SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X )QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-16386
CANNON EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0650141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1457 Robinson
P.O. Box 364
Springdale, Arkansas 72765
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 751-9209
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 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
Number of shares of $.01 par value common stock outstanding at October 31,
2001: 3,205,276
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of September 30, 2001 and June 30, 2001...........................1
Consolidated Statements of Operations
for the Three Months Ended September 30, 2001 and 2000...............3
Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 2001 and 2000...............4
Notes to Consolidated Financial Statements.............................5
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................7
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings ...........................................*
ITEM 2 -- Changes in Securities........................................*
ITEM 3 -- Defaults Upon Senior Securities..............................*
ITEM 4 -- Submission of Matters to a Vote of Security-Holders..........*
ITEM 5 -- Other Information............................................*
ITEM 6 -- Exhibits and Reports on Form 8-K............................11
*No information submitted under this caption.
PART 1.
ITEM 1. Financial Statements (Unaudited)
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 June 30
2001 2001
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 1,573,943 $ 2,958,450
Receivables, net of allowance for doubtful
accounts (September 30, 2001-$186,141;
June 30, 2001-$542,618):
Trade 10,758,112 10,348,355
Other 137 837,987
Current portion of net investment in
direct financing leases 1,925,300 2,678,000
Prepaid expenses and supplies 1,314,741 1,703,016
Total current assets 15,572,233 18,525,808
Property and equipment:
Land, buildings and improvements 1,368,273 1,368,273
Revenue equipment 72,999,637 74,067,666
Service, office and other equipment 3,012,569 2,982,769
77,380,479 78,418,708
Less allowances for depreciation 27,744,139 27,003,925
49,636,340 51,414,783
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,423,497 2,417,686
Marketable securities 317,550 342,550
Net investment in direct financing leases,
less current portion 1,628,657 2,693,838
Other 111,182 111,182
Total other assets 4,504,292 5,588,662
$69,712,865 $75,529,253
Note: The balance sheet at June 30, 2001 has been derived from the audited
consolidated balance sheet at that date but it does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
September 30 June 30
2001 2001
(Unaudited) (Note)
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,293,532 $ 1,435,153
Accrued expenses:
Insurance reserves 3,582,869 3,539,724
Other 2,091,165 2,064,307
Federal and state income taxes payable 1,821,079 2,175,579
Current portion of long-term debt 21,118,065 15,969,109
Total current liabilities 29,906,710 25,183,872
Long-term debt, less current portion 30,363,607 38,839,680
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,265,401 shares 32,654 32,654
Additional paid-in capital 3,747,575 3,747,575
Retained earnings 5,863,536 7,926,689
Accumulated other comprehensive income,
net of income taxes (953) (953)
9,642,812 11,705,965
Less treasury stock, at cost (60,125 shares) 200,264 200,264
9,442,548 11,505,701
$69,712,865 $75,529,253
Note: The balance sheet at June 30, 2001 has been derived from the audited
consolidated balance sheet at that date but it does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
September 30
2001 2000
(Unaudited)
Operating revenue $ 21,725,631 $ 22,615,464
Operating expenses and costs:
Salaries, wages and fringe benefits 7,321,483 5,901,360
Operating supplies and expense 7,274,344 4,826,038
Operating taxes and licenses 1,037,224 832,455
Insurance and claims 990,305 877,868
Depreciation and amortization 2,210,989 2,327,845
Rents and purchased transportation 3,762,721 8,046,073
Other 627,310 834,250
23,224,376 23,645,889
Operating loss (1,498,745) (1,030,425)
Other income (expense):
Interest expense (911,738) (1,275,992)
Other income 7,359 105,079
(904,379) (1,170,913)
Loss before income taxes (2,403,124) (2,201,338)
Federal and state income taxes:
Current (Credit) (339,971) (1,283,500)
Deferred - 149,000
(339,971) (1,134,500)
Net loss $(2,063,153) $(1,066,838)
Basic and diluted loss per share $ (0.64) $ (0.33)
Basic and diluted shares outstanding 3,205,276 3,205,276
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
September 30
2001 2000
(Unaudited)
Operating activities
Net loss $(2,063,153) $(1,066,838)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,454,289 2,364,834
Provision for losses on accounts receivable 30,000 15,000
Provision for deferred income taxes - 149,000
Gain on disposal of equipment (243,299) (36,989)
Loss on sale of marketable securities 25,000 5,104
Changes in operating assets and liabilities:
Accounts receivable 398,094 3,093,980
Prepaid expenses and supplies 388,275 777,894
Accounts payable, accrued expenses,
taxes payable, and other liabilities (426,118) (496,452)
Net investment in direct financing leases 458,834 1,065,175
Net cash provided by operating activities 1,021,922 5,870,708
Investing activities
Purchases of property and equipment (29,800) (269,309)
Net increase in restricted cash (5,812) -
Proceeds from sale of marketable securities - 4,762
Proceeds from equipment sales 956,300 76,632
Net cash provided by (used in) investing activities 920,688 (187,915)
Financing activities
Proceeds from long-term borrowings - 246,437
Principal payments on long-term debt and
capital lease obligations (3,327,117) (4,556,911)
Net cash used in financing activities (3,327,117) (4,310,474)
Increase (decrease) in cash and cash equivalents (1,384,507) 1,372,319
Cash and cash equivalents at beginning of period 2,958,450 8,351,582
Cash and cash equivalents at end of period $ 1,573,943 $ 9,723,901
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10 - Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended June 30,
2002. For further information, refer to the Company's consolidated financial
statements and notes thereto included in its Form 10 - K for the fiscal year
ended June 30, 2001.
Note B - Future Operations
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, the Company had
increasing net losses before income taxes of approximately $2.1 million and
$1.1 million for the quarters ended September 30, 2001 and 2000,
respectively. In addition, the Company has experienced significant declines
in operating revenues and cash reserves over the past few years. The Company
also has a working capital deficit of approximately $14.3 million at
September 30, 2001, which includes approximately $21 million in current debt
obligations coming due in fiscal year 2002.
These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon
its ability to significantly improve its operating ratios, its ability to
generate sufficient cash flow to meet its obligations on a timely basis, the
support of its stockholders and its ability to obtain additional financing or
refinancing as may be required.
The Company is currently implementing a plan, which management believes will
significantly improve its operating efficiencies over the next fiscal year.
The Company has retained the services of an outside consultant, having
significant experience in the transportation industry, both from an
operational as well as a marketing strategy standpoint throughout the United
States, Mexico and Canada. The Company has identified numerous cost-cutting
measures to eliminate unnecessary overhead, including eliminating a
maintenance shift, expected to save the Company at least $500,000 annually.
The Company is continuing to focus on the reduction of deadhead miles by
concentrating on lane optimization.
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
The Company is also being more selective in its acceptance of new customers,
making a concerted effort to improve the rate per mile realized on each load.
In addition, the risk of further increases in fuel costs, which played a
significant role in the current year net loss, is being mitigated through
efforts to include fuel surcharges on new contracts.
The Company has identified selected assets for possible disposition.
Management believes sale of these assets would increase cash flow and pre-tax
earnings by approximately $3.9 million and $1.8 million, respectively. These
assets include 300 trailers and an airplane.
Finally, the Company has an excellent relationship with its lenders and is
currently in the process of renegotiating the terms of its debt due to be
paid off in the next 12 months. The Company has been approved for a $6
million working capital line of credit that will be collateralized by
qualifying accounts receivable. The Company will pay a monthly fee of 1% over
prime rate for balances outstanding against this line. There are no monthly
minimum fees. At September 30, 2001, the outstanding balance on this line of
credit was $0. Management further expects interest costs to decline as
interest rates continue to decrease and the Company's debt includes floating
interest rates.
There is no assurance that the Company will be able to improve its operating
ratios or that the Company will be successful in securing capital resources
to fund maturities of debt and other obligations as they become due in fiscal
2002 or to support the Company until such time that the Company is able to
consistently generate results sufficient to support its operations.
Note C - Supplemental Disclosures of Cash Flow Information
Three Months Ended
September 30
2001 2000
(Unaudited)
Interest paid 857,667 1,195,250
Non-cash investing and financing activities:
Decrease in direct financing leases 1,333,409 2,264,562
Note D - Reclassification
Certain reclassifications have been made to the September 30, 2000 financial
statements to conform to the September 30, 2001 financial statement
presentation. These reclassifications had no effect on net income.
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
Note E - Recent Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of long-lived Assets, (SFAS 144), to be effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early adoption encouraged. SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS supersedes FASB Statement No. 121 but retains Statement 121's
fundamental provisions for (a) recognition/measurement of impairment of long-
lived assets to be held and used and (b) measurement of long-lived assets to
be disposed of by sale. SFAS 144 also supersedes the accounting/reporting
provisions of APB Opinion No. 30 for segments of a business to be disposed of
but retains APB 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale.
Management believes the impact of SFAS 144 will not be significant to the
financial statements as reported.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations --First Quarter
Operating revenue for the first quarter of fiscal 2002 (ended September 30,
2001) was $21,725,631 compared to $22,615,464 for the first quarter of fiscal
2001, a decrease of $889,833 or 3.9% for the period. At September 30, 2001,
the Company's fleet consisted of 777 trucks and 1,506 trailers, while on
September 30, 2000, the Company's fleet consisted of 779 trucks and 2,268
trailers. Logistics and intermodal revenue for the first quarter of fiscal
2002 decreased by $972,887, or 56.5%, over the comparable period in fiscal
2001. The Company's revenue continued to be negatively impacted by a shortage
of qualified drivers to operate its trucks for the first quarter of fiscal
2002. Additionally, the Company was affected by an industry-wide shortage of
freight during the first quarter of fiscal 2002.
Salaries, wages, and fringe benefits, made up primarily of drivers. wages,
increased as a percentage of revenue to 33.7% in the first quarter of fiscal
2002 from 26.1% in the comparable period of fiscal 2001. The Company has
experienced significant turnover in its lease program. Economic conditions
were not favorable to small companies who did not have financial resources to
survive. Consequently, 147 trucks which were lease trucks on September 30,
2000, were converted to Company trucks.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Operating supplies and expenses, as a percentage of revenue, increased to
33.5% in the first quarter of fiscal 2002 from 21.3% in the comparable
period of fiscal 2001. Maintenance and tire costs increased by approximately
$944,000 due to the increase in Company trucks. Although the average cost per
gallon of fuel was 12 cents lower than in the comparable period of fiscal 2001,
fuel costs increased operating expense by approximately $1,120,000 also due to
the increase in Company trucks. Operating taxes and licenses also increased to
4.8% of revenue in fiscal 2002 from 3.7% in fiscal 2001 primarily due to the
increase in Company trucks. Insurance and claims were 4.6% of revenue in fiscal
2002, increasing from 3.9% in fiscal 2001. Depreciation and amortization
decreased to 10.2% of revenue in fiscal 2002 from 10.3% in the same period of
fiscal 2001. A gain on sale of equipment of $243,299 was recorded in the first
quarter of fiscal 2002 compared to a gain of $36,989 recorded in the same
period of fiscal 2001. Rents and purchased transportation decreased to 17.3% of
revenue in fiscal 2002 from 35.6% in fiscal 2001 due primarily to the decrease
in the Company's owner operators and to decreased logistics activities.
Operating revenue for the first quarter of 2002 decreased by 3.9% over the
comparable period of 2001, and operating expenses decreased by $421,513 or
1.8%. Accordingly, the Company.s operating ratio increased to 106.9% in the
first fiscal quarter of 2002 from 104.6% in the same period of fiscal 2001.
Interest expense decreased to 4.2% of revenue in the first quarter of
fiscal 2002 from 5.6% recorded in the first quarter of fiscal 2001 due to
lower average debt balances and lower interest rates on floating rate debt.
Beginning in 1999 and continuing though the first quarter of fiscal 2002, the
Company recognized a previously unrealized tax benefit resulting from a
sale/leaseback transaction entered into during fiscal year 1995. The Company
took a position on its 1995 and later tax returns, which the Company believed
might be challenged by the Internal Revenue Service (the Service). The
Company initially did not recognize any tax benefit for financial reporting
purposes. The Company is currently undergoing an audit by the Service for
its fiscal 1997 tax period. Although the Service has not made a final
determination with regard to the lease transaction and its tax consequences,
the Company believes that the Service will ultimately determine that its
previous tax deductions were appropriate, and the Company will then recognize
all benefits accrued through the most current reporting period. Consequently,
the Company recognized an income tax credit of $354,500 during the quarter
ended September 30, 2001.
Net loss for the first quarter of fiscal 2002 ended September 30, 2001 was
($2,063,153) ($.64 loss per diluted share) compared to net loss of
($1,066,838) ($.33 loss per diluted share) during the comparable period of
fiscal 2001, a decrease of $996,315 or 93.4% for the period.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Fuel Cost and Availability
The Company, and the motor carrier industry as a whole, is dependent upon the
availability and cost of diesel fuel. Although average price per gallon was
12 cents lower in the quarter ended September 30, 2001 than in the same
period of the prior year, the Company's total cost of fuel increased due to
the increase in Company trucks. Historically, increases in fuel costs have been
passed through to most of the Company's customers, either in the form of fuel
surcharges, or if deemed permanent in nature, through increased rates.
Although the Company has currently implemented fuel surcharges for its
customers, there is no assurance that any future increases in fuel costs can
be passed through to the Company's customers. Future cost increases or
shortages of fuel could affect the Company's future profitability.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash flows generated
from operations and proceeds from borrowings. The Company typically extends
credit to its customers, billing freight charges after delivery.
Accordingly, the ability of the Company to generate cash to satisfactorily
meet its ongoing cash needs is substantially dependent upon timely payment by
its customers. The Company has not experienced significant uncollectible
accounts receivable.
Operating activities provided cash flows of $1.0 million for the first three
months of fiscal 2002 compared to $5.9 million for the same period of fiscal
2001. Cash flows from operations in the first quarter of fiscal 2001 were
the result of $2.1 million in net loss, $2.5 million in depreciation offset
by $0.2 million from gain on sale of equipment, and $0.8 million provided by
accounts receivable and other assets. Investing activities provided net cash
of $0.9 million during the first three months of fiscal 2002 compared to $0.2
million net cash used for the same period of fiscal 2001. Financing
activities used net cash of $3.3 million during the first quarter of fiscal
2002 compared to $4.3 million cash used in the first quarter of 2001.
The Company's working capital decreased by $7.6 million to a deficit of $14.3
million at September 30, 2001 from a deficit of $6.7 million at June 30,
2001. Approximately, $5.1 million of this decrease was due to the increase in
current maturities of long-term debt at September 30, 2001. Historically,
working capital needs have been met from cash generated from operations.
Management believes that the Company's working capital is sufficient for its
short-term needs. The Company has been approved for a $6 million working
capital line of credit that will be collateralized by qualifying accounts
receivable.
Like other truckload carriers, the Company experiences significant driver
turnover. The Company experienced a shortage of qualified drivers during the
quarter ended September 30, 2001. Management anticipates that competition for
qualified drivers will continue. The Company seeks to attract drivers by
advertising job openings, encouraging referrals from existing employees and
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
providing a training program for applicants whose experience does not meet
the Company's minimum requirements; however, no assurance can be made that
the Company will not experience a shortage of drivers in the future.
During the first quarter of fiscal 2001, the Company has sold 148 of its
trailers resulting in a gain of $243,299. The Company plans to convert the
majority of its trailer fleet to 53 foot trailers in the future in order to
allow it to compete for freight from the increasing number of customers who
require 53 foot trailers for some or all of their shipments. The Company
currently owns and operates 1,092 of the 53 foot trailers and 414 of the 48
foot trailers.
Future Operations
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, the Company has
experienced increasing net losses before income taxes of approximately $2.1
million and $1.1 million for the quarters ended September 30, 2001 and 2000,
respectively. In addition, the Company has experienced significant declines
in operating revenues and cash reserves over the past few years. The Company
also has a working capital deficit of approximately $14.3 million at
September 30, 2001, which includes approximately $21 million in current debt
obligations coming due in fiscal year 2002.
These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon
its ability to significantly improve its operating ratios, its ability to
generate sufficient cash flow to meet its obligations on a timely basis, the
support of its stockholders and its ability to obtain additional financing or
refinancing as may be required.
The Company is currently implementing a plan, which management believes will
significantly improve its operating efficiencies over the next fiscal year.
The Company has retained the services of an outside consultant, having
significant experience in the transportation industry, both from an
operational as well as a marketing strategy standpoint throughout the United
States, Mexico and Canada. The Company has identified numerous cost-cutting
measures to eliminate unnecessary overhead, including eliminating a
maintenance shift, expected to save the Company at least $500,000 annually.
The Company is continuing to focus on the reduction of deadhead miles by
concentrating on lane optimization.
The Company is also being more selective in its acceptance of new customers,
making a concerted effort to improve the rate per mile realized on each load.
In addition, the risk of further increases in fuel costs, which played a
significant role in the current year net loss, is being mitigated through
efforts to include fuel surcharges on new contracts.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
The Company has identified selected assets for possible disposition.
Management believes sale of these assets would increase cash flow and pre-tax
earnings by approximately $3.9 million and $1.8 million, respectively. These
assets include 300 trailers and an airplane.
Finally, the Company has an excellent relationship with its lenders and is
currently in the process of renegotiating the terms of its debt due to be
paid off in the next 12 months. The Company has been approved for a $6
million working capital line of credit that will be collateralized by
qualifying accounts receivable. The Company will pay a monthly fee of 1% over
prime rate for balances outstanding against this line. There are no monthly
minimum fees. At September 30, 2001, the outstanding balance on this line of
credit was $0. Management further expects interest costs to decline as
interest rates continue to decrease and the Company's debt includes floating
interest rates.
There is no assurance that the Company will be able to improve its operating
ratios or that the Company will be successful in securing capital resources
to fund maturities of debt and other obligations as they become due in fiscal
2002 or to support the Company until such time that the Company is able to
consistently generate results sufficient to support its operations.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions
made by management from information currently available to management. These
statements address future plans, expectations and events or conditions
concerning various matters such as the results of the Company's sales efforts
as set forth in the discussion of results of operations, capital
expenditures, litigation and capital resources, and accounting matters.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results could differ
materially from those currently reported.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to cash flow and interest rate risk due to changes in
interest rates with respect to its long-term debt. See Note 2 to the
Consolidated Financial Statements in the Company's Annual Report for fiscal
year ended June 30, 2001 for details on the Company's long-term debt.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form-K
No reports on Form 8-K were filed during the three months ended September 30,
2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNON EXPRESS, INC.
(Registrant)
Date: November 14, 2001 /s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: November 14, 2001 /s/ Rose Marie Cannon
Secretary, Treasurer and Director