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 DECEMBER 31, 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. 1-13917
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: (479) 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 January 29,
2002: 3,205,276
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of December 31, 2001 and June 30, 2001 1
Consolidated Statements of Operations
for the Three Months and Six Months Ended December 31, 2001 and 2000 3
Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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 14
*No information submitted under this caption.
PART 1.
ITEM 1. Financial Statements (Unaudited)
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31 June 30
2001 2001
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 950,350 $2,958,450
Receivables, net of allowance for doubtful accounts
(December 31, 2001-$201,300; June 30, 2001-$542,618):
Trade 7,939,612 10,348,355
Other 72,846 837,987
Current portion of net investment
in direct financing leases 1,636,700 2,678,000
Prepaid expenses and supplies 1,001,612 1,703,016
Total current assets 11,601,120 18,525,808
Property and equipment:
Land, buildings and improvements 1,394,478 1,368,273
Revenue equipment 72,879,395 74,067,666
Service, office and other equipment 3,145,981 2,982,769
77,419,854 78,418,708
Less allowances for depreciation 29,809,839 27,003,925
47,610,015 51,414,783
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,425,015 2,417,686
Marketable securities 317,550 342,550
Net investment in direct financing leases,
less current portion 1,145,380 2,693,838
Other 111,182 111,182
Total other assets 4,022,533 5,588,662
$63,233,668 $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)
December 31 June 30
2001 2001
(Unaudited) (Note)
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,398,255 $ 1,435,153
Accrued expenses:
Insurance reserves 3,079,848 3,539,724
Other 1,501,897 2,064,307
Federal and state income taxes payable 1,808,529 2,175,579
Current portion of long-term debt 22,166,730 15,969,109
Total current liabilities 29,955,259 25,183,872
Long-term debt, less current portion 26,349,654 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 3,349,743 7,926,689
Accumulated other comprehensive income,
net of income taxes (953) (953)
7,129,019 11,705,965
Less treasury stock, at cost (60,125 shares) 200,264 200,264
6,928,755 11,505,701
$63,233,668 $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 Six Months Ended
December 31 December 31
2001 2000 2001 2000
(Unaudited) (Unaudited)
Operating revenue $19,774,737 $20,460,341 $41,500,368 $43,075,805
Operating expenses and costs:
Salaries, wages
and fringe benefits 7,498,813 5,892,961 14,820,296 11,794,321
Operating supplies
and expenses 5,936,118 4,850,342 13,210,462 9,676,380
Taxes and licenses 1,079,093 907,077 2,116,317 1,739,532
Insurance & claims 936,001 1,184,385 1,926,306 2,062,253
Depreciation and amort. 2,415,271 2,378,044 4,626,260 4,705,889
Rents and purchased
transportation 2,935,410 6,278,826 6,698,131 14,324,899
Other 766,874 521,438 1,394,184 1,355,688
21,567,580 22,013,073 44,791,956 45,658,962
Operating loss (1,792,843) (1,552,732) (3,291,588) (2,583,157)
Other income(expense)
Interest expense (738,312) (1,229,753) (1,650,050) (2,505,745)
Other income 17,362 118,242 24,721 223,321
(720,950) (1,111,511) (1,625,329) (2,282,424)
Loss before income taxes (2,513,793) (2,664,243) (4,916,917) (4,865,581)
Federal and state income taxes
Current - (383,500) (339,971) (767,000)
Deferred - (1,026,000) - (1,777,000)
- (1,409,500) (339,971) (2,544,000)
Net loss (2,513,793) (1,254,743) (4,576,946) (2,321,581)
Basic and diluted
loss per share $( 0.78) $(0.39) $(1.43) $(0.72)
Basic and diluted
shares outstanding 3,205,276 3,205,276 3,205,276 3,205,276
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
December 31
2001 2000
(Unaudited)
Operating activities
Net loss $(4,576,946) $(2,321,581)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,946,349 4,835,034
Provision for losses on accounts receivable 45,000 30,000
Provision for deferred income taxes - (1,148,093)
Gain on disposal of equipment (320,088) (129,144)
Loss on sale of marketable securities 25,000 5,104
Changes in operating assets and liabilities:
Accounts receivable 3,128,884 4,055,033
Prepaid expenses and supplies 701,404 (306,407)
Accounts payable, accrued expenses,
taxes payable, and other liabilities (1,426,234) (1,280,287)
Net investment in direct financing leases 779,043 1,913,500
Net cash provided by operating activities 3,302,412 5,653,159
Investing activities
Purchases of property and equipment (189,417) (364,487)
Net increase in restricted cash (7,329) (7,489)
Proceeds from sale of marketable securities - 4,762
Proceeds from equipment sales 1,178,639 299,614
Net cash provided by (used in) investing activities 981,893 (67,600)
Financing activities
Proceeds from long-term borrowing - 246,437
Principal payments on long-term debt and
capital lease obligations (6,292,405) (7,620,964)
Net cash used in financing activities (6,292,405) (7,374,527)
Decrease in cash and cash equivalents (2,008,100) (1,788,968)
Cash and cash equivalents at beginning of period 2,958,450 8,351,582
Cash and cash equivalents at end of period $ 950,350 $ 6,562,614
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 and six month periods ended December 31, 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 $4.6 million and
$2.3 million for the six months ended December 31, 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 $18.4 million at December
31, 2001, which includes approximately $22 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 rations, its ability to
generate sufficient cash flow to meet its obligations on a timely basis, the
support of it 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 during the current 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. 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, and is analyzing
profitability on every load.
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 profitability on each load. In addition,
the risk of further increases in fuel costs, which played a significant role
in the previous year's net loss, is being mitigated through efforts to include
fuel surcharges on new contracts.
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. To date, the Company's largest creditors have
indicated a willingness to cooperate in extending the terms of this debt.
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, subject to a floor of 6%, for
balances outstanding against this line. There are no monthly minimum fees.
At December 31, 2001, the outstanding balance on this line of credit was $0,
although the Company anticipates using a portion of the credit line in the
current quarter.
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
Six Months Ended
December 31
2001 2000
(Unaudited)
Interest paid 1,624,372 2,427,289
Non-cash investing and financing activities:
Decrease in direct financing leases 1,810,714 6,247,485
Note D - Tax Matters
In December 2001, the Company received a Notice of Proposed Deficiency from
the Internal Revenue Service related to the years ending June 30, 1994
through 1999. The Company is in the process of appealing the proposed tax
deficiency with the Appeals Section of the IRS.
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
The total amount of tax and interest that the Company would be required to
pay if the IRS were ultimately to prevail on the material issues described in
the Notice approximates $6 million as of December 31, 2001. The Company has
not accrued any liability related to penalties and interest, which represents
approximately $1,079,000 of the total amount. Management believes its
position on the material issues will be up held in appeal and that the
ultimate outcome will not have a material adverse impact on the Company's
financial position or results of operations.
Note E - Reclassification
Certain reclassifications have been made to the December 31, 2000 financial
statements to conform to the December 31, 2001 financial statement
presentation. These reclassifications had no effect on net income.
Note F - Recent Accounting Pronouncement
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of." SFAS No. 121 requires an assessment of the
recoverability of the Company's investment in long-lived assets to be held
and used in operations whenever events or circumstances indicate that their
carrying amounts may not be recoverable. Such assessment requires that the
future cash flows associated with the long-lived assets be estimated over
their remaining useful lives and an impairment loss recognized when the
future undiscounted cash flows are less than the carrying value of such
assets. When a determination is made that a long-lived asset is impaired, it
must be written down to its fair value.
The Company has assessed the recoverability of its investment in long-lived
assets to be held and used in operations under the guidelines set forth in
SFAS No. 121 and has determined that no impairment loss was required as of
December 31, 2001. Such assessment required the Company to make certain
estimates of future sales volumes, prices and costs which are expected to
occur over the remaining useful lives of its long-lived assets. Such long-
lived assets primarily consist of the Company's fleet of trucks and trailers.
The Company's estimates of these factors are based upon management's belief
that future freight volumes will increase over recent historical levels
achieved by the Company.
Although the Company believes it has a reasonable basis for its estimates of
future sales volumes, prices and costs, it is reasonably possible that the
Company's actual performance could materially differ from such estimates.
Management expects that the Company's future performance will provide
additional evidence to confirm or disprove such future estimates. Management
also believes that if such estimates are not confirmed, revisions to such
estimates could result in a material impairment loss on its long-lived
assets. We will include this statement on accounting policy which addresses
the recognition and measurement of impairment of long-lived asserts in Note 1
to the Financial Statements.
Notes to Consolidated Financial Statements (Unaudited)
(Continued)
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (Statement 141), Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(Statement 142), and Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" (Statement 143). In October,
2001, the FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement
144).
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. The Company is required to adopt the
provisions of Statement 141 immediately, and Statement 142 effective July 1,
2002. Goodwill acquired in business combinations completed before July 1,
2001will continue to be amortized prior to the adoption of Statement 142.
Management does not believe the adoption of Statement 141 or 142 will have a
material impact on the Company's results of operations.
Statement 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset. Statement 143 is effective for fiscal years beginning after June 15,
2002. Statement 144 retains the requirement to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. Statement 144 is
effective for fiscal years beginning after December 15, 2001, and for interim
periods within those fiscal years. The Company is currently assessing the
impact of Statements 143 and 144 on its financial condition and results of
operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations -- Second Quarter
Operating revenue for the second quarter of fiscal 2002 (ended December 31,
2001) was $19,774,737 compared to $20,460,341 for the second quarter of
fiscal 2001, representing a decrease of $685,604 or 3.4% for the period. At
December 31, 2001, the Company's fleet consisted of 777 trucks and 1,473
trailers, while on December 31, 2000, the Company's fleet consisted of 779
trucks and 2,234 trailers. Logistics and intermodal revenue for the second
quarter of fiscal 2002 decreased by $596,841 from $1,326,145 for the second
quarter of fiscal 2001 to $729,304 for the same period of fiscal 2002. The
Company's revenue continued to be negatively impacted by the weaker economy
and shortage of freight during the second quarter of fiscal 2002.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Salaries, wages, and fringe benefits, made up primarily of drivers' wages,
increased as a percentage of revenue to 37.9% in the second quarter of fiscal
2002 from 28.8% in the second quarter 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, 93 trucks which were lease trucks on December 31,
2000, were converted to Company trucks. Company drivers were awarded
approximately $213,000 in annual safety bonuses for the twelve-month period
ended December 31, 2001 as compared with $202,000 awarded during the twelve-
month period ended December 31, 2000.
Operating supplies and expenses, as a percentage of revenue, increased to
30.0% in the second quarter of fiscal 2002 from 23.7% in the comparable
period of fiscal 2001 primarily due to the increase in Company trucks.
Operating taxes and licenses increased to 5.5% of revenue in fiscal 2002 from
4.4% in fiscal 2001 primarily due to the increase in Company trucks.
Insurance and claims were 4.7% of revenue in fiscal 2002, decreasing from
5.8% of revenue in fiscal 2001. Depreciation and amortization increased to
12.2% of revenue in fiscal 2002 from 11.6% in the same period of fiscal 2001,
a result of transferring trucks from the lease program to Company trucks. A
gain on sale of equipment of $76,789 was recorded in the second quarter of
fiscal 2002 compared to a gain of $92,155 recorded in the same period of
fiscal 2001. Rents and purchased transportation decreased to 14.8% of revenue
in fiscal 2002 from 30.7% in fiscal 2001 primarily due to the decrease in the
Company's lease operators and to decreased logistics activities.
Operating revenue for the second quarter of 2002 decreased by 3.4% over the
comparable period of 2001, and operating expenses decreased by $445,493 or
2.0%. Accordingly, the Company's operating ratio (operating expenses divided
by operating revenue) increased to 109.1% in the second fiscal quarter of
2002 from 107.6% in the same period of fiscal 2001.
Interest expense decreased to 3.7% of revenue in the second quarter of fiscal
2002 from 6.0% recorded in the second quarter of fiscal 2001 due to lower
average debt balances and lower interest rates on floating rate debt.
Beginning in 1999 and continuing through 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. In December 2001, the Company received a Notice of Proposed
Deficiency from the Internal Revenue Service related to the years ending June
30, 1994 through 1999. The Company is in the process of appealing the
proposed tax deficiency with the Appeals Section of the IRS. Management
believes its position on the material issues will be up held in appeal and
that the ultimate outcome will not have a material adverse impact on the
Company's financial position or results or operations. However, the Company
will not recognize any current income tax credits until the appeal process is
concluded.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Net loss for the second quarter of fiscal 2002 ended December 31, 2001 was
($2,513,793) ($.78 loss per share) compared to net loss of ($1,254,743) ($.39
loss per share) during the comparable period of fiscal 2001, a decrease of
$1,259,050 or 100.3% for the period.
Results of Operations - Six Month Period
Operating revenue for the first six months of fiscal 2002 ended December 31,
2001 was $41,500,368 compared to $43,075,805 for the comparable period of
fiscal 2001, representing a decrease of $1,575,437 or 3.7%. Logistics and
intermodal revenue for the six-month period of fiscal 2001 decreased by
$1,569,362 over the comparable period in fiscal 2001. As in the three-month
period, the Company was affected by the weaker economy and shortage of
freight during the first six months of fiscal 2002.
Salaries, wages, and fringe benefits increased to 35.7% of revenue in the
six-month period of fiscal 2002 from the 27.4% reported in the six-month
period of fiscal 2001. As in the three-month period, this increase was
primarily due to the increase in Company drivers. The Company has experienced
significant turnover in its lease program. Economic conditions were not
favorable to the small companies in the lease program who did not have
financial resources to survive. Consequently, 93 trucks which were lease
trucks on December 31, 2000 were converted to company trucks. Operating
supplies and expenses increased to 31.8% of revenue in fiscal 2002 from
22.5% in fiscal 2001 primarily due to the increase in company drivers. Taxes
and licenses increased to 5.1% of revenue during fiscal 2002 from 4.0% in
fiscal 2001, again due to the increase in company drivers. Insurance and
claims were 4.6% of revenue in fiscal 2002, decreasing from 4.8% of revenue
in fiscal 2001. Depreciation and amortization, as a percentage of revenue,
increased to 11.1% of revenue in fiscal 2002 from 10.9% in the same period of
fiscal 2001, a result of transferring trucks from the lease program to
Company trucks. A gain on sale of equipment of $320,088 was recorded in the
first six months of fiscal 2002 compared to a gain of $129,145 recorded in
the same period of fiscal 2001. Rents and purchased transportation decreased
to 16.1% of revenue in the first six months of fiscal 2002 from 33.3% during
the comparable period of fiscal 2001 due primarily to the decrease in the
Company's lease operators and to decreased logistics activities.
Operating revenue for the first six months of 2002 decreased by 3.7% over the
comparable period of 2001, and operating expenses decreased by $867,006 or
1.9%. Accordingly, the Company's operating ratio (operating expenses divided
by operating revenue) increased to 107.9% for the first six months of 2002
from 106.0% in the same period of fiscal 2001.
Interest expense decreased to 4.0% of revenue in the first six months of fiscal
2002 from 5.8% recorded in the first six months of fiscal 2001 due to lower
average debt balances and lower interest rates on floated rate debt.
Beginning in 1999 and continuing through 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. In December 2001, the Company received a Notice of Proposed
Deficiency from the Internal Revenue Service related to the years
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Cont'd
ending June 30, 1994 through 1999. The Company is in the process of
appealing the proposed tax deficiency with the Appeals Section of the IRS.
Management believes its position on the material issues will be up held in
appeal and that the ultimate outcome will not have a material adverse impact
on the Company's financial position or results or operations. However, the
Company recognized a deferred income tax credit of $354,500 during the six-
month period ended December 31, 2001 and will not recognize any further
credits until the appeal process is concluded.
Net loss for the first six months of fiscal 2002 ended December 31, 2001 was
($4,576,946) ($1.43 loss per diluted share) compared to net loss of
($2,321,581) ($.72 loss per diluted share) during the comparable period of
fiscal 2001, a decrease of $2,255,365, or 97.1% for the six-month period.
Fuel Cost and Availability
The Company, and the motor carrier industry as a whole, is dependent upon the
availability and cost of diesel fuel. For the second quarter of fiscal 2002,
the average cost per gallon of fuel was 36 cents per gallon lower than in the
same quarter of fiscal 2001. For the six month period ended December 31,
2001, the average cost per gallon was 25 cents lower than in the same period
of fiscal 2001. Although average price per gallon was lower, 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 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.
Cash flows from Operations - Operating activities provided cash flows of $3.3
million for the first six months of fiscal 2002 compared to $5.7 million
provided during the same period of fiscal 2001. Cash flows from operations
in the first two quarters of fiscal 2002 were the result of $4.6 million net
loss, $4.9 million in depreciation offset by $.3 million from gain on sale of
equipment, and $3.2 million provided by other working capital assets and
liabilities.
Cash flows from Investing Activities - Investing activities provided net cash
of $.9 million during the first six months of fiscal 2002 compared to $.1
million net cash used in the same period of fiscal 2001. Proceeds from
equipment sales totaling $1.1 million was offset by $.2 million in purchases
of property and equipment and other investing activities for the first six
months of fiscal 2002. Purchases on property and equipment totaling $.4
million was offset by $.3 million in equipment sales and other investing
activities for the first six months of fiscal 2001.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations- Cont'd
Cash flows from Financing Activities - Financing activities used net cash of
$6.3 million during the first two quarters of fiscal 2002 compared to $7.4
million used in fiscal 2001. During the first 2 quarters of fiscal 2002,
payment on long term debt and capital leases was $6.3 million, with no
additional debt incurred. During the first two quarters of fiscal 2001,
payment on long term debt and capital leases was $7.6 million, with
additional debt incurred of $.2 million.
The Company's working capital decreased by $11.7 million to a deficit of
$18.4 million at December 31, 2001 from a deficit of $6.7 million at June 30,
2001. Approximately $6.2 million of this decrease was due to the increase in
current maturities of long-term debt at December 31, 2001. The Company
believes it will be able to restructure its debt to extend the maturities of
balloon and trac payments which will be due within the next 12 months. If
one or more lenders become unwilling to extend the maturities of these
obligations, the Company would be faced with obtaining alternate financing
sources or liquidating equipment. The Company also believes it will be
successful in improving its operating ratios over the next few months.
However, if the Company is unsuccessful in this endeavor, it would be
required to obtain additional operating capital to continue its operations.
Management believes the Company has sufficient resources to meets its
obligations for a period of at least 12 months from the date of the balance
sheet.
Like other truckload carriers, the Company experiences significant driver
turnover. The Company experienced a shortage of qualified drivers during the
quarter ended December 31, 2001, although to a lesser degree than in recent
periods. The Company seeks to attract drivers by advertising job openings,
encouraging referrals from existing employees and 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
continue to experience a shortage of drivers in the future.
During the first six months of fiscal 2002, the Company has sold 181 of its
trailers resulting in a gain of $320,088. 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 1,090 of the 53 foot trailers and 383 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 had
increasing net losses before income taxes of approximately $4.6 million and
$2.3 million for the six months ended December 31, 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 $18.4 million at December
31, 2001, which includes approximately $22 million in current debt
obligations coming due in fiscal year 2002.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
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 during the current 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. 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, and is analyzing
profitability on every load.
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 previous year's net loss, is being mitigated through
efforts to include fuel surcharges on new contracts.
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. To date, the Company's largest creditors have
indicated a willingness to cooperate in extending the terms of this debt.
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, subject to a floor of 6%, for
balances outstanding against this line. There are no monthly minimum fees.
At December 31, 2001, the outstanding balance on this line of credit was $0,
although the Company anticipates using a portion of the credit line in the
current quarter.
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-8K
No reports on Form 8-K were filed during the three months ended December 31,
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: February 14, 2002 /s/ Dean G. Cannon
President, Chairman of the
Board,Chief Executive Officer
and Chief Accounting Officer
Date: February 14, 2002 /s/ Rose Marie Cannon
Secretary, Treasurer and
Director