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 MARCH 31, 2002
( )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
April 22, 2002: 3,205,276
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of March 31, 2002 and June 30, 2001.....................1
Consolidated Statements of Operations
for the Three Months and Nine Months Ended March 31, 2002
and 2001.....................................................3
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 2002 and 2001..........4
Notes to Consolidated Financial Statements...................5
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................7
ITEM 3 Quantitative and Qualitative Disclosure about Market
Risk .....................................................12
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings ................................12
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..................12
*No information submitted under this caption.
PART 1.
ITEM 1. Financial Statements (Unaudited)
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31 June 30
2002 2001
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $333,396 $2,958,450
Receivables, net of allowance for doubtful
accounts(March 31, 2002-$216,300;
June 30, 2001-$542,618):
Trade 8,967,390 10,348,355
Other 78 837,987
Current portion of net investment in
direct financing leases 877,500 2,678,000
Prepaid expenses and supplies 1,883,138 1,703,016
Total current assets 12,061,502 18,525,808
Property and equipment:
Land, buildings and improvements 1,376,193 1,368,273
Revenue equipment 74,110,483 74,067,666
Service, office and other equipment 3,171,241 2,982,769
78,657,917 78,418,708
Less allowances for depreciation 32,296,405 27,003,925
46,361,512 51,414,783
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,426,153 2,417,686
Marketable securities 317,550 342,550
Net investment in direct financing leases,
less current portion 360,960 2,693,838
Other 111,182 111,182
Total other assets 3,239,251 5,588,662
$61,662,265 $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.
1
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
March 31 June 30
2002 2001
(Unaudited) (Note)
Liabilities and Stockholders Equity
Current liabilities:
Trade accounts payable $1,532,105 $ 1,435,153
Accrued expenses:
Insurance reserves 2,822,668 3,539,724
Other 2,040,903 2,064,307
Federal and state income taxes payable 1,808,529 2,175,579
Current portion of long-term debt 15,634,710 15,969,109
Total current liabilities 23,838,915 25,183,872
Long-term debt, less current portion 33,268,260 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 976,078 7,926,689
Unrealized depreciation on marketable
securities, net of income taxes (953) (953)
4,755,354 11,705,965
Less treasury stock, at cost (60,125 shares) 200,264 200,264
4,555,090 11,505,701
$61,662,265 $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.
2
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
March 31 March 31
2002 2001 2002 2001
(Unaudited) (Unaudited)
Operating revenue $18,527,847 $20,850,239 $60,028,215 $63,926,044
Operating expenses and costs:
Salaries, wages and fringe
benefits 7,019,291 6,320,789 21,839,587 18,115,110
Rents and purchased
transportation 1,971,869 5,685,623 8,670,000 20,010,522
Operating supplies and expense 6,111,996 5,589,218 19,322,458 15,265,598
Taxes and licenses 1,112,556 970,915 3,228,873 2,710,447
Insurance & claims 817,497 571,489 2,743,804 2,633,742
Depreciation and amortization 2,539,761 2,047,313 7,166,020 6,753,202
Other 589,119 556,541 1,983,303 1,912,229
20,162,089 21,741,888 64,954,045 67,400,850
Operating income (loss) (1,634,242) (891,649) (4,925,830) (3,474,806)
Other income (expense)
Interest expense (752,979) (1,106,128) (2,403,029) (3,611,873)
Other income 13,556 80,500 38,277 303,821
(739,423) (1,025,628) (2,364,752) (3,308,052)
Income(loss) before
income taxes (2,373,665) (1,917,277) (7,290,582) (6,782,858)
Federal and state income taxes
Current (0) (383,500) (339,971) (1,150,500)
Deferred (0) (738,000) (0) (2,515,000)
(0) (1,121,500) (339,971) (3,665,500)
Net loss (2,373,665) (795,777) (6,950,611) (3,117,358)
Basic and diluted loss per share ($0.74) ($0.25) ($2.17) ($0.97)
Basic and diluted shares
outstanding 3,205,276 3,205,276 3,205,276 3,205,276
See notes to consolidated financial statements.
3
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
March 31
2002 2001
(Unaudited)
Operating activities
Net income (loss) $(6,950,611) (3,117,358)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 7,483,473 7,321,912
Provision for losses on accounts receivable 60,000 45,000
Benefit for deferred income taxes (0) (2,272,596)
Gain on disposal of equipment (315,075) (568,709)
(Gain) loss on sale of marketable securities 25,000 5,104
Changes in operating assets and liabilities:
Accounts receivable 2,158,874 3,073,616
Prepaid expenses and supplies (180,122) 51,906
Accounts payable, accrued expenses,
taxes payable, and other liabilities (1,010,558) (939,985)
Net investment in direct financing leases 1,028,004 2,622,715
Net cash provided by operating activities 2,298,985 6,221,605
Investing activities
Purchases of property and equipment (196,392) (391,097)
Net increase in restricted cash (8,467) (10,770)
Proceeds from sales of marketable securities 0 4,762
Proceeds from equipment sales 1,186,639 1,676,173
Net cash provided by investing activities 981,780 1,279,068
Financing activities
Proceeds from long-term borrowing 0 246,437
Principal payments on long-term debt and
capital lease obligations (8,552,409) (10,644,788)
Proceeds from line of credit 15,236,507 0
Principal payments on line of credit (12,589,917) 0
Net cash used in financing activities (5,905,819) (10,398,351)
Decrease in cash and cash equivalents (2,625,054) (2,897,678)
Cash and cash equivalents at beginning of period 2,958,450 8,351,582
Cash and cash equivalents at end of period $ 333,396 5,453,904
See notes to consolidated financial statements.
4
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 nine month periods ended March 31, 2002 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
$7.3 million and $6.8 million for the nine months ended March 31, 2002 and
2001, 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 $11.8
million at March 31, 2002, which includes approximately $15 million in
current debt obligations coming due in the 12-month period ending March
31, 2003.
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 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
consulting firm, having significant experience in the transportation
industry, both from an operational as well as a marketing strategy
standpoint. The Company has identified cost-cutting measures to eliminate
unnecessary overhead, including eliminating a maintenance shift and
reducing non-driving administrative staff, expected to save the Company
approximately $2,500,000 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.
5
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.
Notes to Consolidated Financial Statements (Unaudited)
Continued
Finally, the Company 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. This line of credit has been limited to
50% of eligible receivables while the Company's Net Worth is less than $6
million, increasing to 75% when the Tangible Net Worth is between $6
million and $10 million, and 80% when the Tangible Net Worth is greater
than $10 million. 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 March 31, 2002, the
outstanding balance on this line of credit was $2.6 million.
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 and 2003 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
Nine Months Ended
March 31
2002 2001
Interest paid $ 2,403,029 $ 3,611,873
Non-cash investing and financing activities:
Decrease in direct financing leases $ 3,027,061 $6,608,715
Note D - Legal Proceedings
The Company is a party to routine litigation incidental to its business,
primarily involving claims for personal injuries and property damage
incurred in the transportation of freight. Management believes that adverse
results in one or more of these cases would not have a material adverse
effect on profitability or financial position. Additionally, a decision has
been rendered against the Company by the Equal Employment Opportunity
Commission (''EEOC'') for unlawful hiring practices regarding pre-employment
questions about medical issues. The Company believed it was required by
Department of Transportation regulations to ask these questions. The
Company believes the probable range of settlement will be between $50,000
and $100,000, but the Company accrued $250,000 in the quarter ended
September 30, 2000 for potential penalties and associated legal fees. The
Company believes that settlement of this charge will not have a material
adverse effect on profitability or financial position of the Company.
6
Note E - Reclassification
Certain reclassifications have been made to the March 31, 2001 financial
statements to conform to the March 31, 2002 financial statement
presentation. These reclassifications had no effect on net income.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations -- Third Quarter
Operating revenue for the third quarter of fiscal 2002 (ended March 31,
2002) was $18,527,847 compared to $20,850,239 for the third quarter of
fiscal 2001, a decrease of $2,322,392 or 11.1% for the period. At March
31, 2002, the Company's fleet consisted of 777 trucks and 1,474 trailers,
while on March 31, 2001, the Company's fleet consisted of 779 trucks and
2,023 trailers. Logistics and intermodal revenue for the third quarter of
fiscal 2002 decreased by $282,529 from $894,974 for the third quarter of
fiscal 2001 to $612,445 for the same period of fiscal 2002. The Company's
revenue continued to be negatively impacted by a shortage of qualified
drivers to operate its trucks during the third quarter of fiscal 2002.
Additionally, the Company was affected by a shortage of freight during the
quarter ended March 31, 2002.
The Company experienced significant turnover in its lease program in the
third quarter of fiscal 2002. Consequently, 74 trucks which were lease
trucks on March 31, 2001, were converted to Company trucks. Salaries,
wages, and fringe benefits, made up primarily of drivers' wages, increased
as a percentage of revenue to 37.9% in the third quarter of fiscal 2002
from 30.3% in the third quarter of fiscal 2001 due to the increase in
Company drivers. Rents and purchased transportation decreased to 10.6% of
revenue in fiscal 2002 from 27.3% in fiscal 2001 primarily due to the
decrease in the Company's owner operators and to decreased logistics
activities.
Operating supplies and expenses, as a percentage of revenue, increased to
33% in the third quarter of fiscal 2002 from 26.8% in the comparable
period of fiscal 2001. This increase was due to the increase in company
drivers and decrease in lease operators. Operating taxes and licenses
increased to 6% of revenue in fiscal 2002 from 4.7% in fiscal 2001.
Insurance and claims were 4.4% of revenue in fiscal 2002, increasing from
2.7% in fiscal 2001, due to increase in cargo claims and liability
insurance. Depreciation and amortization increased to 13.7% of revenue in
fiscal 2002 from 9.8% in fiscal 2001. This increase was largely due to a
smaller gain on sale of equipment of $317,452 which was realized in the
third quarter of fiscal 2002 as compared to a gain of $568,710 in the
third quarter of fiscal 2001 as gains are netted against depreciation and
amortization. Other expenses were 3.2% of revenue in the third quarter of
fiscal 2002 and 2.7% an increase from the comparable period of 2001.
Operating revenue for the third quarter of 2002 decreased by 11.1% over
the comparable period of 2001, while operating expenses decreased by
($1,579,799) or 7.3%. Accordingly, the Company's operating ratio increased
to 108.8% in the third fiscal quarter of 2002 from 104.3% in the same
period of fiscal 2001.
7
Interest expense decreased to 4.1% of revenue in the third quarter
of fiscal 2002 from 5.3% recorded in the third 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 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 of operations.
However, the Company will not recognize any current income tax credits
until the appeal process is concluded.
Net loss for the third quarter of fiscal 2002 ended March 31, 2002 was
($2,373,665) ($.74 loss per diluted share) compared to net loss of
($795,777) ($.25 earnings per diluted share) during the comparable period
of fiscal 2001, a decrease of $1,577,888 or 198.3% for the period.
Results of Operations - Nine Month Period
Operating revenue for the first nine months of fiscal 2002 ended March 31,
2002 was $60,028,215 compared to $63,926,044 for the comparable period of
fiscal 2001, representing a decrease of ($3,879,829) or 6.1%. Logistics
and intermodal revenue decreased by $1,467,831 for the nine-month period
of fiscal 2002 over the comparable period of fiscal 2001. As in the
three-month period, a continuing shortage of qualified drivers and an
industry-wide shortage of freight impaired the Company's ability to
produce revenue.
Salaries, wages, and fringe benefits increased to 36.4% of revenues in the
nine-month period of fiscal 2002 from the 28.3% reported in the nine-month
period of fiscal 2001. This increase is primarily due to the increase in
Company drivers. The Company has experienced a 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. Rents and purchased transportation decreased to 14.4% of revenue
in the first nine months of fiscal 2002 from 31.3% during the comparable
period of fiscal 2001. This decrease was caused primarily by fewer
payments made to the Company's smaller fleet of owner operators. Operating
supplies and expenses increased to 32.2% of revenue in fiscal 2002 from
23.9% in fiscal 2001. Taxes and licenses increased to 5.4% of revenue
during fiscal 2002 from 4.2% in fiscal 2001. Insurance and claims were
4.6% of revenue in fiscal 2002, decreasing from 4.1% in fiscal 2001.
Depreciation and amortization, as a percentage of revenue, increased to
11.9% of revenue in fiscal 2002 from 10.6% in the same period of fiscal
2001. This decrease was largely due to smaller gain on sale of equipment
of $317,452 which was realized in the nine-month period of fiscal 2002 as
compared to a gain of $568,710 in the same period of fiscal 2001 as gains
8
are netted against depreciation and amortization. The remaining increase
is due to depreciation on new equipment. Other expenses increased to 3.3%
in the nine-month period of fiscal 2002 from 3% in the nine-month period
of fiscal 2001.
Operating revenue for the nine-month period of 2002 decreased by 6.1% over
the comparable period of 2001, while operating expenses decreased by
$2,446,805 or 3.6%. Accordingly, the Company's operating ratio increased
to 108.2% for the nine-month period in 2002 from 105.4% during the same
period in 2001.
Interest expense decreased to 4% of revenue in the first nine months of
fiscal 2002 from 5.7% recorded in the first nine months of fiscal 2001.
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.
Net loss for the first nine months of fiscal 2002 ended March 31, 2002 was
($6,950,611) ($2.17 loss per diluted share) compared to net income of
($3,117,358) ($.97 loss earnings per diluted share) during the comparable
period of fiscal 2001, a decrease of $3,833,253 or 123% for the nine-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 third quarter of fiscal
2002, the average cost per gallon of fuel was approximately $ .26 cents
per gallon lower than in the same quarter of fiscal 2001. For the nine-
month period ended March 31, 2002, 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, the Company has attempted to
pass increases in fuel costs 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.
9
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.
Cash flows from Operations - Operating activities provided cash flows of
$2.3 million for the first nine months of fiscal 2002 compared to $6.2
million for the same period of fiscal 2001. Cash flows from operations in
the first three quarters of fiscal 2002 were the result of $6.9 million
net loss, $7.5 million in depreciation offset by $.3 million from gain on
disposal of assets.
Cash flow from Investing Activities - Investing activities provided net
cash of $1 million during the first nine months of fiscal 2002 compared to
$1.3 million net cash used in the same period of fiscal 2001.
Cash flows from Financing Activities - Financing activities used net cash
of $5.9 million during the first three quarters of fiscal 2002 compared
to $10.4 million used in fiscal 2001. During the first three quarters
2002, payment on long term debt and capital leases were $8.6 million, with
no additional long-term debt incurred. The Company, at March 31, 2002 had
utilized approximately $ 2.6 million of the accounts receivable revolving
line of credit. During the first three quarters of fiscal 2001, payment
on long term debt and capital leases was $10.6 million, with additional
debt incurred of $.2 million.
The Company's working capital decreased by $5.1 million to a deficit of
$11.8 million at March 31, 2002 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 March 31, 2002. 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 can
provide no assurance that alternative funding sources will be available.
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.
The Company experiences significant driver turnover. 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.
10
During the first nine months of fiscal 2002, the Company has sold 2 trucks
decreasing its fleet to 777 at March 31, 2002. Additionally, the Company
has sold 185 of its 48 foot trailers resulting in a gain of approximately
$317,000. 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
$7.3 million and $6.8 million for the nine months ended March 31, 2002 and
2001, 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 $11.8
million at March 31, 2001, which includes approximately $15 million in
current debt obligations coming due in the 12 month period ending March
31, 2003.
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 two outside
consulting firms, one having significant experience in the transportation
industry, both from an operational as well as a marketing strategy
standpoint, and the second, having significant experience in budgeting,
strategy, and implementation of turn-around plans. The Company has
identified cost-cutting measures to eliminate unnecessary overhead,
including eliminating a maintenance shift and reducing non-driving
administrative staff, expected to save the Company approximately
$2,500,000 annually. The Company is continuing to focus on the reduction
of deadhead miles by concentrating on lane optimization, and 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.
10
Finally, the Company 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
Companys 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. This line of credit has been limited to
50% of eligible receivables while the Company's Net Worth is less than $6
million, increasing to 75% when the Tangible Net Worth is between $6
million and $10 million, and 80% when the Tangible Net Worth is greater
than $10 million. 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 March 31, 2002, the
outstanding balance on this line of credit was $2.6 million.
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 and 2003 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. At 3-31-02, the
Company's variable interest loans aggregated approximately $13 million at
rates ranging from 1.25% to 2% above LIBOR. The Company's weighted
average interest costs for the quarter ended March 31, 2002 was
approximately 6.1%. An increase of 10% or a decrease of 10% in the
Company's borrowing costs on variable rate loans would have an impact of
less than $5,000 on the Company's monthly interest expense. The Company
does not attempt to fix its interest costs through hedge arrangements or
interest rate swap arrangements. 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.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is a party to routine litigation incidental to its business,
primarily involving claims for personal injuries and property damage
incurred in the transportation of freight. Management believes that adverse
results in one or more of these cases would not have a material adverse
effect on profitability or financial position. Additionally, a decision has
been rendered against the Company by the Equal Employment Opportunity
Commission ("EEOC") for unlawful hiring practices regarding pre-employment
questions about medical issues. The Company believed it was required by
Department of Transportation regulations to ask these questions. The
Company believes the probable range of settlement will be between $120,000
and $150,000, but accrued $250,000 in the quarter ended September 30, 2000
for potential penalties and associated legal fees. The Company believes
that settlement of this charge will not have a material adverse effect on
profitability or financial position of the Company.
ITEM 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31,
2002.
Note B - Future Operations
ITEM 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31, 2002.
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: May 15, 2002 /s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: May 15, 2002 /s/ Rose Marie Cannon
Secretary, Treasurer and Director
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