Attached files
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EX-31.1 - SECTION 302 CEO CERTIFICATION - TRAILER BRIDGE INC | dex311.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - TRAILER BRIDGE INC | dex312.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - TRAILER BRIDGE INC | dex321.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-22837
TRAILER BRIDGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) |
13-3617986 (I.R.S. Employer Identification No.) | |
10405 New Berlin Road East Jacksonville, FL 32226 (Address of Principal Executive Offices) |
32226 (Zip Code) |
(904) 751-7100
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ¨ No x
As of May 11, 2011, 12,016,681 shares of the registrants common stock, par value $0.01 per share, were outstanding.
Table of Contents
TRAILER BRIDGE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2011
PART I: FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements | |||||
Condensed Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited) | 1 | |||||
Condensed Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 | 2 | |||||
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited) | 3 | |||||
Notes to Condensed Unaudited Financial Statements | 4 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||||
Item 3. |
Quantitative and Qualitative Disclosure About Market Risk | 13 | ||||
Item 4. |
Controls and Procedures | 13 | ||||
PART II: OTHER INFORMATION | ||||||
Item 1. |
Legal Proceedings | 13 | ||||
Item 1A. |
Risk Factors | 14 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 14 | ||||
Item 3. |
Defaults Upon Senior Securities | 14 | ||||
Item 5. |
Other Information | 15 | ||||
Item 6. |
Exhibits | 15 | ||||
SIGNATURES | 16 | |||||
EXHIBIT 31.1 | 17 | |||||
EXHIBIT 31.2 | 18 | |||||
EXHIBIT 32.1 | 19 |
Table of Contents
PART I: FINANCIAL INFORMATION
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
2011 | 2010 | |||||||
OPERATING REVENUES |
$ | 24,813,947 | $ | 28,844,964 | ||||
OPERATING EXPENSES: |
||||||||
Salaries, wages, and benefits |
3,512,894 | 4,039,755 | ||||||
Purchased transportation and other rent |
7,270,339 | 7,175,202 | ||||||
Fuel |
5,077,919 | 4,293,654 | ||||||
Operating and maintenance (exclusive of depreciation & dry-docking shown separately below) |
6,305,477 | 6,558,082 | ||||||
Dry-docking |
6,610,263 | | ||||||
Taxes and licenses |
138,299 | 178,824 | ||||||
Insurance and claims |
768,314 | 771,933 | ||||||
Communications and utilities |
185,570 | 171,789 | ||||||
Depreciation and amortization |
1,563,025 | 1,540,742 | ||||||
(Gain) loss on sale of property and equipment |
(778 | ) | 21,344 | |||||
Other operating expenses |
1,397,767 | 1,862,933 | ||||||
32,829,089 | 26,614,258 | |||||||
OPERATING (LOSS) INCOME |
(8,015,142 | ) | 2,230,706 | |||||
NONOPERATING (EXPENSE) INCOME: |
||||||||
Interest expense |
(2,368,980 | ) | (2,535,191 | ) | ||||
Interest income |
1,444 | 4,386 | ||||||
LOSS BEFORE PROVISION FOR INCOME TAXES |
(10,382,678 | ) | (300,099 | ) | ||||
PROVISION FOR INCOME TAXES |
(7,200 | ) | (7,470 | ) | ||||
NET LOSS |
$ | (10,389,878 | ) | $ | (307,569 | ) | ||
PER SHARE AMOUNTS: |
||||||||
NET LOSS PER SHARE BASIC |
$ | (0.86 | ) | $ | (0.03 | ) | ||
NET LOSS PER SHARE DILUTED |
$ | (0.86 | ) | $ | (0.03 | ) | ||
WEIGHTED AVERAGE |
||||||||
SHARES OUTSTANDING BASIC AND DILUTED |
12,016,681 | 12,013,788 | ||||||
See accompanying summary of significant accounting policies and notes to the condensed unaudited financial statements.
1
Table of Contents
CONDENSED BALANCE SHEETS
March 31, 2011 |
December 31, 2010 |
|||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 3,125,474 | $ | 11,481,965 | ||||
Trade receivables, less allowance for doubtful accounts of $982,843 and $1,065,955 |
13,825,733 | 13,022,057 | ||||||
Prepaid and other current assets |
2,558,185 | 2,397,948 | ||||||
Deferred income taxes, net |
225,645 | 225,645 | ||||||
Total current assets |
19,735,037 | 27,127,615 | ||||||
Property and equipment, net |
82,774,629 | 82,631,050 | ||||||
Reserve fund for long-term debt |
4,639,479 | 4,638,215 | ||||||
Other assets |
1,961,541 | 2,004,426 | ||||||
TOTAL ASSETS |
$ | 109,110,686 | $ | 116,401,306 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 6,488,774 | $ | 7,411,181 | ||||
Accrued liabilities |
9,930,236 | 4,725,030 | ||||||
Unearned revenue |
1,023,315 | 1,410,963 | ||||||
Current portion of long-term debt |
85,374,700 | 85,374,700 | ||||||
Total current liabilities |
102,817,025 | 98,921,874 | ||||||
Long-term debt, less current portion |
16,774,927 | 17,795,827 | ||||||
TOTAL LIABILITIES |
119,591,952 | 116,717,701 | ||||||
Commitments and Contingencies |
||||||||
Stockholders Deficit: |
||||||||
Preferred stock, $.01 par value, 1,000,000, shares authorized; no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 20,000,000 shares authorized; 12,102,587 shares issued; 12,016,681 shares outstanding at March 31, 2011 and December 31, 2010 |
121,026 | 121,026 | ||||||
Treasury stock, at cost, 85,906 shares at March 31, 2011 and December 31, 2010 |
(318,140 | ) | (318,140 | ) | ||||
Additional paid-in capital |
54,838,650 | 54,613,643 | ||||||
Capital deficit |
(65,122,802 | ) | (54,732,924 | ) | ||||
TOTAL STOCKHOLDERS DEFICIT |
(10,481,266 | ) | (316,395 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
$ | 109,110,686 | $ | 116,401,306 | ||||
See accompanying summary of significant accounting policies and notes to the condensed unaudited financial statements.
2
Table of Contents
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (10,389,878 | ) | $ | (307,569 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
1,563,025 | 1,540,742 | ||||||
Amortization of loan costs |
234,739 | 236,334 | ||||||
Non-cash stock compensation expense |
225,007 | 226,071 | ||||||
Provision for doubtful accounts |
114,734 | 194,024 | ||||||
(Gain) loss on sale of property and equipment |
(778 | ) | 21,344 | |||||
(Increase) decrease in: |
||||||||
Trade receivables |
(918,411 | ) | (2,179,429 | ) | ||||
Prepaid and other current assets |
(160,237 | ) | 486,778 | |||||
Other assets |
(199,153 | ) | 3,392 | |||||
(Decrease) increase in: |
||||||||
Accounts payable |
(922,407 | ) | 870,140 | |||||
Accrued liabilities |
5,205,206 | 1,908,706 | ||||||
Unearned revenue |
(387,648 | ) | 115,567 | |||||
Net cash (used in) provided by operating activities |
(5,635,801 | ) | 3,116,100 | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(1,712,335 | ) | (290,660 | ) | ||||
Proceeds from sale of property and equipment |
12,546 | 46,600 | ||||||
Additions to other assets |
| (385,999 | ) | |||||
Net cash used in investing activities |
(1,699,789 | ) | (630,059 | ) | ||||
Financing activities: |
||||||||
Exercise of stock options |
| 12,999 | ||||||
Principal payments on notes payable |
(1,020,901 | ) | (2,037,346 | ) | ||||
Net cash used in financing activities |
(1,020,901 | ) | (2,024,347 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(8,356,491 | ) | 461,694 | |||||
Cash and cash equivalents, beginning of the period |
11,481,965 | 10,987,379 | ||||||
Cash and cash equivalents, end of period |
$ | 3,125,474 | $ | 11,449,073 | ||||
Supplemental cashflow information: |
||||||||
Cash paid for interest |
$ | 738,756 | $ | 921,887 | ||||
See accompanying summary of significant accounting policies and notes to the condensed unaudited financial statements.
3
Table of Contents
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
1. BASIS OF PRESENTATION AND GENERAL INFORMATION
Basis of Presentation
The accompanying unaudited condensed financial statements include all adjustments, consisting of normal recurring accruals, which Trailer Bridge, Inc. (the Company) considers necessary for a fair presentation of the results of operations for the periods shown. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Companys audited financial statements for the year ended December 31, 2010 included in the Form 10-K filed by the Company with the Securities and Exchange Commission.
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 amounts reported in the condensed unaudited financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior periods amounts in the financial statements have been reclassified to conform to current year presentation.
Accounts Receivable Concentration
At March 31, 2011 collection of approximately 10% of the Companys trade accounts receivable was dependent upon Puerto Rico government funding.
2. GOING CONCERN, LIQUIDITY, AND MANAGEMENTS PLANS
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the balance sheet, as of March 31, 2011 the Company had short-term debt obligations of $85,374,700, including the $82,500,000 of the 9.25% Senior Secured Notes (the Notes) which become due in November 2011. The Companys available liquidity plus the expected additional cash generated by operations will not be sufficient to pay this debt, without additional financing. This resulted in the inclusion of an explanatory going concern paragraph in the audit report of our Independent Registered Certified Public Accounting Firm for the year ended December 31, 2010. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current debt obligations on a timely basis through refinancing, and ultimately to attain successful operations. The Company expects to refinance these Notes prior to November 2011. Such refinancing could involve new lenders and/or existing lenders and might involve the private or public lending market and include an equity component.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06) which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, ASU 2010-06 amends guidance on employers disclosures about postretirement benefit plan assets under ASC 715, Compensation - Retirement Benefits to require that disclosures be provided by classes of assets instead of by major categories of assets. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuance, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on the Companys financial statements.
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TRAILER BRIDGE, INC.
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
In October 2009, the FASB issued ASU No. 2009-13, Multiple - Deliverable Revenue Arrangements, (ASU 2009-13). ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of ASC Subtopic 605-25, Multiple - Element Arrangements. ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and also eliminates the residual method of allocating arrangement consideration. The new guidance provides for separate revenue recognition based upon managements estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Under the previous guidance, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply ASU 2009-13 (i) prospectively to new or materially modified arrangements after its effective date or (ii) retrospectively for all periods presented. The adoption of ASU 2010-13 did not have a material impact on the Companys financial statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). ASU 2010-20 improves disclosures about the credit quality of an entitys financing receivables and related allowance for credit losses by facilitating evaluation of the nature of credit risk inherent in an entitys portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. A financing receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entitys statement of financial position including loans, trade accounts receivable, notes receivable, credit cards receivables and lease receivables, except for operating leases. Short term trade receivables and receivables measured at fair value or lower of cost or fair value are excluded. Further, the standard defines two levels of disaggregation for disclosure purposes: portfolio segment and class of financing receivables. The disclosures relating to disaggregated investment balances, allowance for credit losses, nonaccrual status, credit quality indicators, credit risk factors and impairment of financing receivables are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2011. The adoption of this standard had no material impact on the Companys financial statements.
4. STOCK BASED COMPENSATION
During the three months ended March 31, 2011 and 2010, the Company recorded compensation cost relating to previously issued stock options of $225,000 and $226,100, respectively. These costs are recorded in salaries, wages and benefits in the Condensed Unaudited Statements of Operations. As of March 31, 2011, the total compensation expense not yet recognized in the Condensed Unaudited Statement of Operations was approximately $2.5 million and is expected to be recognized over a period of up to 5 years.
During the three months ended March 31, 2011, no options were exercised or granted. During the three months ended March 31, 2010, 48,207 options were exercised. On January 15, 2010, the Company granted options to purchase 175,000 shares of the Companys common stock under the Companys Non-Employee Director Stock Incentive Plan, subject to shareholder approval for an increase in the authorized number of shares available for issuance which was obtained at the 2010 Annual Meeting held on May 27, 2010. Using the Black-Scholes method, the assumptions used to calculate the fair value of those options granted on January 15, 2010 are as follows:
2010 | ||
Expected Term |
6.5 years | |
Volatility |
64.53% | |
Risk-free interest rate |
3.17% | |
Dividends |
None |
Earnings per share - Options to purchase 1,309,314, and 1,604,528 shares of the Companys common stock were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive during the three-month periods ended March 31, 2011 and 2010, respectively.
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TRAILER BRIDGE, INC.
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
5. LONG-TERM DEBT
During the first quarter of 2010, the Company completed its previously announced purchase, in privately negotiated transactions, of $1.0 million (face amount) of its Notes maturing on November 15, 2011, at par value. Since September 2009, the Company has repurchased $2.5 million of these Notes, which have an outstanding balance of $82.5 million at March 31, 2011.
6. INCOME TAXES
The federal tax expense related to first quarter of 2011 and 2010 under the tonnage tax method is estimated to be approximately $7,200 and $7,500, respectively. As of March 31, 2011 and 2010, the remaining deferred tax asset of approximately $226,000 and $279,000, respectively, represents the state portion of the Companys deferred tax asset. The Companys research of the tonnage tax suggests that states do not recognize the tonnage tax and, therefore, NOLs related to state qualifying shipping income would not be suspended.
During the first quarter of 2011, the Company received notice that the IRS will be conducting an audit of its 2009 tax year which is currently in process. The Company intends to fully cooperate with the IRS and all of its requests during the audit. The Company is not currently involved in any state income tax examination.
7. SEGMENTS
The Companys primary business is to transport freight from its origination point in the continental United States to San Juan, Puerto Rico and Puerto Plata, Dominican Republic and from San Juan, Puerto Rico and Puerto Plata, Dominican Republic 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 Companys 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 water, land and rail. The Company provides intermodal services to its customers to and from the continental United States, San Juan, Puerto Rico and Puerto Plata, Dominican Republic. 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. Revenue related to the Dominican Republic service for the three months ended March 31, 2011 and 2010 was approximately $5.0 million and $3.2 million, respectively.
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 management and directors of the Company make operating and reporting decisions based on the total results of operations.
8. CONTINGENCIES AND COMMITMENTS
On April 17, 2008, the Company received a subpoena from the Antitrust Division of the U.S. Department of Justice (the DOJ) seeking documents and information relating to a criminal grand jury investigation of alleged anti-competitive conduct by Puerto Rico ocean carriers. Company representatives have met with United States Justice Department attorneys and pledged the Companys full and complete cooperation with the DOJ investigation. The Company has made document submissions to the DOJ in response to the subpoena. To date, neither the company nor any of its employees has been charged with any wrongdoing in this investigation and we will continue to cooperate with government officials.
Following publicity about the DOJ investigation, beginning on April 22, 2008, shippers in the Puerto Rico trade lane, and in one case indirect consumer purchasers within Puerto Rico, have filed at least 40 purported class actions against domestic ocean carriers, including Horizon Lines, Sea Star Lines, Crowley Liner Services and the Company. The actions alleged that the defendants inflated prices and engaged in other allegedly anti-competitive conduct in violation of federal antitrust laws and seek treble damages, attorneys fees and injunctive relief. The actions, which were filed in the United States District
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TRAILER BRIDGE, INC.
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
Court for the Southern District of Florida, the United States District Court for the Middle District of Florida, and the United States District Court for the District of Puerto Rico, were consolidated into a single multi-district litigation proceeding (MDL 1960) in the District of Puerto Rico for pretrial purposes.
Plaintiffs lead counsel filed a number of amended class action complaints under seal. The Company filed a motion to dismiss the last operative consolidated complaint with the court. On April 30, 2010, in a non-final order, the Court granted the Companys motion to be dismissed with prejudice as to the claims of the named plaintiffs. This order will not become final and appealable until a further order or judgment is entered by the Court. The Company intends to continue its vigorous defense of these actions, if necessary.
Horizon Lines, Crowley Liner Services, Sea Star Lines, LLC, Saltchuck Resources, an affiliate of Sea Star Lines, LLC, and their related companies entered into settlement agreements with certain named direct purchaser plaintiffs on behalf of a purported class of claimants in the MDL 1960 proceeding, while denying any liability for the underlying claims. All of these settlements received Preliminary Approval from the court in August, 2010, and notices to the putative class members were mailed in September, 2010. All settling defendants have opted to move forward with the settlement.
Plaintiffs who have opted-out are likely to pursue claims against the settling defendants. It is not clear whether an individual opt-out plaintiff would attempt to bring an action against the Company in such a proceeding or even whether they could do so in light of the Companys dismissal with prejudice from the underlying MDL. Moreover, it is not clear what, if any, impact these settlements, whether or not finally approved, will have on further prosecution of the MDL 1960 or other claims on the Company, or on the trade, in general.
On March 15, 2011, Horizon Lines, LLC plead guilty to a charge of violating federal antitrust laws with respect to the Puerto Rico trade lane in which the Company operates. Horizon Lines, LLC was sentenced to pay a fine of $45 million, which was subsequently reduced to $15 million payable over five years and was placed on criminal probation. It is unclear what, if any, impact the Horizon Lines, LLC plea will have on the civil actions discussed above, on the Company, or on the trade, in general.
On October 9, 2009, the Company received a Request for Information and Production of Documents from the Puerto Rico Office of Monopolistic Affairs. The request relates to an investigation into possible price fixing and unfair competition in the Puerto Rico domestic ocean shipping business. The Company has indicated to the Puerto Rican authorities that we will cooperate fully with this investigation and have provided requested documents to such authorities.
The Company understands that, all currently named defendants in the indirect purchaser action entered into a settlement with the Commonwealth of Puerto Rico and attorneys representing a putative class of indirect purchasers to resolve all of the alleged claims of the Commonwealth of Puerto Rico and the indirect purchasers related to ocean shipping services in the Puerto Rico trade lane. The Company is not a party to the indirect purchaser litigation and it is unclear what, if any, impact this settlement will have on the future course of the investigation by the Puerto Rican authorities.
Significant legal fees and costs are expected to be incurred in connection with the DOJ investigation, the class actions, and the Puerto Rico Office of Monopolistic Affairs investigation. During the three-month periods ended March 31, 2011, and 2010, costs were approximately $25,000 and $380,000, respectively.
On October 15, 2009, the Company commenced legal action against its insurer for a judicial declaration that the insurer owes and has breached its duty to defend the Company in an antitrust lawsuit captioned: In re Puerto Rican Cabotage Antitrust Litigation, U.S.D.C., Puerto Rico, Case No. 3:08-md-01960-DRD (MDL 1960), and for judgment requiring the insurer to defend and to reimburse the Companys defense expenses. The case was held in the Middle District of Florida, Jacksonville Division, and was captioned: Trailer Bridge, Inc. v. Illinois National Insurance Company. On July 23, 2010 the Court denied the Companys motion and granted summary judgment in favor of the defendant. The Company appealed this decision to the Eleventh Circuit Court of Appeals on August 19, 2010. Oral argument will be scheduled in October, 2011, for a future date however, the appeals outcomes cannot be predicted with certainty.
The Company is not able to predict the ultimate outcome or cost of the DOJ investigation, the civil class actions, or the Puerto Rico Office of Monopolistic Affairs investigation. However, should this result in an unfavorable outcome for the Company, it could have a material adverse effect on the Companys financial position and future operations.
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TRAILER BRIDGE, INC.
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010
The Company is a defendant in certain employee actions for wrongful termination, age and gender discrimination from employee terminations in 2009 and 2010. The Company is insured for such actions and in the opinion of management such actions are not expected to have a material adverse effect on the Companys financial position or cash flows.
The Company is involved in routine litigation 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 Companys financial position or cash flows.
In the second quarter of 2010, the Company committed to capital expenditures of approximately $5.5 million for modifications and improvements at its San Juan, Puerto Rico terminal. As of March 31, 2011, approximately $5.5 million had been spent and the Company placed into service the land-based ramp that was built to replace the floating ramp.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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 Trailer Bridge, Inc. (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 Companys ability to refinance its existing debt, the risks of changes in demand for transportation services offered by the Company, changes in rate levels for transportation services offered by the Company, changes in the cost of fuel, unfavorable outcomes from the United States Department of Justice (DOJ) investigation and related class or individual actions, economic recessions and severe weather as well the ability to retain and/or attract the necessary personnel and maintain necessary vendor relationships. An additional description of the Companys risk factors is described in Part 1 Item 1A. Risk Factors filed on Form 10-K for the year ended December 31, 2010. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS:
EXECUTIVE SUMMARY
The Company earns revenue by the movement of freight by water to and from Puerto Rico, the Dominican Republic and the continental United States through its terminal facility in Jacksonville, Florida. The Company also earns revenue from the movement of freight within the continental United States when such movement complements its core business of moving freight to and from Puerto Rico and the Dominican Republic. The Company also earns revenue from chartering its vessels that are not in liner service to third party operators. The Companys operating expenses consist of the cost of the equipment, labor, facilities, fuel, inland transportation and administrative support necessary to move freight to and from Puerto Rico, the Dominican Republic and within the continental United States.
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
For the three month period ended March 31, 2011, the Company had a net loss of $10.4 million compared to a net loss of $0.3 million in the same period of the previous year. The Companys operating loss for the three month period ended March 31, 2011, was $8.0 million compared to operating income of $2.2 million in the same period of the previous year. The Companys net loss was mainly attributable to higher marine costs associated with the regulatory dry-docking of the Companys two roll-on/roll-off (ro/ro) vessels in the first quarter of 2011 which was approximately $6.6 million.
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The following table sets forth the indicated items as a percentage of net revenues for the three months ended March 31, 2011 and 2010.
Operating Statement - Margin Analysis
(% of Operating Revenues)
Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Operating revenues |
100.0 | % | 100.0 | % | ||||
Salaries, wages, and benefits |
14.2 | 14.0 | ||||||
Purchased transportation and other rent |
29.3 | 24.9 | ||||||
Fuel |
20.5 | 14.9 | ||||||
Operating and maintenance (exclusive of depreciation & dry-docking shown separately below) |
25.4 | 22.7 | ||||||
Dry-docking |
26.6 | | ||||||
Taxes and licenses |
0.6 | 0.6 | ||||||
Insurance and claims |
3.1 | 2.7 | ||||||
Communications and utilities |
0.7 | 0.6 | ||||||
Depreciation and amortization |
6.3 | 5.3 | ||||||
(Gain) loss on sale of equipment |
| 0.1 | ||||||
Other operating expenses |
5.6 | 6.5 | ||||||
Total operating expenses |
132.3 | 92.3 | ||||||
Operating (loss) income |
(32.3 | ) | 7.7 | |||||
Net interest expense |
(9.6 | ) | (8.8 | ) | ||||
Net loss |
(41.9 | )% | (1.1 | )% | ||||
The Companys operating ratio, or operating expenses expressed as a percentage of revenue, declined from 92.3% during the three months ended March 31, 2010 to 132.3% during the three months ended March 31, 2011. The decline is primarily due to decreased volume along with lower charterhire and fuel surcharge revenues combined with higher operating costs as explained under the operating expenses caption below.
Revenues
The following table sets forth by percentage and dollar, the changes in the Companys revenue and volume, measured by equivalent units:
Volume & Revenue Changes in the first quarter of 2011 compared to 2010
Overall | ||||
Volume Percent Change: |
||||
Total Equivalent Units |
(18.3 | )% | ||
Revenue Change (in millions): |
||||
Core Service Revenue |
$ | (3.8 | ) | |
Other Revenues |
(0.2 | ) | ||
Total Revenue Change |
$ | (4.0 | ) | |
Vessel capacity utilization southbound was 88.8% for the three months ended March 31, 2011 compared to 96.5% for the three months ended March 31, 2010. Vessel capacity utilization northbound was 22.6% for the three months ended March 31, 2011 compared to 30.2% for the three months ended March 31, 2010. The vessel capacity utilization southbound and
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northbound decreased primarily due to decreased cargo volumes with the northbound volume negatively affected by the temporary cessation of the movement of recyclable tires.
Total revenue for the three months ended March 31, 2011 was $24.8 million, compared to $28.8 million for the three months ended March 31, 2010. Excluding the effect of fuel surcharge revenue, revenue decreased 14.7% from the prior year period primarily as a result of a decrease in freight volumes and lower charterhire revenue. The Companys fuel surcharge, which is included in operating revenues, amounted to $3.7 million during the three months ended March 31, 2011 compared to $4.1 million from the prior year period. This decrease in fuel surcharge revenue was primarily the result of lower freight volumes. Charterhire, which is rental revenue for vessels not in use in liner service, amounted to approximately $50,000 during the three months ended March 31, 2011, compared to $1.3 million in the prior year period. This decrease in charterhire revenue was primarily the result of fewer days the available vessels were chartered in the first quarter of 2011.
Operating Expenses
Total operating expense was $32.8 million for the three months ended March 31, 2011 as compared to $26.6 million for the prior year period. This increase was primarily due to dry-docking costs and higher fuel, partially offset by decreases in salaries and benefits and other operating expenses due to the lower freight volume. Dry-docking expenses associated with the required regulatory dry-docking of the Companys two ro/ro barges during the first quarter of 2011 totaled $6.6 million. The Company did not have any dry-docking expenses in the first quarter of 2010. The ro/ro vessels are not scheduled for another regulatory dry-docking until 2014 for one and 2016 for the other. Marine purchased transportation expense was negatively impacted by a one-time charter of a tug-barge unit to maintain our schedule during the first quarter. Fuel expense increased $0.8 million or 18.3% due primarily to market price increases. The category fuel expense does not include fuel related expenses associated with embedded inland purchased transportation that experienced a slight increase as well. The Company estimates that its fuel expense associated with purchased transportation increased approximately $68,000 or 4.7%. Salaries, wages, and benefits decreased by $0.5 million or 13.0% primarily due to reductions in force in 2010 and less driver payroll as a result of a shift from company employed drivers to purchased transportation. Other operating expenses decreased by $0.5 million or 25.0% primarily due to decreases in legal fees associated with the on-going DOJ investigation.
As a result of the factors described above, the Company reported a net loss of $10.4 million or $0.86 per basic and diluted share for the three months ended March 31, 2011 compared to net loss of $0.3 million or $0.03 per basic and diluted share in the same period in 2010.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $5.6 million in the first three months of 2011 compared to net cash provided by operations of $3.1 million in the first three months of 2010. This decrease was partially the result of a decrease in accounts receivable that resulted primarily from lower revenues. This decrease was also the result of an increase in accounts payables and accrued liabilities primarily as a result of higher operating costs mainly due to dry-docking expenses incurred in the first quarter of 2011 related to the Companys two ro/ro barges, as noted in the operating expense section above. Net cash used in investing activities was $1.7 million in the first three months of 2011 compared to $0.6 million in 2010. This increase resulted primarily from payments made for improvements at the Companys San Juan, Puerto Rico terminal for the construction of a land-based ramp that was put into service in the first quarter of 2011. Net cash used in financing activities was $1.0 million in the first three months of 2011 compared to $2.0 million in 2010. The change in net cash used in financing activities was mainly attributable to decreased debt payments in the first three months of 2011. The Company purchased $1.0 million of its 9.25% Senior Secured Notes (the Notes) during the three months ended March 31, 2010. At March 31, 2011, cash amounted to approximately $3.1 million, working capital deficit was $83.1 million, primarily due to classification of the Companys $82.5 million Notes due November 2011 as current in the Companys March 31, 2011 balance sheet. The Company also had $4.6 million in a reserve fund for its 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 (collectively, the Title XI Bonds).
The Companys revolving credit facility with Wells Fargo (formerly Wachovia), as amended, provides for a maximum availability of $10 million and expires April 2012. The facility provides for interest equal to the prime rate. The revolving line of credit is subject to a borrowing base formula based on a percentage of eligible accounts receivable. The revolving credit facility is secured by the Companys accounts receivable. At March 31, 2011, there were no advances drawn on this credit facility. During the fourth quarter of 2008, the Company amended the Revolving Credit Agreement to eliminate all financial covenants at any time the Company has at least $3.0 million in unused borrowing capacity under the facility. As of March 31, 2011, the Company had $6.6 million available under this facility as calculated by the borrowing base formula and
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therefore was not subject to the financial covenants.
The Company has an outstanding term loan with Wachovia that provides for interest equal to the prime rate and principal payments over a 72 month period through December 2014. At March 31, 2011, approximately $5.4 million was drawn on this loan to fund previous equipment purchases. This term loan is collateralized by eligible new equipment with a carrying value of $14.2 million at March 31, 2011.
The Companys $82.5 million Notes mature on November 15, 2011. Interest on the Notes is payable semi-annually on each May 15 and November 15. The Company 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. 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 the Company 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, places restrictions on the Companys ability to (a) incur or guarantee additional debt, (b) to pay dividends, repurchase common stock or subordinated debt, (c) create liens, (d) transact with affiliates, and (e) transfer or sell assets.
The Company expects to refinance these Notes prior to November 2011. The Companys previously discussed refinancing effort has not come to fruition but the Company continues actively working with its lenders and advisors to refinance the Notes and other indebtedness of the Company. Such refinancing could involve new lenders and/or existing lenders and might involve the private or public lending market and include an equity component. The interest rate the Company pays on its overall debt may be higher under such refinancing and the Company could incur significant additional expenses, including prepayment penalties on the Title XI Bonds and expensing of unamortized issuance costs in completing such a transaction. The existing Notes are secured by a substantial portion of the Companys revenue generating assets and failure to refinance the debt could impair the Companys ability to use such assets. The Company can provide no assurance that it will be able to refinance the Notes. In the event the Company is not able to refinance the Notes, the Companys finances and ability to operate would be severely impaired.
The Company is restricted from performing certain financial activities described below due to certain leverage ratios under its Title XI Bonds. The provisions of the Title XI Bond debt documents provide that, in the event the Company does not maintain certain leverage ratios, the Company is restricted from conducting certain financial activities without obtaining the written permission of the Secretary of Transportation of the United States. 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 Bond 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 the 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 of the Merchant Marine Act of 1936, as amended, and liens incurred in the ordinary course of business. As of March 31, 2011, the Company was in compliance with such restrictions. If the Company retires this debt prior to the maturity date, the Company will be subject to certain prepayment penalties as defined in the agreement.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2011, the Company did not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our critical accounting policies during the three months ended March 31, 2011, as compared to those the Company disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report filed on Form 10-K for the year ended December 31, 2010.
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RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements are detailed in Note 3 of the Companys Unaudited Financial Statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not required for smaller reporting companies.
Item 4. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
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 financial officer concluded that Trailer Bridge, Inc.s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There has been no significant change in our internal controls over financial reporting identified in connection with the evaluation referred to in the paragraph above that occurred during the three month period ended March 31, 2011 that has materially affected, or is reasonably likely to materially effect, our internal controls over financial reporting.
PART II
Item 1. | Legal Proceedings |
On April 17, 2008, the Company received a subpoena from the Antitrust Division of the U.S. Department of Justice (the DOJ) seeking documents and information relating to a criminal grand jury investigation of alleged anti-competitive conduct by Puerto Rico ocean carriers. Company representatives have met with United States Justice Department attorneys and pledged the Companys full and complete cooperation with the DOJ investigation. The Company has made document submissions to the DOJ in response to the subpoena. To date, neither the company nor any of its employees has been charged with any wrongdoing in this investigation and we will continue to cooperate with government officials.
Following publicity about the DOJ investigation, beginning on April 22, 2008, shippers in the Puerto Rico trade lane, and in one case indirect consumer purchasers within Puerto Rico, have filed at least 40 purported class actions against domestic ocean carriers, including Horizon Lines, Sea Star Lines, Crowley Liner Services and the Company. The actions alleged that the defendants inflated prices and engaged in other allegedly anti-competitive conduct in violation of federal antitrust laws and seek treble damages, attorneys fees and injunctive relief. The actions, which were filed in the United States District Court for the Southern District of Florida, the United States District Court for the Middle District of Florida, and the United States District Court for the District of Puerto Rico, were consolidated into a single multi-district litigation proceeding (MDL 1960) in the District of Puerto Rico for pretrial purposes.
Plaintiffs lead counsel filed a number of amended class action complaints under seal. The Company filed a motion to dismiss the last operative consolidated complaint with the court. On April 30, 2010, in a non-final order, the Court granted the Companys motion to be dismissed with prejudice as to the claims of the named plaintiffs. This order will not become final and appealable until a further order or judgment is entered by the Court. The Company intends to continue its vigorous defense of these actions, if necessary.
Horizon Lines, Crowley Liner Services, Sea Star Lines, LLC, Saltchuck Resources, an affiliate of Sea Star Lines, LLC, and their related companies entered into settlement agreements with certain named direct purchaser plaintiffs on behalf of a purported class of claimants in the MDL 1960 proceeding, while denying any liability for the underlying claims. All of these settlements received Preliminary Approval from the court in August, 2010, and notices to the putative class members were mailed in September, 2010. All settling defendants have opted to move forward with the settlement.
Plaintiffs who have opted-out are likely to pursue claims against the settling defendants. It is not clear whether an individual opt-out plaintiff would attempt to bring an action against the Company in such a proceeding or even whether they could do so in light of the Companys dismissal with prejudice from the underlying MDL. Moreover, it is not clear what, if any,
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impact these settlements, whether or not finally approved, will have on further prosecution of the MDL 1960 or other claims on the Company, or on the trade, in general.
On March 15, 2011, Horizon Lines, LLC plead guilty to a charge of violating federal antitrust laws with respect to the Puerto Rico trade lane in which the Company operates. Horizon Lines, LLC was sentenced to pay a fine of $45 million, which was subsequently reduced to $15 million payable over five years and was placed on criminal probation. It is unclear what, if any, impact the Horizon Lines, LLC plea will have on the civil actions discussed above, on the Company, or on the trade, in general.
On October 9, 2009, the Company received a Request for Information and Production of Documents from the Puerto Rico Office of Monopolistic Affairs. The request relates to an investigation into possible price fixing and unfair competition in the Puerto Rico domestic ocean shipping business. The Company has indicated to the Puerto Rican authorities that we will cooperate fully with this investigation and have provided requested documents to such authorities.
The Company understands that all currently named defendants in the indirect purchaser action entered into a settlement with the Commonwealth of Puerto Rico and attorneys representing a putative class of indirect purchasers to resolve all of the alleged claims of the Commonwealth of Puerto Rico and the indirect purchasers related to ocean shipping services in the Puerto Rico trade lane. The Company is not a party to the indirect purchaser litigation and it is unclear what, if any, impact this settlement will have on the future course of the investigation by the Puerto Rican authorities.
Significant legal fees and costs are expected to be incurred in connection with the DOJ investigation, the class actions, and the Puerto Rico Office of Monopolistic Affairs investigation. During the three-month periods ended March 31, 2011, and 2010, costs were approximately $25,000 and $380,000, respectively.
On October 15, 2009, the Company commenced legal action against its insurer for a judicial declaration that the insurer owes and has breached its duty to defend the Company in an antitrust lawsuit captioned: In re Puerto Rican Cabotage Antitrust Litigation, U.S.D.C., Puerto Rico, Case No. 3:08-md-01960-DRD (MDL 1960), and for judgment requiring the insurer to defend and to reimburse the Companys defense expenses. The case was held in the Middle District of Florida, Jacksonville Division, and was captioned: Trailer Bridge, Inc. v. Illinois National Insurance Company. On July 23, 2010 the Court denied the Companys motion and granted summary judgment in favor of the defendant. The Company appealed this decision to the Eleventh Circuit Court of Appeals on August 19, 2010. Oral argument will be scheduled in October, 2011, for a future date however, the appeals outcomes cannot be predicted with certainty.
The Company is not able to predict the ultimate outcome or cost of the DOJ investigation, the civil class actions, or the Puerto Rico Office of Monopolistic Affairs investigation. However, should this result in an unfavorable outcome for the Company, it could have a material adverse effect on the Companys financial position and future operations.
The Company is a defendant in certain employee actions for wrongful termination, age and gender discrimination from employee terminations in 2009 and 2010. The Company is insured for such actions and in the opinion of management such actions are not expected to have a material adverse effect on the Companys financial position or cash flows.
The Company is involved in routine litigation 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 Companys financial position or cash flows.
Item 1A. | Risk Factors |
An investment in our securities involves a high degree of risk. There have been no material changes to the risk factors previously reported under Item 1A of our annual report on Form 10-K for the year ended December 31, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
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Item 5. | Other Information |
None
Item 6. | Exhibits |
Exhibit Number |
Description of Exhibit | |
31.1 | 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 | 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 | 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 2002) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRAILER BRIDGE, INC.
Date: May 13, 2011 | By: | /s/ Ivy B. Suter | ||||
Ivy B.Suter | ||||||
Chief Executive Officer | ||||||
Date: May 13, 2011 | By: | /s/ Mark A. Tanner | ||||
Mark A. Tanner | ||||||
Vice President of Administration and Chief Financial Officer |
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