
delivery work in the Jacksonville area. The Company also operated 548 dry van
trailers, of which 533 measured 48' x 102" models and 15 of which were 53' x
102" models, as well as, 2,797 53' containers and 2,174 chassis.
Page 4
At December 31, 2004, the Company owned 305 Vehicle Transport Module(R) or
VTM's(TM) ("VTM's") designed and built by the Company. These units are used to
transport automobiles and can hold up to three vehicles to provide an efficient
unit for loading and unloading. During 2004 the Company received two separate
patents for the VTMs. One patent covers the VTM unit while the second patent
covers the method of loading and unloading vehicles into the VTM.
The Company performs preventative maintenance on equipment at its Jacksonville
operations center, with major maintenance and repairs handled by outside
contractors.
DRIVER RECRUITING AND RETENTION
The Company offers competitive compensation and full health care benefits
differentiating it from many truckload operators. Management also promotes
driver retention by assigning drivers a tractor for the life of the unit.
Drivers are assigned a single dispatcher, regardless of geographic area,
awarding supporting line-haul operations positions, while providing more
predictable home time for its drivers. The Company driver turnover in 2004 was
21.9% compared to 33% in 2003.
FUEL AVAILABILITY AND COST
The Company actively manages its fuel costs by requiring drivers to fuel in
Jacksonville at an offsite fuel facility where the Company has established a
favorable pricing arrangement. Whenever possible in route, drivers are required
to fuel at truck stops and service centers with which the Company has
established volume purchasing discounts. The Company also offers
fuel-conservation bonuses to our drivers based on achieving miles per gallon
goals.
Although the Company pays indirectly for the marine fuel used by the large tugs
it charters, tug crew personnel employed by the tug owner control the actual
fuel loading. The tug owner is responsible for providing the tug fuel. The cost
of which is rebilled and paid by the Company. The fuel is purchased and loaded
in each of the ports served by the Company, primarily Jacksonville, Florida, at
nearby fuel facilities during cargo loading operations.
Trailer Bridge does not engage in any fuel hedging activities.
In 2001 due to the increased cost of fuel, the Company instituted fuel
surcharges to its customers, pursuant to its tariff and these fuel surcharges
have remained in place throughout 2004. The fuel surcharges for domestic truck
movements are charged on a per mile basis and are stipulated in the Company's
tariff at predetermined levels based upon the price of fuel. During 2004 the
fuel surcharge for domestic truck movements was between $.04 per mile to $.14
per mile. This fuel surcharges on movements to and from Puerto Rico are assessed
on a per move basis and have substantially helped to offset the increases in
fuel prices. The additional fuel surcharge is distinguished from freight
revenues and both are reported in the Company's operating revenues.
SAFETY AND INSURANCE
Trailer Bridge emphasizes safety in all aspects of its operations. The Company
maintains its own strict standards for recruiting drivers, including a minimum
of two years of verifiable commercial driving experience, a safe driving history
and a successful physical examination, including drug and alcohol testing. Its
ongoing driver safety program includes an initial orientation for all new
drivers, 100% log monitoring and strong adherence to all speed and weight
regulations.
Page 5
The Company bids annually for both marine and land insurance policies. Major
coverages include hull and protection indemnity, pollution, excess liability,
marine cargo, truckers' liability, workers' compensation and commercial
property.
TECHNOLOGY
The Company utilizes an IBM AS-400 computer system to handle its accounting and
operations requirements. The computer system links the Company's headquarters,
truck operations center, San Juan office and marine terminals in Jacksonville
and San Juan. The system enhances the Company's operating efficiency by
providing cost effective access to detailed information concerning available
equipment, loads, shipment status and specific customer requirements, and
permits the Company to respond promptly and accurately to customer requests.
The Company's electronic data interchange ("EDI") capability allows customers to
tender loads, receive load confirmation, check load status and receive billing
information via computer. The Company's EDI system also helped in accelerating
the collection of its receivables. The Company's largest customers require EDI
service from their core carriers. It is Management's belief that this advanced
technology will be required by an increasing number of large shippers as they
reduce the number of carriers they use in favor of the more responsive core
carriers.
During 2003 the Company implemented a web-based load tracking system, providing
customers with real time load information this booking system was deployed
during 2004. This system, along with the EDI, has allowed the Company to better
respond to customer demands. Since the deployment of this web based tracking
system, usage has increased as our customers have found these systems to be
useful for tracking their inventory and monitoring of their current payables.
These systems have also enabled Trailer Bridge to handle increasing demand with
greater efficiency, by knowing the exact location and load of every operator as
well as, open or excess capacity and their performing customers.
A new project initiative under review for 2005 will allow for the integration of
all of our servers under a common platform. The new iSeries AS/400 computer
system will further enhance the security of all corporate data by combining all
data stores into a unified environment. This approach to data storage and
retrieval into a SANS environment tightens controls on access via better
management tools in the integrated environment. It also moves control of
traditionally vulnerable Microsoft operating software into the control of the
IBM OS/400 operating system, the most secure operating systems in the industry
today.
COMPETITION
The Company currently competes with three carriers for freight moving between
the U.S. and Puerto Rico where its southbound container volume market share,
excluding vehicles, during 2004 was approximately 13%. During 2002 one of the
Company's competitors, Navieras de Puerto Rico ("NPR"), which had operated under
Chapter 11 bankruptcy protection since March 2001, ceased operations by selling
its vessels and other assets to another competitor Sea Star Line. The current
operators in the Puerto Rico trade are Horizon Lines LLC, Crowley Liner
Services, Trailer Bridge and Sea Star Line. Based on available southbound
industry data for 2004, Horizon Lines LLC has approximately 33% of the market
and operates five steam turbine powered container vessels that carry mainly 40'
containers. Crowley Liner Services, a subsidiary of Crowley Maritime
Corporation, has approximately 33% of the market and operates roll-on/roll-off
barges in various services between the U.S. and Puerto Rico. Sea Star Line,
owned primarily by Saltchuk Resources, Inc., parent of Totem Ocean Trailer
Express, Inc. has approximately 21% of the market with two steam turbine powered
combination RO/RO container vessels. If vehicle cargos were included, in the
market share analysis both Trailer Bridge's and Crowley's market share would be
in excess of the preceding figures.
Page 6
Puerto Rico shippers select carriers based primarily upon price and to a lesser
extent, criteria such as frequency, transit time, consistency, billing accuracy
and claims experience. The Company faces vigorous price competition from
competitors in the Puerto Rico market, which are part of larger transportation
organizations that possess greater financial resources than the Company.
The trucking industry is highly competitive and fragmented with, no one carrier
or group of carriers dominating the market. The Company's non-Puerto Rico
domestic truckload operations, which are used primarily to balance its core
Puerto Rico service, compete with a number of trucking companies as well as
private truck fleets used by shippers to transport their own products. Truckload
carriers compete primarily on the basis of price. The Company's truck freight
service also competes to a limited extent with rail and rail-truck intermodal
service, but the Company attempts to limit this competition by seeking more time
and service-sensitive freight.
REGULATION
As a common and contract motor carrier, the Company is regulated by the Surface
Transportation Board (the successor federal agency to the Interstate Commerce
Commission) and various state agencies. The Company's drivers, including
owner-operators, also must comply with the safety and fitness regulations
promulgated by the Department of Transportation, including those relating to
drug testing and hours of service.
The Company's operations are subject to various federal, state and local
environmental laws and regulations, implemented principally by the Environmental
Protection Agency and similar state regulatory agencies. These regulations
govern the management of hazardous wastes, discharge of pollutants into the air,
surface and underground waters, and the disposal of certain substances.
Management is not aware of any water or land fuel spills or hazardous substance
contamination on its properties and believes that its operations are in material
compliance with current environmental laws and regulations.
The Company's marine operations are conducted in the U.S. domestic trade. A set
of federal laws known as the Jones Act requires that only U.S. built, operated
and crewed vessels move freight between ports in the U.S., including the
noncontiguous areas of Puerto Rico, Alaska, Hawaii and Guam. These marine
operations are subject to regulation by various federal agencies, including the
Surface Transportation Board, the U.S. Maritime Administration and the U.S.
Coast Guard. These regulatory authorities have broad powers governing activities
such as operational safety, tariff filings of freight rates, certain mergers,
contraband, environmental contamination and financial reporting. Management
believes that its operations are in material compliance with current marine laws
and regulations, but there can be no assurance that current regulatory
requirements will not change.
EMPLOYEES
At December 31, 2004, Trailer Bridge had 202 employees consisting of 80 truck
drivers and 122 executive and administrative personnel.
WEBSITE
The Company maintains a website at TrailerBridge.com. All Company filings can be
viewed on this website as soon as practicable after filing.
Item 2. Properties
Trailer Bridge is headquartered in Jacksonville, Florida, where it owns a 16,000
square foot office building adjacent to its truck operations center. This
facility allows 81 Jacksonville personnel to be centralized in one location. The
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office building has also been designed so that additions can be constructed to
serve the Company's future needs. The truck operations center property consists
of 27.0 acres near Interstate 95, approximately 2 miles from the Company's
marine terminal on Blount Island. In addition to the office building, the
property includes an 11,400 square foot tractor maintenance shop where
preventative maintenance and repair are performed, as well as, a trailer washing
facility, drivers' lounge and parking space for tractors and trailers.
The Company maintains small sales office facilities in Georgia, North Carolina,
Illinois, Ohio and New Jersey that are utilized by sales personnel. The Company
also rents a 2,600 square foot office in San Juan where 16 Puerto Rico
administrative and sales personnel are based.
PORT FACILITIES
The Company utilizes port facilities in Jacksonville and San Juan where its
vessels are loaded and freight is stored awaiting further movement by either
vessel or truck. Trailer Bridge's terminal in Jacksonville is located on Blount
Island and consists of a berthing area and approximately 25 acres leased from
the Jacksonville Port Authority. The lease, which expires in 2013, allows the
Company to use the berthing area on a preferential, although non-exclusive,
basis and the land area on an exclusive basis. Included in the lease is a $3.6
million triple deck loading ramp funded by the Jacksonville Port Authority that
the Company uses to load and unload its triple-deck roll-on/roll-off barges. The
Company pays the Jacksonville Port Authority a monthly rental payment plus a
wharfage payment based upon total cargo volume with a minimum guarantee of
approximately $1.7 million per year. The Company's marine terminal in San Juan
consists of two berthing areas and 39 acres that the Company utilizes on a
preferential basis under a stevedoring services agreement with the contractor
who provides cargo-handling services. This agreement, which expires in November
2006, calls for the Company to make fixed payments as well as payments based
upon total cargo volume and the prevailing wharfage rates of the Puerto Rico
Ports Authority. The Company believes its present port facilities are sufficient
for its current operations. See - RAMP STRUCTURES in Item 1- Business.
Item 3. Legal Proceedings
The Company from time to time is a party to litigation arising in the ordinary
course of its business, substantially all of which involves claims related to
personnel matters or for personal injury and property damage incurred in the
transportation of freight. The Company presently is a party to litigation
arising from vehicle accidents and cargo damage. Management is not aware of any
claims or threatened claims that reasonably would be expected to exceed
insurance limits or have a material adverse effect upon the Company's operations
or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 2004.
Page 8
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on the NASDAQ National Market tier of
The NASDAQ Stock Market on July 29, 1997 under the symbol: TRBR. During 2003 the
Company's Common Stock was transferred to the NASDAQ Small Cap Market.
The following table represents the high and low sales price for the past two
years.
2004 High Low
---- ---- ---
First Quarter $ 7.99 $ 5.25
Second Quarter 6.50 3.56
Third Quarter 6.13 3.92
Fourth Quarter $ 9.52 $ 4.50
2003 High Low
---- ---- ---
First Quarter $ 2.95 $ 1.68
Second Quarter 3.99 2.09
Third Quarter 4.00 3.00
Fourth Quarter $ 6.72 $ 3.35
The Company has never paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future. Certain of the Company's loan
documents prevent the payment of cash dividends under certain circumstances.
As of March 15, 2005 there were 50 stockholders of record in addition to
approximately 850 stockholders whose shares were held in nominee name.
Page 9
Item 6. Selected Financial Data
The selected financial data set forth below has been derived from the financial
statements of the Company. The selected financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto appearing elsewhere in this report.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 98,775 $ 86,434 $ 75,954 $ 82,134 (1) $ 94,067 (1)
Operating income (loss) 8,597 (2,595) (4,036) (26,242) (2)(3) (3,961)
Net income (loss) 4,430 (5,455) (7,103) (29,420) (2)(3) (10,342) (4)
Net income (loss) attributable to common
shareholders 2,353 (7,282) (7,747) (29,420) (10,342)
Basic, net income (loss) per common share 0.20 (0.74) (0.79) (3.01) (1.06) (4)
Diluted, net income (loss) per common share 0.19 (0.74) (0.79) (3.01) (1.06)
BALANCE SHEET DATA:
Working capital (deficit) 10,423 (2,041) (6,452) (21,373) 3,159
Total assets 114,226 (5) 61,262 65,406 67,724 82,640
Long-term debt, capitalized
leases and due to affiliate 109,595 (5) 43,340 44,959 61,153 52,473
(Capital deficit) Stockholders' equity $ (7,090)(5) $ 4,634 $ 9,000 $ (8,745) $ 18,866
---------------------------------------------------------
(1) During the fourth quarter of 2000 and throughout 2001, the Company provided
weekly service between Newark, New Jersey and San Juan, Puerto Rico. The
service was discontinued in December 2001.
(2) Includes $1,054,410 of restructing expenses relating to the wind down of
its Newark operations
(3) Includes $3,820,421 charge for impairment of assets
(4) Includes income from the cumulative effect of change in accounting
principle relating to drydocking costs of $127,000 or $.01 per basic and
diluted share.
(5) During the fourth quarter of 2004 the Company aquired all the assets and
certain debt of an affiliate, resulting in the retirement of the Company's
Class B Preferred Stock.
Page 10
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
EXECUTIVE SUMMARY
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.
During the fourth quarter of 2004, the Company purchased Kadampanattu
Corporation, as discussed further in Note 6 to the Financial Statements. This
purchase and refinancing were immediately accretive to the Company's earnings.
The Company believes the overall savings during the month of December, the first
month after the transaction occurred was approximately $.2 million. The Company
further believes the transaction will have a favorable annual impact of
approximately $2.0 million, in 2005 and each year thereafter. This savings is
primarily from a reduction in rent and annual lease payments of $11.5 million
partially off set by an increase in depreciation and interest expense of
approximately $9.5 million.
RESULTS OF OPERATIONS
The following table sets forth the indicated items as a percentage of net
revenues for the years ended December 31, 2004, 2003 and 2002.
Operating Statement - Margin Analysis
(% of Operating Revenues)
2004 2003 2002
---------------- -------------- --------------
Operating Revenues 100% 100% 100%
Salaries, wages, and benefits 15 18 20
Rent and purchased transportation:
Related Party 7 8 10
Other 24 28 28
Fuel 10 10 10
Operating and maintenance (exclusive of
depreciation shown separately below) 24 25 23
Taxes and licenses 0 1 1
Insurance and claims 3 3 4
Communications and utilities 1 1 1
Depreciation and amortization 3 4 4
Other operating expenses 4 4 7
---------------- -------------- --------------
Total Operating Expenses 91 103 105
---------------- -------------- --------------
Operating income (loss) 9 (3) (5)
Net interest expense (5) (3) (4)
---------------- -------------- --------------
Net income (loss) 4% (6)% (9)%
================ ============== ==============
Year ended December 31, 2004 Compared to Year ended December 31, 2003
The Company operating ratio (operating expense stated as a percentage of
operating revenues) decreased from 103% in 2003 to 91% in 2004. This improvement
is more fully explained under operating expense caption set forth below.
Page 11
Revenues
The following table sets forth by percentage and dollar, the changes in the
Company's revenue and volume by sailing route and freight carried:
Volume & Revenue Changes 2004 compared to 2003
Overall Southbound Northbound
---------------- ---------------------------------------
Volume Percent Change:
Core container & trailer 4.1% 0.2% 17.5%
Auto and other cargos 15.4% 16.0% 11.5%
SOLs 16.0% 19.2% (11.7)%
Domestic linehaul (54.3)%
Revenue Change ($millions):
Core container & trailer $ 4.2 $ 3.4 $ 0.8
Auto and other cargos 3.3 3.1 0.2
SOLs 0.4 0.4 (0.0)
Domestic linehaul (1.2)
Other Revenues 5.6
----------------
Total Revenue Change $ 12.3
----------------
The increase in core container and trailer revenue, auto and other revenue is
due to increased vessel capacity utilization and increased rates per equivalent
units.
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic
lane was 96.5% during 2004, compared to 93.3% during 2003.
Domestic revenue is for moves that originate and terminate within the
continental United States. The decrease in domestic line haul revenue was
primarily the result of less domestic linehaul within the continental United
States, because of increased demand in the Puerto Rico shipping lane. This
change in demand resulted in less equipment available for Domestic linehaul.
The increase in other revenues is primarily attributable to an increase in fuel
surcharges, demurrage, security charges and charterhire. The Company's fuel
surcharge is included in the Company's revenues and amounted to $7.0 million in
2004 and $4.0 million in 2003. Demurrage, a charge assessed for failure to
return empty freight equipment on time, is also included in the Company's
revenues and amounted to $2.9 million in 2004 in comparison to $2.2 million in
2003. During 2004 total charterhire revenue amounted to $0.7 million in 2004 and
$0.4 million in 2003. Charterhire is rental revenue for vessels not in use in a
liner service. Security Charges are charges to cover the Company's expenses
beyond the normal security required to ensure the safety of the Shipper's cargo.
These charges amounted to $1.3 million in 2004 in comparison to $.3 million in
2003.
Operating expenses
Operating expenses increased by $1.2 million, or 2.1% from $89.0 million in 2003
to $90.2 million for 2004. This increase was due to volume-related increases in
substantially all areas other than salaries and benefits, related party purchase
transportation, other purchase transportation and taxes and licenses which
decreased 3.5%, 8.5%, 4.5% and 60.0%, respectively. The decrease in salaries and
benefits was due to lower driver payroll due to fewer miles driven by Company
drivers. The decrease in related party purchase transportation was the result of
the purchase of the Ro/Ro Barges in December. The decrease in rent of other
Page 12
purchase transportation was the result of the Company purchasing equipment that
was previously leased and the increased usage of rail transportation instead of
truck transportation. The decrease in taxes and license is associated with a
favorable legal determination in Puerto Rico, which resulted in the reversal of
a $.3 million accrual recorded in 2001. Fuel expense increased $1.2 million or
13.8% primarily as a result of a $1.4 million increase in tug fuel from
increased fuel prices partially offset by a decrease of $0.2 million in truck
fuel expense resulting from increased use of rail transportation. Operating and
maintenance expense increased $1.8 million or 8.3% due to $1.2 million in higher
cargo handling costs related to increased volume; $0.3 million increase in
repairs and maintenance due to a detailed survey of revenue equipment and
increased dry docking and vessel maintenance expense and marine terminal
expenses. Other operating expenses increased $0.8 million due to professional
fees during 2004; an increase in the provision for doubtful accounts is
primarily due to the increase in revenues during 2004. Depreciation expense
declined $0.3 million or 10% to $3.1 million in 2004 from $3.4 million in 2003,
primarily due to a change in estimated lives of depreciable property as further
discussed below, partially off-set by an increase in depreciable assets. And as
a result, the Company's operating ratio improved to 92% during 2004 from 103%
during 2003.
The Company extended the estimated remaining life for its TBC barges by twelve
years and its containers, VTMs and chassis by seven and nine years respectively,
to more accurately reflect the remaining useful life of its equipment. This
change in estimate was recorded prospectively and resulted in reduction in
depreciation expense of approximately $409,000 or $0.03 per common share for
2004.
Interest Expense
Interest expense increased to $4.2 million in 2004 from $2.9 million in 2003
primarily due to higher interest rates on the Company's floating rate
indebtedness and the write-off of approximately $0.5 million in deferred loan
costs associated with the Company's prior term loan with a variable interest
rate. In December of 2004, the term loan indebtedness was satisfied with the
proceeds of the $85 million in senior secured debt.
Income taxes
Income taxes are calculated using the liability method specified by SFAS No. 109
"Accounting for Income Taxes". Valuation allowances are provided against
deferred tax assets if it is considered "more likely than not" that some portion
or the entire deferred tax asset will not be realized.
During 2004 the Company realized a reversal of approximately $1.7 million of
its' deferred tax asset, from which the management has recorded approximately
$21.0 million as a valuation allowance for the current year. Management is
continuously evaluating the deferred tax valuation allowance, to determine what
portion of the deferred tax asset, if any, may be realized in the future.
Management's evaluation includes, among other things, such factors as a history
of profitability, a substantial history of operations upon which to base a
forecast and a history of accurately forecasting future results of operations.
As a result of the factors described above the Company reported net income of
$4.4 million for 2004 compared to net loss of $5.5 million in 2003.
Preferred Stock Series "B"
Undeclared Dividends - The undeclared dividends on the preferred stock series
"B" increased to $1,115,796 in 2004 from $846,385 in 2003, primarily due to
increases in the contractual dividend rate from 2003. These dividends will never
be paid and are recorded because they were contractual obligations.
Page 13
Preferred Stock Accretion - The Preferred Stock Series "B" accretion decreased
to $515,845 in 2004 from $980,745 in 2003, due to the recognition of the implied
discount rate, which was applicable to the Series "B" Preferred Stock in
accordance with the Staff Accounting Bulletin No. 68 "Increasing Rate Preferred
Stock", through December 1, 2004.
Excess Consideration Transferred to the Holders of the Preferred Stock Over the
Carrying Amount - In connection with the acquisition of K-Corp on December 1,
2004, the Company redeemed the Series "B" Preferred Stock for $24 million. In
connection with the redemption, the Company recorded the excess of the
consideration transferred ($24 million) to the holders of the preferred stock
over the carrying amount of the preferred stock, ($23.5 million), and reflected
as a subtraction of $0.5 million from net earnings available to common
shareholders. This transaction was recorded in accordance with Emerging Issues
Task Force D-42 "The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock"
As a result of the acquisition of K-Corp and the redemption of the Series "B'
Preferred Stock, the Company will not have these transactions in 2005 and
subsequent years.
Vessels
Currently the Company owns five TBCs. Of these vessels two are used for liner
service between San Juan, Puerto Rico and Jacksonville, Florida. In 2004 the
revenue earned from these two vessels was approximately $35.3 million in
comparison to $34.1 million in the prior year.
Of the remaining three vessels that were originally used in Newark, New Jersey,
one was leased to an unrelated third party during the first quarter of 2005 at
an approximate annual rent of $1.6 million and the remaining two vessels are
available for charter. The charter agreement will expire in April of 2005 but
can be renewed up until January of 2006. Management continues to evaluate the
use of the two vessels and no determination has been made as to their final use.
As an alternative to their current use management has considered using one
vessel as a ready spare, relieving the other vessels in the fleet during periods
of dry-docking in order to protect market share and keep established shipping
routes open, and possibly leasing the other vessel under a similar contract to
the agreement reached during 2005. Ultimately management intends to use all of
these vessels on expanded trade routes throughout the American Continents and
surrounding island countries, as new markets become available and are considered
to be economically feasible.
It is the management's belief that based on the current cash flows derived from
the TBC vessels and their current market value as determined by an independent
appraiser, that the current excess capacity of the two vessels, available for
charter, does not indicate an impairment.
Year ended December 31, 2003 Compared to Year ended December 31, 2002
The following table sets forth by percentage and dollar, the changes in the
Company's revenue and volume by sailing route and freight carried:
Page 14
Revenue & Volume Changes 2003 compared to 2002
Overall Southbound Northbound
---------------- ----------------- ----------------
Volume Percent Change:
Core container & trailer 17.2% 18.3% 13.5%
Auto and other cargos 0.1% (1.4)% 26.2%
SOLs (3.1)% (8.5)% 54.5%
Domestic linehaul (53.9)%
Revenue Change ($millions):
Core container & trailer 7.6 7.2 0.4
Auto and other cargos 1.7 1.2 0.5
SOLs 0.4 0.3 0.1
Domestic linehaul (1.6)
Other Revenues 2.4
----------------
Total Revenue Change 10.5
----------------
Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic
lane was 92.0% during 2003, compared to 79.4% during 2002.
The Company's fuel surcharge is included in the Company's revenues and amounted
to $4.0 million in 2003 and $2.6 million in 2002. The Company's demurrage is
included in the Company's revenues and amounted to $2.3 million in 2003 and $1.3
million in 2002. 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 $0.4 million in 2003 and $0.7 million in
2002. Charterhire is rental revenue for vessels not in use in a liner service.
The decrease in domestic line haul revenue was primarily as a result of
increased southbound volumes resulting in less available domestic equipment
capacity and the loss of a particular domestic linehaul customer. Domestic
revenue is for moves that originate and terminate within the continental United
States.
Operating expenses
Operating expenses increased $9.0 million, or 11.3% from $80.0 million in 2002
to $89.0 million for 2003. This increase was due to volume-related increases in
substantially all areas other than insurance and claims, communications and
utilities that decreased 1.6% and 12.0%, respectively, due primarily to lower
claims volume and premiums as well as entering into a contract with a new
telephone company. Salary, wages and benefits increased 4.1% due to increased
workers compensation insurance premiums of $0.7 million that was partially
offset by a $0.2 million decrease in salary and employee benefits. Purchased
transportation other than to a related party increased $2.9 million or 13.2%
primarily due to increased volume resulting in additional inland miles and
increased fuel costs increasing the rate per mile. Fuel expense increased $1.6
million or 21.2% primarily as a result of a $1.3 million increase in tug fuel
from increased fuel prices and an increase of $0.2 million in truck fuel expense
resulting from increased fuel prices. Operation and maintenance expense
increased $3.9 million or 21.9% due to $1.3 million in higher stevedoring costs
related to increased volume and increased stevedoring rates in Jacksonville;
$1.4 million in truck maintenance due to increased tire, parts and repair
expense and increased dry docking and vessel maintenance expense and marine
terminal expenses. As a result, the Company's operating ratio decreased to 103%
during 2003 from 105% during 2002.
Page 15
Interest Expense
Interest expense decreased to $2.9 million in 2003 from $3.1 million in 2002
primarily due to lower interest rates on the Company's floating rate
indebtedness and lower loan balances.
Income taxes
Income taxes are calculated using the liability method specified by SFAS No. 109
"Accounting for Income Taxes". Valuation allowances are provided against
deferred tax assets if it is considered "more likely than not" that some portion
or the entire deferred tax asset will not be realized.
During 2003 the Company realized an increase of approximately $2.0 million of
its' deferred tax asset, from which the management has recorded approximately
$22.7 million as a valuation allowance for the current year.
As a result of the factors described above the Company reported a net loss of
$5.5 million for 2003 compared to net loss of $7.1 million in 2002.
DIVIDENDS
The Company has not declared or paid dividends on its common stock during the
past five years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $3.1 million in 2004 compared to net cash
provided by operations of $.9 million in 2003. This represented an increase of
$2.1 million from 2003. $9.9 million of the improvement was attributable to
increased net income. Increases in accounts receivable and decreases in accounts
payable offset this amount by $6.4 million. The trade receivable balance
increased $4.6 due to revenue earned in the fourth quarter of 2004 in comparison
with the revenue earned in the fourth quarter of 2003. The increase in revenue
was primarily the result of higher volume and higher yields. The revenue in the
fourth quarter of 2004 and 2003 was $27.8 million and $22.1 million,
respectively. The decrease in accounts payable was facilitated by the Company's
improved profitability. Net cash used in investing activities was $23.6 million
in 2004 compared to net cash provided by investing activity in 2003 of $.1
million in 2003. This represented a decrease of $23.7 million from 2003. $19.8
million of the decrease is directly related to the purchase of equipment
primarily the Ro/Ro vessels and revenue equipment from the proceeds of the
senior secured notes in December 2004. $2.0 million of the decrease is result of
a required contractual deposit related to the Ship Financing Bonds and the
Notes, Title XI debt. Net cash provided in financing activities was $26.2
million in 2004 compared to net cash used by financing activities of $2.6
million in 2003 representing an increase of $28.8 million. Net cash provided in
financing activities consisted primarily of activity related to the sale of
senior secured notes of $85.0 million which was used to acquire K-Corp for $32.0
million and assumed $9.1 million worth of debt which was paid off on December 1,
2004, repay the Company's credit facility for $20.2 million, exercise equipment
purchase options for $11.8 million, provide an increase of working capital of
$6.0 million and the remainder of which went to fees and expenses of $3.5
million associated with the senior secured notes. At December 31, 2004, cash
amounted to $6.2 million, working capital was a $10.4 million, and stockholders'
equity was a deficit of $7.1 million.
During the period between 1998 and 2002, the Company operated in a trade lane
that was characterized by significant over capacity and fierce competition. This
over capacity and competition resulted in significant and prolonged rate
decreases throughout that period. Similarly, the Company's ability to pass on
certain expenses to customers, through surcharges and other customer charges was
severely hampered due to competition. As a result, during the years ended
December 31, 2003 and 2002, the Company incurred net losses applicable to common
shares of $7,282,220 and $7,746,644 respectively and had cash flows provided
(used) by operating activities of $860,093 and $(3,704,325) respectively as well
Page 16
as a working capital deficiency of $2,040,623 and $6,451,866 at December 31,
2003 and 2002 respectively.
Also during this period, one of the trade lane's largest participants filed
bankruptcy and, after operating in bankruptcy for approximately 18 months, sold
its vessel assets to another competitor in the trade. With a realignment of
capacity and demand in the trade lane, 2003 resulted in a redistribution of
freight volume among the remaining four participants, which resulted in
increased volume and capacity utilization. During the fourth quarter of 2003,
the Company began to implement increases in customer rates and surcharges. In
addition to the revenue increases, the Company also implemented several changes
to reduce cost. This increase in rates and utilization of capacity helped the
Company improve its operating position for the current year. For the year ended
December 31, 2004 earnings available to common shareholders were $2,352,672 and
as of December 31, 2004, working capital was $10,422,542.The most notable
changes for 2004 were made in purchased transportation, healthcare costs and tug
fuel consumption. During the fourth quarter of 2003, the Company began utilizing
lower cost rail transportation in certain lanes effectively lowering the unit
cost per mile of inland transportation. In January 2004, the Company implemented
a change in policy and healthcare providers, reducing benefit costs and started
chartering tugs with more fuel-efficient engines. The Company has also entered
into written contracts with customers that reflect increased rates and
additional surcharges as market conditions have improved. Based upon the
foregoing, the Company believes that it will be able to maintain the increased
vessel capacity utilization at these increased rates over the foreseeable
future. The trade lane in which the Company operates in is protected by a number
of barriers to entry, the most formidable of which is the Jones Act that
requires that vessels serving the trade lane be built in the United States,
operated by United States citizens and crewed by United States citizens. Other
barriers to entry include limited port space in San Juan. Both act as major
constraints to the addition of new capacity.
At December 31, 2003, The Company had $13.1 million due to a bank under its
senior credit facility, which expired January 31, 2004. In addition, the Company
had $6.3 million due to related parties, all of which was scheduled to be paid
in 2004. In April 2004, after receiving extensions from its then existing senior
lender, the Company refinanced this bank debt with a new senior lender. This
bank debt in turn was fully paid down with the proceeds of its $85.0 million
note offering completed December 1, 2004. As of December 31, 2004, the Company
had an unused and available line of credit of $10 million secured by current
eligible receivables with interest at prime plus 1.5% that may only be drawn
upon if certain conditions are satisfied. Additionally, with the proceeds of the
$85.0 million senior secured notes, the Company paid $5.3 million of its debt
payable to related parties, deferring approximately $2.5 million until January
of 2005. This debt is scheduled to be repaid in 36 monthly payments to the
Estate of M. P. McLean. The Company's Chief Executive Officer, John McCown,
personally guarantees approximately $0.1 million of this debt. All other amounts
owed to affiliates were repaid with a portion of the proceeds of the $85.0
million note offering completed December 1, 2004. This restructure of debt,
along with increased rates and vessel utilization are expected to allow us to
meet our working capital requirements through December 31, 2005. During previous
years, due to overcapacity and hyper competitiveness in the United States /
Puerto Rico trade lane in which the Company operates, it had significant
negative cash flow from operations. The conditions in the United States / Puerto
Rico trade lane have changed significantly and the Company now has significant
positive cash flow from operations which is expected to continue over the
foreseeable future. Our business plan does not require or anticipate any
utilization of the revolving credit facility.
The Company has issued two series of Ship Financing Bonds designated as its
7.07% Sinking Fund Bonds Due September 30, 2022 and 6.52% Sinking Fund Bonds Due
March 30, 2023. These bonds are guaranteed by the U.S. government under Title XI
of the Merchant Marine Act of 1936, as amended. The Company refers to these
bonds as the "Title XI Bonds." During 2003, with the consent of the holders of
the Title XI Bonds, the Company deferred the semi-annual principal payments on
the Title XI Bonds and in 2004 the Company spread those deferred principal
payments over the remaining maturity. The Company has therefore rescheduled the
principal payments of $232,022 and $372,429 due each semi-annual period until
Page 17
fully paid on September 30, 2022 and March 30, 2023, respectively. The aggregate
principal amount of the Title XI Bonds outstanding at December 31, 2004 was
$22.1 million. In addition, in connection with obtaining the consent of the
Secretary of Transportation of the United States of America to offer and sell
the notes, in December 2004 the Company deposited approximately $2.0 million
into a reserve fund that secures the Title XI Bonds.
As of December 31, 2004, the Company was restricted from performing certain
financial activities due to it not being in compliance with Title XI debt
covenants. The provisions of the Title XI covenants provide that, in the event
of noncompliance with the covenants, the Company is restricted from conducting
certain financial activities without obtaining the written permission of the
Secretary of Transportation of the United States (the "Secretary "). If such
permission is not obtained and the Company enters into any of the following
actions it will be considered to be in default of the Title XI covenants and the
lender will have the right to call the debt. These actions are as follows: (1)
acquire any fixed assets other than those required for the normal maintenance of
its existing assets; (2) enter into or become liable under certain charters and
leases (having a term of six months or more); (3) pay any debt subordinated to
the Title XI Bonds; (4) incur any debt, except current liabilities or short term
loans incurred in the ordinary course of business; (5) make investments in any
person, other than obligations of U.S. government, bank deposits or investments
in securities of the character permitted for money in the reserve fund; or (6)
create any lien on any of its assets, other than pursuant to loans guaranteed by
the Secretary of Transportation of the United States under Title XI and liens
incurred in ordinary course of business. However, none of the foregoing
covenants will apply at any time if the Company meets certain financial tests
provided for in the agreement and the Company has satisfied its obligation to
make deposits into the reserve fund. As of December 31, 2004, the Company was in
compliance with such restrictions. The debt was not in default, and the lender
did not have the right to call the debt.
In November 2004, the Company received permission from the Secretary to issue
$85.0 million in Senior Secured Notes and to use the proceeds of this
transaction to fund the acquisition of K Corp., repay K Corp.'s indebtedness,
repay its existing debts, exercise certain equipment purchase options on
equipment previously leased and strengthen its liquidity.
Interest on the Senior Notes is payable semi-annually on each May 15 and
November 15, beginning on May 15, 2005. The notes accrue interest at 9-1/4 % per
year on the principal amount. The notes will mature on November 15, 2011. After
November 15, 2008, we may redeem the notes, in whole or in part, at its option
at any time or from time to time at the redemption prices specified in the
indenture governing the notes, plus accrued and unpaid interest thereon, if any,
to the redemption date. In addition, prior to November 15, 2007, we may redeem
up to 35% of aggregate principal amount of the notes with the net proceeds of
certain equity offerings at a redemption price of 109 1/4 % of the principal
amount of the notes, plus accrued and unpaid interest to the date of redemption.
Upon the occurrence of certain changes in control specified in the indenture
governing the notes, the holders of the notes will have the right, subject to
certain conditions, to require us to repurchase all or any part of their notes
at a repurchase price equal to 101% of the principal amount of the notes, plus
accrued and unpaid interest thereon, if any, to the redemption date.
On December 1, 2004 the Company has amended its existing revolving credit
facility with Congress Financial Corporation to reduce the maximum availability
from $20 million to $10 million. The revolving line of credit is subject to a
borrowing base formula (approximately $9,400,000 at December 31, 2004) based on
a percentage of eligible accounts receivable. At December 31, 2004 there were no
advances drawn on this credit facility.
The Company believes that cash from operations will allow it to meet the
Company's ongoing working capital requirements. The Company currently
anticipates limited capital expenditures for 2005, and do not expect to require
additional borrowings to fund the Company operations through the end of 2005.
Page 18
INFLATION
Inflation has had a minimal effect upon the Company's operating results in
recent years. Most of the Company's operating expenses are inflation-sensitive,
with inflation generally producing increased costs of operation. The Company
expects that inflation will affect its costs no more than it affects those of
other truckload and marine carriers.
SEASONALITY
The Company's marine operations are subject to the seasonality of the Puerto
Rico freight market where shipments are generally reduced during the first
calendar quarter and increased during the third and fourth calendar quarter of
each year. This seasonality is not as pronounced in recent years.
FORWARD LOOKING STATEMENTS
This 10-K contains statements that constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The matters
discussed in this Report include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to the future operating performance of the Company. Investors are cautioned that
any such forward looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors.
Without limitation, these risks and uncertainties include the risks of changes
in demand for transportation services offered by the Company, any changes in
rate levels for transportation services offered by the Company, economic
recessions and severe weather.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations and
commitments. See Notes 5, 6 and 7 of the Notes to Financial Statements for
additional information regarding transactions with related parties, long-term
debt and operating leases.
Payments due by period
- ----------------------------------------------------------------------------------------------------------
Contractual obligations Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------------------------------------------
Long-term Debt Obligations $ 107,132,647 $ 1,208,902 $ 2,356,764 $ 2,356,764 $ 101,204,501
Due to affiliates 2,462,136 760,807 1,707,045
Operating Lease Obligations 30,656,329 12,010,354 7,513,024 3,616,267 7,516,684
----------- ----------- ---------- ---------- ----------
Total $ 140,251,112 $ 13,980,063 $ 11,576,833 $ 5,973,031 $ 108,721,185
Purchase obligations are reflected in accounts payable and accrued liabilities
on the balance sheet and are not reflected in the above table. In addition, the
table above does not include contractual interest obligations on the Company's
debt and other purchase obligations that are not material.
TRANSACTIONS WITH AFFILIATES
The Company leased two roll-on/roll-off barge vessels and the use of a ramp
system in San Juan, Puerto Rico from an affiliate, Kadampanattu Corp. (K-Corp),
under operating lease agreements until December 2004. Certain stockholders of
the affiliate were controlling stockholders of the Company through August 16,
2004. The lease payments were $10,050 per day for each vessel. The vessels were
purchased with proceeds from the Senior Secured notes. Total lease expense under
these leases from affiliate totaled $6,714,863, $7,336,500 and $7,336,500 in
Page 19
2004, 2003 and 2002, respectively. During 2004 the affiliate, agreed to defer
$1.5 million of charter hire to be paid by the Company, in 2004. In addition
during 2002, the Company issued to this affiliate $24 million before discount of
non-convertible preferred stock Series B as payment for indebtedness, amounts
deferred under the long-term charters of the Company and an advance portion of
the 2003 charterhire. The Series B Preferred Stock was redeemed in December
2004. The Company received net cash advances from the same affiliate totaling
$989,436 and $461,468 in 2003 and 2002, respectively. These advances were used
to meet the Company's cash flow requirements.
The Company received net advances of $121,500 and $203,877 from a Mr. John
McCown, the Company's Chief Executive Officer in 2003 and 2002, respectively.
Such advances were used to meet the Company's cash flow requirements. Such
advances totaled $386,127 and $264,627 at December 31, 2003 and 2002,
respectively. In connection with the senior secured debt offering, a portion of
the proceeds was used to payoff this obligation in December 2004.
During the quarter ended June 30, 2002 the Company borrowed $5 million from an
affiliate, with interest at the rate of 8.03% a year. Certain stockholders of
the affiliate are also principal stockholders of the Company. The proceeds of
this borrowing were used to repay the $3 million borrowed under the revolving
credit agreement, and to provide $2 million in working capital. Amounts
outstanding were $4,933,205 at December 31, 2003. In April 2004, the $4,933,205
related party obligation was rescheduled from October 2004 to May 2007. In
connection with the Senior Secured debt offering, a portion of the proceeds was
used to payoff this obligation in December 2004. In addition during 2002, the
same affiliate purchased preferred convertible stock Series A for $2 million.
The preferred stock Series A, had a liquidation preference of $2 million. The
Preferred Stock Series A, pursuant to its terms was converted into 1,955,000
common shares in July of 2004. In April 2004, the $1.5 million deferred charter
hire obligation was combined with the $989,436 of advances into a $2.5 million
obligation payable over 36 months with interest at 8.03% a year. In connection
with the K-Corp acquisition, this debt was transferred to another affiliate and
remained an obligation of the Company as of December 31, 2004.
On August 16, 2004, the Estate of M.P. McLean distributed 1,641,732 shares of
common stock to its beneficiaries. This distribution resulted in a decrease of
the Estates' ownership in the Company to approximately 44.7%. In December 1,
2004, the Company purchased 100% of the stock of K Corp. for $32.0 million and
assumed $9.1 million worth of debt, which was paid off on December 1, 2004 from
a portion of the proceeds obtained with the senior secured notes. Previously
K-Corp leased to the Company two roll-on / roll-off barge vessels and the use of
a ramp system in San Juan, Puerto Rico. As a result of the purchase, the Company
expects to improve its operations by eliminating the rent expense and replacing
it with additional interest and depreciation.
On December 1, 2004, the Company acquired 100% of the outstanding stock of K
Corp. with a portion of the proceeds obtained from the senior secured notes.
Previously K-Corp leased to the Company two roll-on / roll-off barge vessels and
the use of a ramp system in San Juan, Puerto Rico. As a result of the purchase,
the Company expects to improve its operations by eliminating the lease
agreements and replacing it with interest expense resulting from the notes on
the senior secured debt and depreciation expense of the acquired RO/RO vessels.
The Company paid $32.0 million and assumed debt of $9.1 million, which was paid
off on December 1, 2004. These obligations were paid with a portion of proceeds
of the senior secured debt.
The Company purchased the stock of K-Corp for $41.1 million. In this connection,
the Company acquired K-Corp's assets, which had a historical carrying value of
$48.9 million. Since the Company and K-Corp had similar controlling
shareholders, the Company, recorded K-Corp's assets at the historical carrying
value of $24.9 million and estimated the value of the preferred stock to
approximate its liquidation value. The excess of the historical carrying value
over the amount paid is recorded as a $7.8 million capital contribution on the
Statement of Changes in (Capital Deficit) Stockholders Equity.
Page 20
The assets acquired are as follows:
2004
-----------------------
Vessels $ 24,150,632
Land 750,000
Investment in Preferred Stock Series B 24,000,000
-----------------------
Total assets acquired $ 48,900,632
=======================
The purchase price is as follows:
Purchase price 2004
-----------------------
Cash paid by Company 32,000,000
Long term debt acquired in connection with the K-Corp Acquistion 9,132,306
-----------------------
Purchase price of assets aquired $ 41,132,306
=======================
On December 1, 2004, in connection with the acquisition of K-Corp the Company
redeemed the preferred stock Series B for $24 million. In connection with this
redemption the Company recorded the excess of the consideration transferred to
the holders of the preferred stock over the carrying amount of the preferred
stock on the Company's balance sheet as a subtraction from net earnings to
arrive at net earnings available to common shareholders.
The redemption of the preferred stock is as follows:
2004
-----------------------
Purchase price paid to K-Corp $ 24,000,000
Accreated value of the Company 23,543,702
-----------------------
Excess consideration given to the shareholders over the
carrying value of the Preferred Class B securities $ (456,298)
=======================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the application of
certain accounting policies, many of which requires the Company to make
estimates and assumptions about future events and their impact on amounts
reported in these financial statements and related notes. Since future events
and their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the
financial statements.
Management believes the application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, management has found the
application of accounting policies to be appropriate, and actual results have
not differed materially from those determined using necessary estimates.
Page 21
The Company's accounting policies are more fully described in Note 1 to the
financial statements. Certain critical accounting policies are described below.
Revenue Recognition. Voyage revenue is recognized ratably over the duration of a
voyage based on the relative transit time in each reporting period; commonly
referred to as the "percentage of completion" method. Voyage expenses are
recognized as incurred. Demurrage and charterhire revenue are included in our
revenues. Demurrage is a charge assessed for failure to return empty freight
equipment on time. Charter hire is rental revenue for vessels not in use in a
liner service. The Company recognizes demurrage and charterhire revenue based on
negotiated fees included in the contracts of our customers. These amounts are
computed daily and included in "Operating Revenue."
Useful Life and Salvage Values. The Company reviews the selections of estimated
useful lives and salvage values for purposes of depreciating our property and
equipment. Depreciable lives of property and equipment range from 2 to 40 years.
Estimates of salvage value at the expected date of trade-in or sales are based
on the expected values of equipment at the time of disposal. The accuracy of
these estimates affects the amount of depreciation expense recognized in a
period and ultimately, the gain or losses on the disposal of the asset.
Impairment Of Long-Lived Assets. The Company evaluates the carrying amounts and
periods over which long-lived assets are depreciated to determine if events have
occurred which would require modification to our carrying values or useful
lives. In evaluating useful lives and carrying values of long-lived assets, the
Company reviews certain indicators of potential impairment, such as undiscounted
projected operating cash flows, replacement costs of such assets, business plans
and overall market conditions. The Company determines undiscounted projected net
operating cash flows and compares it to the carrying value. In the event that
impairment occurred, the Company would determine the fair value of the related
asset and record a charge to operations calculated by comparing the asset's
carrying value to the estimated fair value. The Company estimates fair value
primarily through the use of third party valuations. In 2001, the Company
recorded an impairment charge on our Triplestack Box Carriers (R) barges
amounting to approximately $3.8 million. The Company recognized no impairments
in 2002, 2003 or 2004. In the fourth quarter of 2004, the Company had an
appraisal performed on these vessels. The results of this appraisal listed the
fair market value of these same vessels at $36 million as compared to a net book
value of $25.67 million.
Uncollectible Accounts. The Company records a monthly accrual provision based on
specific known collectibility problems, historical losses, and current economic
information. In addition, the Company performs an analysis of the total
receivables on a quarterly basis, and adjusts the provision account to the
calculated balance. It is our policy to write off receivables once the account
reaches 180-days past due or it is determined that additional efforts of
collection will not result in the receipt of the receivable. During the
years-ended December 31, 2004, 2003 and 2002 the Company provided $1,467,438,
$1,687,894 and $981,637, respectively for uncollectible accounts. The Company
records this expense in other operating expenses. The trade receivable balances
during the corresponding period were $15.6 million, $11.0 million and $9.9
million for 2004, 2003 and 2002 respectively. The trade receivable balance
increase in 2004 of $4.6 was due the $5.8 million increase in revenue earned in
the fourth quarter of 2004 over the fourth quarter of 2003. The increase in
revenue was primarily the result of higher volume and higher yields. The revenue
in the fourth quarter of 2004 and 2003 was $27.8 million and $22.1 million,
respectively. However, the year-end balance for the allowance account was
reduced by $262,815 and $211,859 for the years-ended December 31, 2004 and 2003,
due to better collection of demurrage revenues and current receivables.
Income taxes. Income taxes are calculated using the liability method specified
by SFAS No. 109 "Accounting for Income Taxes". Valuation allowances are provided
against deferred tax assets if it is considered "more likely than not" that some
portion or the entire deferred tax asset will not be realized.
Page 22
Management is currently evaluating the deferred tax valuation allowance, to
determine what portion, if any of the deferred tax asset that may be realized in
the future. Management's evaluation includes, among other things, such factors
as a consistent history of profitability, a substantial history of operations
upon which to base a forecast and a history of accurately forecasting future
results of operations.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with less management judgment in their application. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result. See the Company's audited
financial statements and notes thereto which begin on page F-1 of this Annual
Report on Form 10-K which contain accounting policies and other disclosures
required by generally accepted accounting principles.
NEW ACCOUNTING PRONOUNCEMENTS.
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123 (revised 2004), "Shared-Based Payment." Statement 123(R)
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. Statement 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other equity-based compensation
issued to employees in the income statement. The revised Statement generally
requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, "Accounting for Stock Issued to Employees", which was
permitted under Statement 123, as originally issued. As a result of
this accounting pronouncement, we anticipate that the adoption ofo this standard
may have a material impact on our Financial Statements. The effective date of
this standard is interim and annual period after June 15, 2005.
Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has limited it's exposure to market risk from changes in interest
rates, because all of the variable debt previously held by the Company was
converted to fixed debt in December 2004. For the current year, the estimated
fair value of the Company's long-term debt was less than the carrying values by
approximately $385,000. This difference in the fair value and the carrying
value is based on the anticipated increase in the Company's prime-lending rate
over the term of the Company's fixed rate debt.
The Company has no interest rate swap or hedging agreements at December 31,
2004.
Expected Fiscal Year of Maturity at December 31, 2004
(Dollars in Thousands)
Long Term Debt:
2005 2006 2007 2008 Thereafter Total Fair Value
Fixed Rate $ 1,969,709 $ 1,997,295 $ 2,066,514 $ 1,178,382 $ 102,382,883 $ 109,594,783 $ 109,208,859
Average Interest Rate 9.19% 9.20% 9.22% 9.22% 8.85% 9.14%
Variable Rate -- -- -- -- -- -- --
Average Interest Rate -- -- -- -- -- -- --
Total $ 109,594,783
Page 23
Item 8. Financial Statements and Supplementary Data
TRAILER BRIDGE, INC.
Financial Statements for each of the Three Years in the Period Ended December
31, 2004 and Reports of Independent
Registered Public Accounting Firms
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Trailer Bridge, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheets of Trailer Bridge, Inc. as of
December 31, 2004 and 2003 and the related statements of operations, (capital
deficit) stockholders' equity and cash flows for the years then ended. We have
also audited the information as of and for the years ended December 31, 2004 and
2003 as set forth in the financial statement schedule listed in item 15(a).
These financial statements and the accompanying schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have nor were we engaged to perform an audit of its internal
controls over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trailer Bridge, Inc. at
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein as of and for the years ended December 31, 2004
and 2003.
BDO Seidman, LLP
Certified Public Accountants
Miami, Florida
February 27, 2005
Page 24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Trailer Bridge, Inc.
Jacksonville, Florida
We have audited the statements of operations, changes in (capital deficit)
stockholders' equity, and cash flows of Trailer Bridge, Inc. (the "Company") for
the year ended December 31, 2002. Our audit also included the financial
statement schedule for the year ended December 31, 2002 listed in Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, such financial
statement schedule for the year ended December 31, 2002, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
The accompanying 2002 financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has recurring losses from operations. This
matter raises substantial doubt about its ability to continue as a going
concern. Management's plans concerning this matter are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
April 12, 2003
Page 25
TRAILER BRIDGE, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
December 31, December 31,
2004 2003
---------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,195,580 $ 424,961
Trade receivables, less allowance for doubtful
accounts of $421,099 and $683,914 15,590,585 11,019,375
Other receivables 9,561 16,888
Prepaid expenses 2,317,749 1,856,451
------------ ------------
Total current assets 24,113,475 13,317,675
Property and equipment, net 82,078,423 46,768,813
Other assets 8,033,929 1,175,454
------------ ------------
TOTAL ASSETS $ 114,225,827 $ 61,261,942
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,930,859 $ 8,502,286
Accrued liabilities 3,531,473 4,038,388
Current portion of long-term debt 1,208,902 1,683,953
Current portion of due to affiliates 760,807 386,127
Unearned revenue 1,258,892 747,544
------------ ------------
Total current liabilities 13,690,933 15,358,298
Due to affiliates 1,701,329 5,922,641
Long-term debt, less current portion 105,923,745 35,347,339
------------ ------------
TOTAL LIABILITIES 121,316,007 56,628,278
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Capital Deficit):
Convertible Preferred stock Series A, $.01 par value, 1,000,000 shares
authorized; 19,550 shares issued and outstanding
(liquidation value $2,000,000) - 1,920,835
Preferred stock Series B, $.01 par value, 1,000,000 shares
authorized; 24,000 shares issued and outstanding
(liquidation value $24,000,000) - 23,027,857
Common stock, $.01 par value, 20,000,000 shares
authorized; 11,762,178 and 9,783,235 shares issued and
outstanding 117,621 97,832
Additional paid-in capital 52,140,986 42,404,394
Deficit (59,348,787) (62,817,254)
------------ ------------
TOTAL (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY (7,090,180) 4,633,664
------------ ------------
TOTAL LIABILITIES AND (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY $ 114,225,827 $61,261,942
============ ============
See accompanying summary of accounting policies and notes to financial
statements
Page 26
TRAILER BRIDGE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
---------------- ------------------- -------------------
OPERATING REVENUES $ 98,774,666 $ 86,433,985 $ 75,953,616
OPERATING EXPENSES:
Salaries, wages, and benefits 15,277,446 15,835,917 15,218,526
Rent and purchased transportation:
Related party 6,714,863 7,336,500 7,336,500
Other 23,340,757 24,435,491 21,587,340
Fuel 10,202,207 8,965,680 7,396,815
Operating and maintenance (exclusive of depreciation
shown separately below) 23,557,052 21,743,396 17,840,809
Taxes and licenses 282,483 706,303 602,742
Insurance and claims 3,298,460 2,988,770 3,036,622
Communications and utilities 524,044 508,228 577,320
Depreciation and amortization 3,081,916 3,392,742 3,383,002
(Gain) on sale of equipment (25,482) (27,961) (101,862)
Other operating expenses 3,924,260 3,144,385 3,112,174
---------------- ------------------- -------------------
90,178,006 89,029,451 79,989,988
---------------- ------------------- -------------------
OPERATING INCOME (LOSS) 8,596,660 (2,595,466) (4,036,372)
NONOPERATING EXPENSE:
Interest (expense) (4,174,300) (2,859,816) (3,057,328)
Interest income 7,244 192 4,759
Miscellaneous income/(expense) - - (10,527)
---------------- ------------------- ---------------------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT FOR INCOME 4,429,604 (5,455,090) (7,099,468)
BENEFIT (PROVISION) FOR INCOME TAXES 11,006 - (3,305)
---------------- ------------------- -------------------
NET INCOME (LOSS) 4,440,610 (5,455,090) (7,102,773)
ACCRETION OF PREFERRED STOCK DISCOUNT (515,845) (980,745) (643,871)
UNDECLARED CUMULATIVE DIVIDEND (1,115,796) (846,385) -
EXCESS OF CONSIDERATION TRANSFERRED TO HOLDERS OF
THE PREFERRED STOCK OVER THE CARRYING AMOUNT (456,298) - -
---------------- ------------------- -------------------
NET INCOME (LOSS) ATTRIBUTABLE TO $ 2,352,671 $ (7,282,220) $ (7,746,644)
COMMON SHARES ================ =================== ===================
PER SHARE AMOUNTS:
NET INCOME (LOSS) PER SHARE BASIC $ 0.20 $ (0.74) $ (0.79)
================ =================== ===================
NET INCOME (LOSS) PER SHARE DILUTED $ 0.19 $ (0.74) $ (0.79)
================ =================== ===================
See accompanying summary of accounting policies and
notes to financial statements
Page 27
TRAILER BRIDGE, INC.
STATEMENT OF CHANGES IN (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED December 31, 2004, 2003 and 2002
Preferred Stock Series A Preferred Stock Series B Common Stock
-------------------------- ------------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, January 1, 2002 - - - - 9,777,500 $ 97,775
Issuance of preferred stock Series
A, net of issuance costs 19,550 $ 1,920,835
Issuance of preferred stock Series B 24,000 $ 21,403,241
Accretion of preferred stock
discount 643,871
Net Loss
-------------------------- ------------------------------- ----------------------------
Balance, December 31, 2002 19,550 1,920,835 24,000 22,047,112 9,777,500 97,775
Accretion of preferred stock
discount 980,745
Options exercised 5,735 57
Satisfaction of preferred stock
series B subscription with related
party vessel services
Net Loss
-------------------------- ------------------------------- ----------------------------
Balance, December 31, 2003 19,550 1,920,835 24,000 23,027,857 9,783,235 97,832
Accretion of preferred stock
discount 515,845
Options exercised 23,943 239
Conversion of preferred stock
series A into common shares (19,550) (1,920,835) 1,955,000 19,550
Redemption of Preferred Stock
Series "B" (24,000) (23,543,702)
Excess of carrying value over the
purchase assets Note 6
Capital contribution as a result of
acquistion of affilate
Net Income
-------------------------- ------------------------------- ----------------------------
Balance, December 31, 2004 - $ - - $ - 11,762,178 $ 117,621
========================== =============================== ============================
See accompanying summary of accounting policies and
notes to financial statements
Page 28
STATEMENT OF CHANGES IN (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED December 31, 2004, 2003 and 2002
Preferred Stock
Additional Paid-In Series B
Capital Deficit Receivable Total
---------------------- ----------------- ----------------- ------------
Balance, January 1, 2002 $ 39,791,818 $ (48,634,775) $ - $ (8,745,182)
Issuance of preferred stock Series
A, net of issuance costs 1,920,835
Issuance of preferred stock Series B 2,596,759 (1,073,352) 22,926,648
Accretion of preferred stock discount (643,871) -
Net Loss (7,102,773) (7,102,773)
---------------------- ----------------- ----------------- ------------
Balance, December 31, 2002 42,388,577 (56,381,419) (1,073,352) 8,999,528
Accretion of preferred stock discount (980,745) -
Options exercised 15,817 15,874
Satisfaction of preferred stock
series B subscription with related
party vessel services 1,073,352 1,073,352
Net Loss (5,455,090) (5,455,090)
---------------------- ----------------- ----------------- ------------
Balance, December 31, 2003 42,404,394 (62,817,254) - 4,633,664
Accretion of preferred stock
discount (515,845) -
Options exercised 66,981 67,220
Conversion of preferred stock
series A into common shares 1,901,285 -
Redemption of Preferred Stock
Series "B" (23,543,702)
Excess of carrying value over the
purchase assets Note 6 (456,298) (456,298)
Capital Contribution as a result of
acquistion of affiliate 7,768,326 7,768,326
Net Income 4,440,610 4,440,610
---------------------- ----------------- ----------------- ------------
Balance, December 31, 2004 $ 52,140,986 $ (59,348,787) $ - $ (7,090,180)
====================== ================= ================= ============
See accompanying summary of accounting policies and
notes to financial statements
Page 29
TRAILER BRIDGE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED December 31, 2004, 2003 and 2002
December 31, December 31, December 31,
2004 2003 2002
---------------- ---------------- ---------------
Operating activities:
Net income (loss) $ 4,440,610 $ (5,455,090) $ (7,102,773)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,816,041 3,392,742 3,383,002
Noncash purchased transportation, related party - 1,073,352 3,673,417
Provision for doubtful accounts 1,467,438 1,687,894 981,637
(Gain)Loss on sale of fixed assets (25,482) (27,961) (101,862)
Loss on trading securities - - 10,527
Proceeds from sale of trading securities - - 50,876
Decrease (increase) in:
Trade receivables (6,038,648) (2,778,354) (362,689)
Other receivables 7,327 152 17,232
Prepaid expenses (461,298) 82,581 (680,907)
Other Assets - - 159,194
Increase (decrease) in:
Accounts payable (1,571,427) 1,522,105 (2,642,035)
Accrued liabilities and related party charterhire 965,786 1,469,943 (1,045,066)
Unearned revenue 511,348 (40,476) (44,878)
Due to affiliate - (66,795) -
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,111,695 860,093 (3,704,325)
------------ ------------ ------------
Investing activities:
Acquistion of K-Corp Assets (8,000,000) - -
Exercise of equipment purchase options (11,770,743) - -
Additions to and construction of property and equipment (1,888,688) (27,442) (47,138)
Proceeds from sale of property and equipment 194,019 161,881 886,424
Additions to other assets (2,095,156) (67,680) -
------------ ------------ ------------
Net cash (used in) provided by investing activities (23,560,568) 66,759 839,286
------------ ------------ ------------
Financing activities:
Proceeds from (payments on) borrowing on revolving line
of credit (5,779,481) (285,010) 102,623
Proceeds from (payments on) borrowing from affiliate (5,319,332) - 4,940,345
Issuance of Preferred Series A Convertible Stock - - 1,920,835
Redemption of Preferred Series B (24,000,000) - -
Exercise of stock options 67,220 15,874 -
Proceeds from Senior Secured Debt 85,000,000 - -
Principal payments on notes payable (18,251,471) (2,377,642) (1,827,572)
Loan costs (5,497,444) - -
Principal payments under capital lease obligations - - (531,673)
Derivative instrument payment - - (35,952)
------------ ------------ ------------
Net cash provided by (used in) financing activities 26,219,492 (2,646,778) 4,568,606
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,770,619 (1,719,926) 1,703,567
Cash and cash equivalents, beginning of the period 424,961 2,144,887 441,320
------------ ------------ ------------
Cash and cash equivalents, end of period $ 6,195,580 $ 424,961 $ 2,144,887
============ ============ ============
See accompanying summary of accounting policies and
notes to financial statements
Page 30
TRAILER BRIDGE, INC.
STATEMENTS OF CASH FLOWS CONTINUED
YEARS ENDED December 31, 2004, 2003 and 2002
Supplemental cash flow information and non-cash investing and financing
activities:
2004 2003 2002
---- ---- ----
Cash paid for state income taxes $ - $ - $ 2,875
============ ============ ============
Cash paid for interest 3,512,239 2,515,630 3,596,847
============ ============ ============
Satisfaction of preferred Stock Series B Subscription
with related party vessel services - 1,073,352 -
============ ============ ============
Conversion of subordinated debt with related party - - 22,926,648
============ ============ ============
Equipment acquired under capital lease agreement - - 375,006
============ ============ ============
Debt assumed on purchased assets purchased from affiliate 9,132,306 - -
============ ============ ============
Capital Contribution resulting from acquisition of K-Corp $ 7,768,326 $ - $ -
============ ============ ============
Page 31
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Trailer Bridge, Inc. (the "Company") is a domestic trucking and
marine transportation company with contract and common carrier authority.
Highway transportation services are offered in the continental United States,
while marine transportation is offered between Jacksonville, Florida and San
Juan, Puerto Rico.
Cash and Cash Equivalents - The Company considers cash on hand and amounts on
deposit with financial institutions with original maturities of three months or
less to be cash equivalents.
Allowance for Doubtful Accounts - The Company records a monthly accrual
provision based on specific known collectibility problems, historical losses,
and current economic information. In addition, the Company performs an analysis
of the total receivables on a quarterly basis, and adjusts the provision account
to the calculated balance. It is our policy to write off receivables once the
account reaches 180-days past due or it is determined that additional efforts of
collection will not result in the receipt of the receivable.
Property and Equipment - Property and equipment is carried at cost. Property and
equipment are depreciated to their estimated salvage values on a straight-line
method based on the following estimated useful lives:
Years
-----
Buildings and structures 40
Office furniture and equipment 6-10
Leasehold improvements 2-12
Freight equipment: 4-40
Vessels 40
Tractors 4
Containers, Chassis and VTM's 18
Trailers 12
During 2004, the Company had an appraisal performed on its vessels, containers
and chassis, which included a review of the useful lives. The results of this
appraisal indicated an increase in the useful life of these assets, from the
lives originally estimated by the Company. As such, management revised its
estimate of the remaining useful lives of chassis, VTMs (Specialized containers
for carrying vehicles), vessels and containers to extend the useful live by
approximately 6 to 10 years. During 2004, a change in accounting estimate was
recognized to reflect this decision, resulting in a decrease of depreciation
expense for 2004 by approximately $409,000 and as an increase in net income of
approximately $409,000 or $.03 per basic and diluted share.
Tires on revenue equipment purchased are capitalized as part of the equipment
cost and depreciated over the life of the vehicle. Replacement tires are
expensed when placed in service.
Leasehold improvements and equipment under capital leases are amortized over the
lesser of the estimated lives of the asset or the lease terms. Maintenance and
repairs are expensed as incurred.
Page 32
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Property and equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by net
undiscounted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying value exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less cost to sell.
Other Assets - Other assets consist mainly of debt issuance costs that are
amortized on a straight-line basis over the term of the associated debt, which
approximates the interest method.
Revenue Recognition and Classification - Voyage revenue is recognized ratably
over the duration of a voyage based on the relative transit time in each
reporting period; commonly referred to as the "percentage of completion" method.
Voyage expenses are recognized as incurred. Demurrage and charterhire revenue
are included in our revenues. Demurrage is a charge assessed for failure to
return empty freight equipment on time. Charter hire is rental revenue for
vessels not in use in a liner service. The Company recognizes demurrage and
charterhire revenue based on negotiated fees included in the contracts of our
customers. These amounts are computed daily and included in "Operating Revenue."
Income Taxes - Income taxes are calculated using the liability method specified
by SFAS No. 109 "Accounting for Income Taxes". Valuation allowances are provided
against deferred tax assets if it is considered "more likely than not" that some
portion or the entire deferred tax asset will not be realized.
Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing
earnings applicable to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings.
Stock-Based Compensation - In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to continue
to account for its employee stock compensation plans under Accounting Principles
Board ("APB") Opinion No. 25, with pro forma disclosures of net earnings and
earnings per share, as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The following
table provides an expanded reconciliation for all periods presented that adds
back to reported net income (loss) the recorded expense under APB 25, net of
related income tax effects, deducts the total fair value expense under SFAS 123,
net of related income tax effects and shows the reported and pro forma earnings
per share amounts.
Page 33
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002 (continued)
2004 2003 2002
---- ---- ----
Net income (loss) attributable to common shares, as reported $ 2,352,671 $ (7,282,220) $ (7,746,644)
Total stock-based employee compensation cost included in the
determination of net loss, net of related tax effects
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related tax effects (368,993) (496,322) (979,380)
---------------- ----------------- ----------------
Net income (loss), pro forma $ 1,983,678 $ (7,778,542) $ (8,726,024)
================ ================= ================
Income (loss) per common share:
Basic, as reported $ 0.20 $ (0.74) $ (0.79)
Diluted, as reported $ 0.19 $ (0.74) $ (0.79)
Basic, pro forma $ 0.17 $ (0.80) $ (0.89)
Diluted, pro forma $ 0.15 $ (0.80) $ (0.89)
The Company used the Black-Scholes option-pricing model to determine the fair
value of grants made. The following assumptions were applied in determining the
pro forma compensation cost:
Years ended December 31 2002
----
Risk-free interest rate 5.13%
Expected dividend yield 0%
Expected option life 7 years
Expected stock price volatility 91.38%
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
New Accounting Standards - In December 2004, the FASB issued Statement of
Financial Accounting Standard ("SFAS") No. 123 (revised 2004), "Shared-Based
Payment." Statement 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Statement 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB Opinion No. 25, "Accounting for Stock Issued to Employees", which was
permitted under Statement 123, as originally issued. As a result of
this accounting pronouncement, we anticipate that the adoption of this standard
may have a material impact on our Financial Statements. The effective date of
this standard is interim and annual period after June 15, 2005.
2. LIQUIDITY
During the period between 1998 and 2002, the Company operated in a trade lane
that was characterized by significant over capacity and fierce competition. This
over capacity and competition resulted in significant and prolonged rate
decreases throughout that period. Similarly, our ability to pass on certain
expenses to customers, through surcharges and other customer charges was
severely hampered due to competition. During the years ended December 31, 2004,
2003 and 2002, the Company incurred net income (losses) applicable to common
Page 34
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
shares of $2,352,671, $(7,282,220) and $(7,746,644), respectively, and had cash
flows from provided (used) by operating activities of $3,111,695, $860,093 and
$(3,704,325), respectively, and had working capital (deficiency) of $10,422,542
and $(2,040,623) at December 31, 2004 and 2003, respectively. As a result, there
was substantial doubt about the Company's ability to continue as a going concern
as of December 31, 2002.
During this period, one of the trade lane's largest participants filed
bankruptcy and, after operating in bankruptcy for approximately 18 months, sold
its vessel assets to another competitor in the trade. With a realignment of
capacity and demand in the trade lane, 2003 resulted in a redistribution of
freight volume among the remaining four participants, which resulted in
increased volume and capacity utilization. During the fourth quarter of 2003,
the Company began to implement increases in customer rates and surcharges. In
addition to the revenue increases, the Company also implemented several changes
to reduce cost. The most notable changes were made in purchased transportation,
healthcare costs and tug fuel consumption. During the fourth quarter of 2003,
the Company began utilizing lower cost rail transportation in certain lanes
effectively lowering the unit cost per mile of inland transportation. In January
2004, the Company implemented a change in policy and healthcare providers,
reducing benefit costs and started chartering tugs with more fuel-efficient
engines. The Company has entered into written contracts with customers that
reflect the increased rates and additional surcharges and improved market
conditions. Based upon the foregoing, management believes that the Company will
be able to maintain increased vessel capacity utilization at these increased
rates. The trade lane in which the Company operates is protected by a number of
barriers to entry, the most formidable of which is the Jones Act that requires
that vessels serving the trade lane be built in the United States, operated by
United States citizens and crewed by United States citizens. Other barriers to
entry include limited port space in San Juan. Both act as major constraints to
the addition of new capacity. Management believes that the capacity utilization
and rate levels can be maintained for the foreseeable future. The trade lane in
which the Company operates is a mature lane that typically sees modest yet
stable growth in demand and has not historically seen dramatic fluctuation in
demand. The Company expects this to continue through the upcoming years
resulting in a stable trade environment.
At December 31, 2003, the Company had $13.1 million due to a bank under our
senior credit facility, which expired January 31, 2004. In addition, the Company
had $6.3 million due to related parties, all of which were due to be paid in
2004. In April 2004, after receiving extensions from our then existing senior
lender, the Company refinanced this bank debt with a new senior lender. This
bank debt in turn was fully paid down with the proceeds of our $85.0 million
senior secured debt note offering completed December 1, 2004. The remaining bank
debt is a $10 million receivables facility that provides for interest at prime
plus 1.5% and may only be drawn upon if certain conditions are satisfied. The
revolving line of credit is subject to a borrowing base calculation based on a
percentage of eligible accounts receivable. In addition to $1.5 million
remaining of the balance, $1 million of the 2004 scheduled repayment of related
party debt has been rescheduled for monthly principal payments commencing
January 2005. With the purchase of K Corp., this deferred amount has been made
payable to the Estate of M. P. McLean and is approximately $2.5 million. This
amount is payable in 36 monthly payments the first of which was made in January
2005. All other amounts owed to affiliates were repaid with the proceeds of the
$85.0 million senior secured debt offering completed December 1, 2004. These
factors, along with increased rates and market share, and our return to
profitability in 2004 are expected to allow us to meet our working capital
requirements through December 31, 2005. Our business plan does not require or
anticipate any utilization of the revolving credit facility.
The Company has issued two series of Ship Financing Bonds designated as our
7.07% Sinking Fund Bonds Due September 30, 2022 and 6.52% Sinking Fund Bonds Due
March 30, 2023. These bonds are guaranteed by the U.S. government under Title XI
Page 35
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
of the Merchant Marine Act of 1936, as amended. The Company refers to these
bonds as the "Title XI Bonds." During 2003, with the consent of the holders of
the Title XI Bonds, the Company deferred the semi-annual principal payments on
the Title XI Bonds and in 2004 the Company spread those deferred principal
payments over the remaining maturity of the Title XI Bonds. The Company
therefore had rescheduled principal payments of $232,022 and $372,429 due each
semi-annual period until fully paid on September 30, 2022 and March 30, 2023,
respectively. The aggregate principal amount of the Title XI Bonds outstanding
at December 31, 2004 was $22.1 million. In addition, in connection with
obtaining the consent of the Secretary of Transportation of the United States of
America to offer and sell the notes, in December 2004 the Company was required
to deposit approximately $2.0 million into a reserve fund that secures the Title
XI Bonds.
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 December 31,
2004, 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 and the Company has satisfied our obligation to make deposits
into the reserve fund. In November 2004, the Company received permission from
the Secretary to issue $85 million in senior secured notes and to use the
proceeds of this transaction to fund the acquisition of K Corp. as discussed in
Note 6, repay K Corp.'s indebtedness, repay our existing debts, exercise certain
equipment purchase options on equipment previously leased and strengthen our
current liquidity needs. As of December 31, 2004, 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.
Interest on the senior secured notes is payable semi-annually on each May 15 and
November 15, beginning on May 15, 2005. The notes accrue interest at 9-1/4 % per
year on the principal amount. The notes will mature on November 15, 2011. After
November 15, 2008, the Company may redeem the notes, in whole or in part, at our
option at any time or from time to time at the redemption prices specified in
the indenture governing the notes, plus accrued and unpaid interest thereon, if
any, to the redemption date. In addition, prior to November 15, 2007, the
Company may redeem up to 35% of aggregate principal amount of the notes with the
net proceeds of certain equity offerings at a redemption price of 109 1/4 % of
the principal amount of the notes, plus accrued and unpaid interest to the date
of redemption. Upon the occurrence of certain changes in control specified in
the indenture governing the notes, the holders of the notes will have the right,
subject to certain conditions, to require us to repurchase all or any part of
their notes at a repurchase price equal to 101% of the principal amount of the
notes, plus accrued and unpaid interest thereon, if any, to the redemption date.
The agreement, among other things, restricts (as defined) the Company to (a)
incur or guarantee additional debt (b) to pay dividends, repurchase common stock
or subordinate debt (c) create liens (d) transact with affiliates and (e)
transfer or sell assets.
Page 36
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
The notes are secured by a first priority lien for the benefit of the holders of
the notes on our two roll-on/roll-off barges, certain equipment and our
Jacksonville, Florida office and terminal, including associated real estate. The
notes are subordinated to the Title XI debt collateralized by the TBC barges.
On December 1, 2004 the Company amended its existing revolving credit facility
with Congress Financial Corporation to reduce the maximum availability from $20
million to $10 million. The revolving credit facility is secured by our accounts
receivable and certain other related assets not including the collateral
securing senior secured notes and the Title XI debt. There are no amounts
currently outstanding under this facility.
As of December 31, 2004 $2.5 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 Company believes that cash from operations will allow us to meet our working
capital requirements through December 31, 2005. The Company currently
anticipates limited capital expenditures for 2005, and does not expect to
require additional borrowings to fund our operations through the end of 2005
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consist of the following:
2004 2003
---- ----
Freight equipment $ 100,005,427 $ 62,974,932
Office furniture and equipment 3,590,107 3,248,186
Buildings and structures 2,585,378 2,585,378
Land 1,254,703 504,703
Leasehold improvements 1,894,546 1,894,546
------------------ -----------------
109,330,161 71,207,745
less accumulated depreciation and amortization (27,251,738) (24,438,932)
------------------ -----------------
$ 82,078,423 $ 46,768,813
================== =================
Depreciation and amortization expense on property and equipment was $3, 081,916,
$3,392,742 and $3,383,002 2004, 2003 and 2002, respectively.
4. TRANSACTIONS WITH RELATED PARTIES
The Company leased two roll-on/roll-off barge vessels and the use of a ramp
system in San Juan, Puerto Rico from an affiliate, Kadampanattu Corp. (K-Corp),
under operating lease agreements until December 2004. Certain stockholders of
the affiliate were controlling stockholders of the Company through August 16,
2004. The lease payments were $10,050 per day for each vessel. Total lease
expense under these leases from affiliate totaled $6,714,863, $7,336,500 and
$7,336,500 in 2004, 2003 and 2002, respectively. During 2004 the affiliate,
agreed to defer $1.5 million of charter hire to be paid by the Company, in 2004.
In addition during 2002, the Company issued to this affiliate $24 million before
discount of non-convertible preferred stock Series B as payment for
indebtedness, amounts deferred under the long-term charters of the Company and
Page 37
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
an advance portion of the 2003 charterhire. The Series B Preferred Stock was
redeemed in December 2004. The Company received net cash advances from the same
affiliate totaling $989,436 and $461,468 in 2003 and 2002, respectively. These
advances were used to meet the Company's cash flow requirements.
Page 38
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
The Company received net advances of $121,500 and $203,877 from a Mr. John
McCown, the Company's Chief Executive Officer in 2003 and 2002, respectively.
Such advances were used to meet the Company's cash flow requirements. Such
advances totaled $386,127 and $264,627 at December 31, 2003 and 2002,
respectively. In connection with the senior secured debt offering, a portion of
the proceeds was used to payoff this obligation in December 2004.
During the quarter ended June 30, 2002 the Company borrowed $5 million from an
affiliate, with interest at the rate of 8.03% a year. Certain stockholders of
the affiliate are also principal stockholders of the Company. The proceeds of
this borrowing were used to repay the $3 million borrowed under the revolving
credit agreement, and to provide $2 million in working capital. Amounts
outstanding were $4,933,205 at December 31, 2003. In April 2004, the $4,933,205
related party obligation was rescheduled from October 2004 to May 2007. In
connection with the Senior Secured debt offering, a portion of the proceeds was
used to payoff this obligation in December 2004. In addition during 2002, the
same affiliate purchased preferred convertible stock Series A for $2 million.
The preferred stock Series A, had a liquidation preference of $2 million. The
Preferred Stock Series A, pursuant to its terms was converted into 1,955,000
common shares in July of 2004. In April 2004, the $1.5 million deferred charter
hire obligation was combined with the $989,436 of advances into a $2.5 million
obligation payable over 36 months with interest at 8.03% a year. In connection
with the K-Corp acquisition, this debt was transferred to another affiliate and
remained an obligation of the Company as of December 31, 2004.
On August 16, 2004, the Estate of M.P. McLean distributed 1,641,732 shares of
common stock to its beneficiaries. This distribution resulted in a decrease of
the Estates' ownership in the Company to approximately 44.7%.
On December 1, 2004 the Company acquired 100% of the outstanding stock of K-Corp
(See note 6).
5. LONG-TERM DEBT AND DUE TO AFFILIATES
Following is a summary of long-term debt at December 31, 2004 and 2003:
Page 39
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
2004 2003
---- ----
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 $14,660,944 at December
31,2004; amount is guaranteed by
The United States of America under the Title XI Federal Ship Financing Program $ 13,779,864 $ 14,524,722
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 $9,458,628 at
December 31, 2004; amount is guaranteed by The United States of America under
the Title XI Federal Ship Financing Program 8,352,783 8,816,827
Senior secured notes maturing on November 15, 2011; Interest on the notes is
payable semi-annually on each May 15 and November 15, beginning on May 15, 2005.
The notes accrue interest at 9 1/4% per year on the principal amount. The
notes are collateralized by a first priority lien with a carrying value of $53.8
million on our two roll-on/roll-off barges, certain equipment and our
Jacksonville, Florida office and terminal, including associated real estate. 85,000,000 -
Unsecured related party debt maturing December 2007; payable in monthly
installments of principal and interest; interest at a rate of 8.03%; 2,462,136 -
Term loan under $29 million credit facility maturing January 31, 2004; payable
in quarterly installments of principal and interest; interest at a rate of 4.25%
above the 30-day dealer commercial paper rate (5.25% as of 12/31/2003;
collateralized by trailers with a carrying value of $14,288,555 at December 31,
2003. (Repaid from the proceeds of senior secured notes.) - 7,285,714
Revolving line of credit under $29 million credit facility; interest at a rate
of 3.75% above the 30-day dealer commercial paper rate (4.75% as of
12/31/2003); collateralized by accounts receivable. - 5,779,481
Note payable to bank maturing October 2006; payable in monthly installments of
principal and interest; interest at a rate of 2.00% above 30-day LIBOR rate
(3.12% at December 31, 2003); collateralized by land and buildings and
structures with a carrying value of $2,035,864 at December 31, 2003 (guaranteed
by an affiliate) - 624,548
----------------- -----------------
109,594,783 37,031,292
Less current portion (1,969,709) (1,683,953)
----------------- -----------------
$ 107,625,074 $ 35,347,339
================= =================
(A) SHIP FINANCING BONDS AND NOTES
As a result of the Company's losses occurring over the past few years, the
lender on several occasions rescheduled its principal payments with the Company.
In the first quarter of 2004, the Company received approval to reschedule
principal payments over the remaining life of each Title XI issue. As
rescheduled, the Company's semi-annual principal payments increased to $232,022
and $372,429 respectively. In addition, in connection with obtaining the consent
of the Secretary of Transportation of the United States of America to offer and
sell senior secured the notes, in December 2004 the Company deposited
approximately $2.0 million into a reserve fund that secures the Title XI Bonds.
As of December 31, 2004, the Company is in default of the financial covenants
contained in the Title XI debt agreements. 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"). The Company may not take, without prior written approval, any of
Page 40
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
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 under Title XI
and liens incurred in ordinary course of business. However, none of the
foregoing covenants will apply at any time if the Company meet certain financial
tests provided for in the agreement and the Company has satisfied our obligation
to make deposits into the reserve fund. In November 2004, the Company received
permission from the Secretary to issue $85 million in Senior Secured Notes and
to use the proceeds of this transaction to fund the acquisition of K Corp.,
repay K Corp.'s indebtedness, repay our existing debts, exercise certain
equipment purchase options on equipment previously leased and strengthen our
current liquidity needs. As of December 31, 2004, the Company has not performed
any such restricted financial activities and therefore, it's in compliance with
such restrictions. As such, the debt was not in default, and the lender did not
have the right to call the debt. The United States of America under the Title XI
Federal Ship Financing Program guarantees the bonds.
(B) SENIOR SECURED NOTES
The $85 million in 9-1/4 % Senior Secured Notes mature on November 15, 2011.
Interest on the notes is payable semi-annually on each May 15 and November 15,
beginning on May 15, 2005. The notes accrue interest at 9-1/4 % per year on the
principal amount. The notes will mature on November 15, 2011. After November 15,
2008, the Company may redeem the notes, in whole or in part, at our option at
any time or from time to time at the redemption prices specified in the
indenture governing the notes, plus accrued and unpaid interest thereon, if any,
to the redemption date. In addition, prior to November 15, 2007, the Company may
redeem up to 35% of aggregate principal amount of the notes with the net
proceeds of certain equity offerings at a redemption price of 109 1/4 % of the
principal amount of the notes, plus accrued and unpaid interest to the date of
redemption. Upon the occurrence of certain changes in control specified in the
indenture governing the notes, the holders of the notes will have the right,
subject to certain conditions, to require us to repurchase all or any part of
their notes at a repurchase price equal to 101% of the principal amount of the
notes, plus accrued and unpaid interest thereon, if any, to the redemption date.
The agreement among other things, restricts (as defined) the Company to (a)
incur or guarantee additional debt (b) to pay dividends, repurchase common stock
or subordinate debt (c) create liens (d) transact with affiliates and (e)
transfer or sell assets.
(C) REVOLVING LINE OF CREDIT
On December 1, 2004 the Company amended our existing revolving credit facility
with Congress Financial Corporation to reduce the maximum availability from $20
million to $10 million. The agreement provides that the loan is due in April
2007 with interest equal to the prime rate plus 1.5%. The revolving line of
credit is subject to a borrowing base formula (approximately $9,400,000 at
December 31, 2004) based on a percentage of eligible accounts receivable. The
revolving credit facility is secured by our accounts receivable. At December 31,
2004 the Company had approximately $9.4 million available for future advances
under this credit line.
Page 41
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Following are maturities of long-term debt at December 31, 2004:
2005 $ 1,969,709
2006 1,997,295
2007 2,066,514
2008 1,178,382
2009 1,178,382
Thereafter 101,204,501
------------------
$ 109,594,783
==================
6. ACQUISTION OF K-CORP.
On December 1, 2004, the Company acquired 100% of the outstanding stock of K
Corp. with a portion of the proceeds obtained from the senior secured notes.
Previously K-Corp leased to the Company two roll-on / roll-off barge vessels and
the use of a ramp system in San Juan, Puerto Rico. As a result of the purchase,
the Company expects to improve its operations by eliminating the lease
agreements and replacing it with interest expense resulting from the notes on
the senior secured debt and depreciation expense of the acquired RO/RO vessels.
The Company paid $32.0 million and assumed debt of $9.1 million, which was paid
off on December 1, 2004. These obligations were paid with a portion of proceeds
of the senior secured debt. Certain pro-forma adjustments were made to eliminate
lease expense previously paid to K-Corp related to the RO/RO vessels, cumulative
undeclared dividends and accretion related to the Preferred Series "B" Stock and
additionally include increased depreciation on the RO/RO vessels and interest on
the senior secured notes issued by the Company on December 1, 2004
The following tables highlight on a pro forma basis the results of 2004 and 2003
as if these transactions took place in the beginning of each year:
Year Ended December 31,
---------------------------------------------
2004 (unaudited) 2003 (unaudited)
----------------------- -------------------
Revenues $ 98,774,666 $ 86,433,985
Income (loss) attributable to common shares 6,846,723 (2,830,600)
Earnings (loss) per share, basic 0.58 (0.29)
Earnings (loss) per share, diluted 0.57 (0.29)
The Company purchased the stock of K-Corp for $41.1 million. In this connection,
the Company acquired K-Corp's assets, which had a historical carrying value of
$48.9 million. Since the Company and K-Corp had similar controlling
shareholders, the Company, recorded K-Corp's assets at the historical carrying
value of $24.9 million and estimated the value of the preferred stock to
approximate its liquidation value. The excess of the historical carrying value
over the amount paid is recorded as a $7.8 million capital contribution on the
Statement of Changes in (Capital Deficit) Stockholders Equity.
Page 42
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
The assets acquired are as follows:
2004
-----------------------
Vessels $ 24,150,632
Land 750,000
Investment in Preferred Stock Series B 24,000,000
-----------------------
Total assets acquired $ 48,900,632
=======================
The purchase price is as follows:
Purchase price 2004
-----------------------
Cash paid by Company 32,000,000
Long term debt acquired in connection with the K-Corp Acquistion 9,132,306
-----------------------
Purchase price of assets aquired $ 41,132,306
=======================
On December 1, 2004, in connection with the acquisition of K-Corp the Company
redeemed the preferred stock Series B for $24 million. In connection with this
redemption the Company recorded the excess of the consideration transferred to
the holders of the preferred stock over the carrying amount of the preferred
stock on the Company's balance sheet as a subtraction from net earnings to
arrive at net earnings available to common shareholders.
The redemption of the preferred stock is as follows:
2004
-----------------------
Purchase price paid to K-Corp $ 24,000,000
Accreated value of the Company 23,543,702
-----------------------
Excess consideration given to the shareholders over the
carrying value of the Preferred Class B securities $ (456,298)
=======================
7. OPERATING LEASES
The Company has various operating lease agreements principally for land leases,
office facilities, charterhire, tug charter and equipment. The Company also has
a lease agreement with the Port Authority of Jacksonville, whereas, monthly rent
is calculated based on the total tonnage shipped, with an annual minimum
guarantee of approximately $1.7 million. During the periods ended December 31,
2004, 2003 and 2002, the Company did not exceed the minimum tonnage under this
lease agreement to require additional rent. In addition, the Company is
responsible for all fuel cost for its tug charter hire agreements.
Page 43
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of December 31,
2004 are as follows:
2005 $ 12,010,354
2006 5,524,488
2007 1,988,536
2008 1,893,303
2009 1,722,964
Thereafter 7,516,684
------------------
$ 30,656,329
==================
Rent expense for all operating leases, including leases with terms of less than
one year, was $21,851,549, $22,949,572 and $22,402,945 for 2004, 2003 and 2002,
respectively.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 2004 and 2003:
2004 2003
---- ----
Fringe benefits $ 639,618 $ 716,358
Marine expense 1,060,697 538,728
Salaries and wages 109,522 395,071
Interest 1,027,969 1,100,033
Rent 90,837 524,958
Taxes 30,181 380,353
Other 572,649 382,887
------------------ --------------
$ 3,531,473 $ 4,038,388
================== ==============
Page 44
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
9. OTHER ASSETS
Other assets consist of the following at December 31, 2004 and 2003:
2004 2003
---- ----
Title XI Restricted Deposit $ 2,042,527 $ -
Debt Issuance Costs 5,690,918 909,427
Other 300,484 266,027
---------------- ------------
$ 8,033,929 $ 1,175,454
================ ============
Amortization expense for the year ended December 31, 2004, 2003 and 2002 was
$734,124, $191,257 and $174,744, respectively.
10. INCOME TAXES
The (provision) benefit for income taxes is comprised of the following for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Current:
Federal $ - $ - $ -
State 11,006 - (3,305)
--------------- --------------- ---------------
11,006 - (3,305)
--------------- --------------- ---------------
Deferred
Federal (1,456,906) 1,818,899 2,384,509
State (276,420) 219,289 280,530
--------------- --------------- ---------------
(1,733,326) 2,038,188 2,665,039
Valuation allowance 1,733,326 (2,038,188) (2,665,039)
--------------- --------------- ---------------
Total income tax benefit (provision) $ 11,006 $ - $ (3,305)
=============== =============== ===============
Income tax (provision) benefit for the years ended December 31, 2004, 2003 and
2002 differs from the amounts computed by applying the statutory Federal
corporate rate to income (loss) before (provision) benefit for income taxes. The
differences are reconciled as follows:
2004 2003 2002
---- ---- ----
Tax (provision) benefit at statutory Federal rate $ (1,515,293) $ 1,859,061 $ 2,413,819
(Increase) decrease in deferred tax asset
valuation allowance 1,733,326 (2,038,188) (2,665,039)
Nondeductible expenses (39,763) (40,162) (32,759)
State income taxes, net of Federal benefit (167,264) 219,289 280,674
----------------- ---------------- ----------------
Total income tax benefit (provision) $ 11,006 $ - $ (3,305)
================= ================ ================
Page 45
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income taxes.
The components of the Company's net deferred tax asset at December 31, 2004 and
2003 are as follows:
2004 2003
---- ----
Deferred tax assets:
Net operating loss carry forwards $ 31,026,256 $ 30,704,715
Employee stock option 3,240,895 3,240,895
Asset impairment charge 1,452,110 1,452,110
Restructuring charge - 73,237
Intangible Assets 123,056 98,764
Allowance for bad debts 160,018 259,887
Accrued vacation 110,036 112,702
Other 252,007 1,482
-------------- ---------------
Gross deferred assets 36,364,378 35,943,792
Deferred tax liabilities:
Fixed asset basis 15,410,331 13,256,419
-------------- ---------------
Gross deferred tax liabilities 15,410,331 13,256,419
Deferred tax asset valuation allowance 20,954,047 22,687,373
-------------- ---------------
Net deferred tax asset $ - $ -
============== ===============
The Company has recorded various deferred tax assets as reflected above. In
assessing the ability to realize the deferred tax assets, management considers,
whether it is more likely than not, that some portion, or all of the deferred
tax asset will be realized. The ultimate realization is dependent on generating
sufficient taxable income in future years. The valuation allowance account
decreased by $1,733,326 in 2004 as a result of the Company being able to use its
net operating loss carryforwards to reduce taxable income. As a result of the
net losses incurred in 2002 and 2003, an increase in the valuation allowance of
$2,038,188 and $2,665,039 was recorded. . The Company anticipates that its
taxable temporary differences will reverse in the same period as the deductible
temporary differences therefore assuring realization after non-reserved portion
of its deferred assets.
At December 31, 2004, the Company had available net operating loss ("NOL")
carryforwards for federal income tax purposes of $81,648,044, which expire
beginning in 2007.
11. STOCKHOLDERS' EQUITY
Earnings Per Share:
The Company has adopted the consensus reached in EITF 03-06, "Participating
Securities and Two-Class Method under FASB 128" which provides further guidance
on the definition of participating securities and requires the use of the
two-class method in calculating earnings per share for enterprises with
participating securities under SFAS Statement 128, "Earnings per Share."
Page 46
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Pursuant to EITF 03-06, the Company's Series A convertible preferred shares
(prior to their conversion to common shares) were considered participating
securities. EITF 03-06 requires that each period's income be allocated to
participating securities, if there is no conversion. Accordingly, for the
reporting periods in which there is income attributable to common shareholders,
the Company allocated a portion of such income to the Series A convertible
shareholders based upon the pro-rata share of income, weighted for the period
prior to redemption. During reporting periods in which there was a net loss
attributable to common shareholders, such loss is allocated entirely to the
common shares.
The following reconciles Basic and Diluted Earnings Per Share:
For the year ended December 31,
----------------------------------------------------------
12/31/2004 12/31/2003 12/31/2002
------------------ ------------------ ----------------
Basic Earnings Per Share:
Net income (loss) attributable to
common shareholdera $ 2,352,671 $ (7,282,220) $ (7,746,644)
Net income (loss) allocated to preferred
Series A Shareholders prior to
conversion (1) (217,706) - -
------------------ ------------------ ----------------
Net income (loss) allocated to common
shareholders $ 2,134,965 $ (7,282,220) $ (7,746,644)
================== ================== ================
Weighted average common shares-basic 10,662,791 9,777,391 9,805,878
------------------ ------------------ ----------------
Income (loss) per common shares-basic $ 0.20 $ (0.74) $ (0.79)
Diluted Earnings Per Share
Add: Diluted effect of assumed conversion
of Preferred Series A 1,087,301 - -
Add: Diluted effect of options 366,655 - -
------------------ ------------------ ----------------
Weighted average shaers-diluted 12,116,747 9,777,391 9,805,878
------------------ ------------------ ----------------
Income (loss) per common shares-diluted $ 0.19 $ (0.74) $ (0.79)
(1) Weighted for days outstanding prior to conversion on July 23, 2004
Options to purchase 489,200, 900,466 and 708,589 shares of the Company's common
stock were excluded from the calculation of diluted earnings per share because
they were out of the money during the years ended December 31, 2004, 2003 and
2002, respectively.
Preferred Stock Series B:
During 2002, the Company issued 24,000 shares of preferred stock Series B to an
affiliate as payment for indebtedness, amounts deferred under the long-term
charters of the Company and an advance portion of the 2003 charterhire. The
total issued value of preferred stock Series B was $24 million. As an increasing
rate preferred stock, Series B was recorded at fair-value resulting in an
initial discount of approximately $2.6 million. Accretion for the year ended
December 31, 2004, 2003 and 2002 was $515,845, $980,745 and $643,871
respectively. Beginning on April 1, 2003 cumulative dividends began to accrue at
a rate equal to the 90-day plus 350 basis points. Beginning in 2004, the
dividend rate increased 25 basis points a quarter up to a maximum dividend rate
of the 90-day libor rate plus 650 points. Contractual undeclared dividends
aggregated to $1,115,795 at December 31, 2004 and $846,385 at December 31, 2003.
Such dividends have not been declared, accrued or paid. On October 31, 2004 the
contractual dividend was permanently waived by the holder. A portion of the
preferred stock series B was issued to pay $1.1 million of the Company's 2003
charterhire commitments to an affiliate. In 2003, the Company offset the
subscription as the charterhire was used. The preferred stock Series B was
redeemed by the Company in conjunction with the acquisition of K-Corp. In
accordance with EITF D-42 the $0.5 million excess of (1) fair value of the
consideration transferred to the holders of the preferred stock over (2) the
carrying amount of the preferred stock in the Company's balance sheet was
Page 47
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
subtracted from net earnings to arrive at net earnings available to common
shareholders in the calculation of earnings per share
Stock Options:
In 1997, the Company's Board of Directors and stockholders authorized the
establishment of an Incentive Stock Plan (the "Plan"). The purpose of the Plan
is to promote the interests of the Company and its shareholders by retaining the
services of outstanding key management members and employees and encouraging
them to have a greater financial investment in the Company and increase their
personal interest in its continued success. The Company initially reserved
785,000 shares of common stock for issuance pursuant to the Plan to eligible
employees under the Plan. In July 2000, the Board of Directors authorized an
increase of 515,000 shares of common stock reserved under the Plan. Awarded
options that expire unexercised or are forfeited become available again for
issuance under the Plan. The options vest equally over a period of five years
and the maximum term for a grant is ten years.
In July 2000, the Company's Board of Directors and its stockholders authorized
the establishment of the Non-Employee Director Stock Incentive Plan (the
"Director Plan"). The purpose of the Director Plan is to assist the Company in
attracting and retaining highly competent individuals to serve as non-employee
directors. The Company has reserved 50,000 shares of common stock for issuance
pursuant to the Director Plan. Awarded options that expire unexercised or are
forfeited become available again for issuance under the Director Plan. The
exercise price per share of options granted under the Director Plan shall not be
less than 100% of the fair market value of the common stock on the date of
grant. Such options become exercisable at the rate of 20% per year beginning on
the first anniversary date of the grant and the maximum term for a grant is ten
years. As of December 31, 2004, there were 29,016 options available for grant.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as provided
by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS No. 148 allows for a prospective method of adoption of SFAS
123, whereas, the Company can prospectively account for the current expense of
options granted during 2003 and thereafter, as a results prior years were not
restated.
A summary of the status of options under the Company's stock-based compensation
plans at December 31, 2004, 2003 and 2002 is presented below:
2004 2003 2002
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 1,315,249 $ 5.43 1,327,110 $ 5.43 1,100,687 $ 5.95
Granted - - - - 302,000 2.88
Exercised (23,943) 2.52 (5,735) 2.77 - -
Forfeited (46,915) 2.78 (6,126) 6.03 (75,577) 2.84
------------- ------------- ------------
Outstanding at end of year 1,244,391 $ 5.58 1,315,249 $ 5.44 1,327,110 $ 5.59
============= ============= ============
Grants exercisable at year-end 1,057,313 $ 6.06 900,466 $ 6.65 708,588
============= ============= ============
Weighted-average fair value of
options granted during the year $ - $ - $ 2.34
The following table summarizes information about the outstanding options at
December 31, 2004:
Page 48
TRAILER BRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED December 31, 2004, 2003 AND 2002
Weighted-Average
Exercise Options Remaining Options
Price Outstanding Contractual Life Exercisable
- -------------------------------------------------------------------------------------------------------------------
$ 10.00 384,209 2.6 years 384,209
10.00 105,000 3.0 years 105,000
2.25 176,570 4.2 years 176,570
2.84 301,831 5.6 years 256,899
2.88 276,781 7.4 years 134,635
-------------- ---------------
1,244,391 1,057,313
============== ===============
Remaining non-exercisable options as of December 31, 2004 become exercisable as
follows:
2005 105,332
2006 60,400
2007 21,347
------------
187,079
============
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan, which covers substantially all employees in the
United States. Participants are permitted to make contributions of up to 15% of
their compensation not to exceed certain limits. The Company makes matching
contributions to the Plan at a rate not to exceed 3% of compensation as defined.
The Company contributed approximately $150,000, $190,000 and $138,000 to the
Plan during 2004, 2003 and 2002.
In addition, the Company has a 165(e) Plan that covers substantially all
employees in Puerto Rico. The Company made contributions of approximately
$20,000, $17,000 and $25,000 to the Plan during 2004, 2003, and 2002.
In March 1998, the Board of Directors authorized an Employee Stock Purchase
Plan, which covers substantially all employees. The Plan allows employees to
invest up to 10% of their base compensation through payroll deductions. The
purchase price will be 15% less than the fair market value on the last day of
the purchase period. The Company made contributions of approximately $515 and
$700 to the Plan during 2003 and 2002, respectively. In accordance with the Plan
document, the Plan terminated automatically on March 1, 2004, the fifth
anniversary of the Plan start date.
The Company has a Incentive Program; the Company made contributions of
$493,971 during 2004 and no contributions was made in 2003 and 2002.
13. CONTINGENCIES
The Company is involved in litigation on a number of matters and is subject to
certain claims which arise in the normal course of business, none of which, in
the opinion of management, are expected to have a material adverse effect on the
Company's financial statements.
Page 49
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents - For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Accounts Receivable and Accounts Payable- The carrying amounts of accounts
receivable and accounts payable approximate fair value due to the relatively
short maturities.
Long Term Debt - Interest rates that are currently available to the Company for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt instruments. For the year ended December 31, 2004
the estimated fair value of the Company's long-term debt were less than the
carrying values by approximately $385,000. This difference in the fair value
and the carrying value is based on the anticipated increase in the Company's
prime-lending rate over the life of the Company's fixed rate debt.
15. 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.
While each of the services that the Company performs related to the
transportation of goods may be considered to be separate business activities,
the Company does not capture or report these activities separately because all
activities are considered part of the Company's "Intermodal Model" for providing
customer service. (Intermodal is a term used to represent the variety of
transportation services the Company provides to move products from one location
to another, including but not limited to air, water, land and rail.) The Company
provides intermodal services to its customers from the continental United States
to San Juan, Puerto Rico. Customers are billed for the transportation of goods
from the point of origin to the final destination, and are not billed separately
for inland or marine transportation.
While the Company is able to track the expenses for these services separately,
the Company does not capture the revenues based on inland or marine
transportation because the results of revenues are not considered relevant to
the model currently employed by the Company. Instead the management and
directors of the Company make operating and reporting decisions based on the
total results of operations.
16. CONCENTRATION OF GEOGRAPHIC MARKET RISK
The Company transports freight between the United States and Puerto Rico for
companies in diversified industries who have operations located there. There is
no one customer that comprises over 10% of the Company total revenues. The
Company performs periodic credit evaluations of the customer's financial
condition and generally does not require collateral. At December 31, 2004 and
2003, accounts receivable was approximately $15.6 million and $11.0 million
respectively. Receivables are generally due within 45 days. Credit losses have
been within management's expectations. The Company leases its tug charter from a
Page 50
single vendor, however the Company believes this risk is mitigated by the
availability tugboat providers currently in the market.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
March 31, June 30, September 30, December 31,
Quarter Ended 2004 2004(3) 2004 2004 (1)
------------------- ------------------ ------------------ ------------------
Operating revenues $ 22,908,730 $ 24,102,899 $ 23,938,849 $ 27,824,188
Operating income 1,052,715 1,660,296 1,976,925 3,906,724
Net income 359,158 988,823 1,154,205 1,938,424
Net income (loss) attributable to
common shares (91,796) 527,791 654,531 1,262,145
Net income (loss) per share -
basic (0.01) 0.04 0.06 0.11
diluted $ (0.01) $ 0.04 $ 0.06 $ 0.10
March 31, June 30, September 30, December 31,
Quarter Ended 2003 2003 2003 2003
------------------- ------------------ ------------------ ------------------
Operating revenues $ 19,419,305 $ 22,333,227 $ 22,619,4737 $ 22,061,980
Operating income (loss) (1,818,678) 78,504 (152,404) (702,888)
Net loss (2,515,888) (665,342) (863,219) (1,410,641)
Net loss attributable to
common shares, as previously reported (2,982,382) (835,470) (1,034,633) (1,865,479)
Net loss attributable to
common shares, as restated (2) (2,982,382) (1,117,598) (1,316,761) (1,865,479)
Net loss per share -
basic and diluted, as previously reported $ (0.31) $ (0.09) $ (0.11) $ (0.19)
Net loss per share -
basic and diluted, as restated (2) $ (0.31) $ (0.11) $ (0.13) $ (0.19)
(1) On December 1, 2004, the Company acquired K-Corp, a company whose
shareholders were also controlling shareholders of Trailer Bridge, Inc.
Prior to the acquisition, the Company leased two RO/RO vessels and a ramp
system in San Juan, Puerto Rico. The Company financed this acquisition
with a portion of the proceeds of the $ 85 million senior secured notes
with a 9 1/4% fixed interest rate. This transaction was accretive in that
the Company reduced its operating lease expense payments to K-Corp and
incurred additional interest and depreciation which together resulted in a
$213,591 increase in operating income for the month of December 2004. In
connection with the $85 million senior secured notes, the Company paid off
its existing credit facility which resulted in the write off of deferred
loan costs of $381,523 in December 2004, which increased interest expense
and decreased net income of the same amount. Further, in connection
with the acquisition of K-Corp, the Company redeemed the Preferred Stock
Series B. In accordance with EITF D-42, the $456,298 excess of (1) fair
value of the consideration transferred to the holders of the preferred
stock over (2) the carrying amount of the preferred stock in the Company's
balance sheet was subtracted from net earnings to arrive at net earnings
available to common shareholders in the calculation of earnings per share.
(2) Subsequent to the issuance of the Company's condensed financial statements
for the three and nine months ended September 30, 2003 on Form 10-Q, the
Company determined that net loss attributable to common shares and net
loss per share should be reduced for undeclared cumulative dividends on
preferred stock. Net loss attributable to common shares and net loss per
share for the three months ended June 30, 2003 and September 30, 2003 have
been restated to reflect the undeclared cumulative preferred stock
dividends.
(3) In June 2004, the Company received a favorable legal determination
regarding the Volume of Business Tax in the Guaynabo Municipality of
Puerto Rico, which resulted in a $250,000 reversal, which increased
operating income by the same amount.
Page 51
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED December 31, 2004
Allowance for Doubtful Accounts
-------------------------------
Balance at
Beginning of the Charged to Costs Deductions Balance at end of
Year year and Expenses (Chargeoffs) year
---- ----------------- ----------------- ------------------ -----------------
2004 $ 683,914 $ 1,467,438 $ (1,730,253) $ 421,099
2003 895,772 1,687,894 (1,899,752) 683,914
2002 1,118,083 981,637 (1,203,947) 895,773
It is the policy of the company to write off receivables once the account
reaches 180-days past due or it is determined that additional efforts of
collection will not result in the receipt of the receivable.
Item 9A. 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-15(e) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of
the period covered by 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 has been no change in our internal control over
financial reporting identified in connection with the
evaluation referred to in paragraph (a) above that occurred
during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information about the Company's equity
compensation plans.
Page 52
Equity Compensation Plan Information
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))
- -------------------------------------- ------------------------ ----------------------- -------------------------------------
Equity compensation plans appoved by
securities holders 1,277,848 $ 5.44 29,016
------------------------ ----------------------- -------------------------------------
Equity compensation plans not appoved
by securities holders
------------------------ ----------------------- -------------------------------------
Total 1,277,848 $ 5.44 29,016
======================== ======================= =====================================
Page 53
Incorporated by Reference
The information called for by Item 10 -- "Directors and Executive
Officers of the Registrant", Item 11 -- "Executive Compensation", Item 12 --
"Security Ownership of Certain Beneficial Owners and Management", Item 13 --
"Certain Relationships and Related Transactions" and Item 14 "Principal
Accountant Fees and Services" is incorporated herein by this reference to the
Company's definitive proxy statement for its annual meeting of stockholders
scheduled to be held in May 2005, which definitive proxy statement is expected
to be filed with the Commission not later than 120 days after the end of the
fiscal year to which this report relates.
Page 54
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as Part of this Report
1. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves,
for each of the three years ended December 31, 2004, 2003 and
2002.
All other schedules are omitted as the required information is
not applicable or the information is presented in the Financial
Statements and notes thereto in Item 8.
2. Exhibits.
EXHIBIT INDEX
(Exhibits being filed with this Form 10-K)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
====== -----------------------
3.1.1(5) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Form of Amended and Restated Bylaws of the Registrant
4.1 See Exhibits 3.1.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining the rights
of holders of the Registrant's Common Stock
10.1(1)# Form of Indemnification Agreement with Directors and Executive
Officers
10.2(1) Bareboat Charter Party dated February 1992
10.2.1(1) Amendment to Bareboat Charter Party dated December 31, 1994
10.2.2(1 Second Amendment to Bareboat Charter Party dated October 1995
10.2.3(1) Third Amendment to Bareboat Charter Party dated March 1, 1997
10.2.4(2) Fourth Amendment to Bareboat Charter Party dated June 30, 1997
10.2.5(6) Fifth Amendment to Bareboat Charter Party dated March 30, 2002
Page 55
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
====== -----------------------
10.8.13(5) United States Government Guaranteed Ship Financing Bond, 1997
Series, Amended and Restated September 30, 2003, in the amount
of $10,515,000
10.8.14(5) Trust Indenture, Second Supplement to Special Provisions
10.8.15(5) United States Government Guaranteed Ship Financing Bond, 1997
Series II, Amended and Restated September 30, 2003, in the
amount of $16,918,000
10.8.16(6) Trust Indenture, Third Supplement to Special Provisions
10.8.17(6) United States Government Guaranteed Ship Financing Bond, 1997
Series, Amended and Restated April 29, 2004, in the amount of
$10,515,000
10.8.18(6) Trust Indenture, Third Supplement to Special Provisions
10.8.19(6) United States Government Guaranteed Ship Financing Bond, 1997
Series II, Amended and Restated April 29, 2004, in the amount of
$16,918,000
10.8.20(7) Trust Indenture, Fourth Supplement to Special Provisions
10.8.21(7) Trust Indenture, Fourth Supplement to Special Provisions
10.8.22(10) Third Amendment to Amended and Restated Title XI Reserve
Fund and Financial Agreement dated as of December 1, 2004
by and between Trailer Bridge, Inc. and the United States
of America, represented by the Secretary of
Transportation, acting by and through the Maritime
Administrator.
Page 56
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
====== -----------------------
10.9(1) Agreement and Lease dated as of August 1, 1991 between the
Registrant and the Jacksonville Port Authority
10.9.1(1) Amendment #5 to Exhibit B, Schedule of Fees and Charges
10.11(1)# Incentive Stock Plan
10.11.1(1)# Form of Stock Option Award Agreement
10.11.2(4)# Amendment No. 1 to Trailer Bridge, Inc. Stock Incentive Plan
10.11.3(4)# Trailer Bridge, Inc. Non-Employee Director Stock Incentive Plan
10.11.4(4)# Form of Non-Employee Director Stock Option Award Agreement
10.12(3) Trailer Bridge, Inc. Employee Stock Purchase Plan
10.24(6)# Employment Agreement dated as of April 5, 2003 between Trailer
Bridge, Inc. and William G. Gotimer, Jr.
10.25(8)# Employment Agreement dated as of August 5, 2004 between Trailer
Bridge, Inc. and John D. McCown
10.25.4(10) Amendment No. 2 to Loan and Security Agreement dated as
of December 1, 2004, by and between Trailer Bridge, Inc.,
as Borrower, and Congress Financial Corporation
(Florida), as Agent and the Lenders from time to time
party thereto, as Lenders.
10.28.1(10) Indenture dated as of December 1, 2004 between Trailer Bridge,
Inc. and Wells Fargo Bank, National Association, as Trustee.
10.28.2(10) Form of 9 1/4% Senior Secured Note due 2011 (incorporated by
reference to Exhibit A to Exhibit 10.28.1 hereof).
10.28.3(10) Security Agreement dated as of December 1, 2004 between Trailer
Bridge, Inc. and Wells Fargo
Bank, National Association, as Trustee.
10.28.4(10) Assignment of Earnings dated as of December 1, 2004 between
Trailer Bridge, Inc. and Wells Fargo Bank, National Association,
as Trustee.
10.28.5(10) Assignment of Insurances dated as of December 1, 2004 between
Trailer Bridge, Inc. and Wells Fargo Bank, National Association,
as Trustee.
Page 57
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
====== -----------------------
10.28.6(10) First Preferred Vessel Mortgage dated as of December 1, 2004
between Trailer Bridge, Inc. and Wells Fargo Bank, National
Association, as Trustee.
10.28.7(10) Mortgage and Security Agreement dated as of December 1, 2004
between Trailer Bridge, Inc. and Wells Fargo Bank, National
Association, as Trustee.
10.29.1(10) Purchase Agreement dated as of November 16, 2004 among Trailer
Bridge, Inc. and the Initial Purchasers named therein.
10.29.2(10) Registration Rights Agreement dated as of December 1, 2004
between Trailer Bridge, Inc. and Wells Fargo Bank, National
Association, Trustee.
23.2(11) Consent of BDO Seidman, LLP, independent registered public
accounting firm
23.3(11) Consent of Deloitte & Touche LLP, independent registered public
accounting firm
31.1(11) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
31.2(11) Certification of Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934
32.1(11) Certification of Trailer Bridge, Inc.'s Chief Executive Officer
and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
(as adopted by Section 906 of the Sarbanes-Oxley Act of 2003)
99.1(9) Shares Acq1uisition Agreement dated as of July 23, 2004 by and
between the Estate of Malcom P. McLean, Kadampanattu Corp., and
Trailer Bridge, Inc.
# Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 333-28221) that became
effective on July 23, 1997.
(2) Incorporated by reference to the indicated exhibit to the Company's
Form 10-Q for the quarter ended September 30, 1997.
(3) Incorporated by reference to the indicated exhibit to the Company's
Form 10-K for the year ended December 31, 1997.
(4) Incorporated by reference to the indicated exhibit to the Company's
Form 10-K for the year ended December 31, 2000.
(5) Incorporated by reference to the indicated exhibit to the Company's
Form 10-Q for the quarter ended September 30, 2003.
(6) Incorporated by reference to the indicated exhibit to the Company's
Form 10-K for the year ended December 31, 2003.
(7) Incorporated by reference to the indicated exhibit to the Company's
Form 10-Q for the quarter ended March 31, 2004.
(8) Incorporated by reference to the indicated exhibit to the Company's
Form 10-Q for the quarter ended September 30, 2004.
(9) Incorporated by reference to the indicated exhibit to the Company's
Form 8-K dated July 28, 2004.
(10) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-122783) which was
filed on February 15, 2005.
(11) Filed herewith.
Page 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on this twenty-eight day of March 2005.
TRAILER BRIDGE, INC.
By: /s/ John D. McCown
-----------------------------------
John D. McCown
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John D. McCown Chairman of the Board and Chief Executive Officer March 30, 2005
- ------------------------------------ and Director (Principal Executive Officer)
John D. McCown
/s/ Mark A. Tanner Vice President -- Administration and Chief Financial March 30, 2005
- ------------------------------------ Officer (Principal Financial and Accounting Officer)
Mark A. Tanner
/s/ William G. Gotimer, Jr. Director March 30, 2005
- ------------------------------------
William G. Gotimer, Jr.
/s/ Nickel van Reesema Director March 30, 2005
- ------------------------------------
Nickel van Reesema
/s/ Allen L. Stevens Director March 30, 2005
- ------------------------------------
Allen L. Stevens
/s/ Peter Shaerf Director March 30, 2005
- ------------------------------------
Peter Shaerf
Director March 30, 2005
- ------------------------------------
Artis E. James
Director March 30, 2005
- ------------------------------------
F. Duffield Meyercord
Page 59
SIGNATURE TITLE DATE
--------- ----- ----
Director March 30, 2005
- ------------------------------------
Malcom P. McLean, Jr.
Director March 30, 2005
- ------------------------------------
Greggory B. Mendenhall
Page 60