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, 1996
( )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 (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 April 30,
1996: 3,147,652
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of March 31, 1996 and June 30, 1995 .......... 1
Consolidated Statements of Income and Retained Earnings
for the Three Months and Nine Months Ended March 31, 1996
and 1995 ........................ 3
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1996 and 1995 .... 4
Notes to Consolidated Financial Statements ........ 5
ITEM 2-Management's Discussion and Analysis of Financial
Condition and Results of Operations ........... 6
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 10
ITEM 5-Other Information ................. 10
ITEM 6-Exhibits and Reports on Form 8-K .......... 10
*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
1996 1995
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $14,434,590 $12,324,394
Marketable securities 4,102,046 3,493,187
Receivables, net of allowance for
doubtful accounts
(March 31, 1996-$163,675;
June 30, 1995-$141,175):
Trade 12,409,492 9,084,562
Other 3,319 661,917
Prepaid expenses and supplies 2,894,626 1,680,448
Total current assets 33,844,073 27,244,508
Property and equipment:
Land, buildings and improvements 1,143,453 1,143,453
Revenue equipment 72,090,890 59,093,534
Service, office and other equipment 2,220,175 2,129,664
75,454,518 62,366,651
Less allowances for depreciation 16,906,065 14,478,734
58,548,453 47,887,917
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 816,397 813,671
Other 1,028,168 1,293,757
Total other assets 1,867,971 2,130,834
$94,260,497 $77,263,259
Note: The balance sheet at June 30, 1995 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)
March 31 June 30
1996 1995
(Unaudited) (Note)
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 570,268 $ 459,319
Accrued expenses:
Insurance reserves 1,875,861 1,337,331
Other 2,788,018 1,485,615
Federal and state income taxes payable 816,782 435,930
Deferred income taxes 211,400 29,000
Current portion of long-term debt 12,761,677 8,727,272
Total current liabilities 19,024,006 12,474,467
Long-term debt, less current portion 44,241,724 35,353,262
Deferred income taxes 3,384,800 3,833,000
Other liabilities 554,670 279,255
Stockholders' equity:
Class A common stock: $.01 par value;
authorized 10,000,000 shares;
issued 2,219,477 shares 22,195 22,195
Class B common stock: $.01 par value;
authorized 10,000,000 shares;
issued 2,224,477 shares 22,245 22,245
Additional paid-in capital 3,542,356 3,542,356
Retained earnings 22,635,979 21,181,034
Unrealized appreciation on marketable
securities, net of income taxes 1,204,297 927,220
27,427,072 25,695,050
Less treasury stock, at cost
(116,250 shares) 371,775 371,775
27,055,297 25,323,275
$94,260,497 $77,263,259
Note: The balance sheet at June 30, 1995 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 Income and Retained Earnings
Three Months Ended Nine Months Ended
March 31 March 31
1996 1995 1996 1995
(Unaudited) (Unaudited)
Operating revenue $21,946,007 $20,401,630 $65,778,832 $58,498,399
Operating expenses and costs:
Salaries, wages and
fringe benefits 7,771,191 6,388,170 22,882,729 17,887,514
Operating supplies
and expense 6,743,710 5,760,578 19,008,449 16,151,310
Insurance, taxes
and licenses 2,636,549 1,940,414 7,549,558 5,383,174
Depreciation and
amortization 2,788,303 2,063,273 7,687,586 5,469,577
Rents and purchased
transportation 943,541 1,165,770 2,994,091 3,213,745
Other 441,365 335,775 1,166,991 943,830
21,324,659 17,653,980 61,289,404 49,049,150
Operating income 621,348 2,747,650 4,489,428 9,449,249
Gain on securities sales 151,570 - 226,213 -
Other income 173,206 109,880 406,067 131,038
324,776 109,880 632,280 131,038
Interest expense 943,004 624,982 2,755,763 1,565,951
Income before income taxes 3,120 2,232,548 2,365,945 8,014,336
Federal and state income taxes
Current (230,000) 705,000 871,000 2,770,000
Deferred 231,000 183,000 40,000 315,000
1,000 888,000 911,000 3,085,000
Net income 2,120 1,344,548 1,454,945 4,929,336
Retained earnings at
beginning of period 22,633,859 18,749,680 21,181,034 15,164,892
Retained earnings at
end of period $22,635,979 $20,094,228 $22,635,979 $20,094,228
Earnings per share:
Net income per
share (Note B) $0.00 $0.41 $0.45 $1.51
Average shares and share
equivalents outstanding 3,234,519 3,274,743 3,244,752 3,269,705
Note: Average shares outstanding and earnings per share for current and
prior period balances reflect the effects of the Recapitalization Plan
which was approved by shareholders at a special meeting held April 10,
1996.
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
March 31
1996 1995
(Unaudited)
Operating activities
Net income $ 1,454,945 $ 4,929,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,687,586 5,469,577
Provision for losses on
accounts receivable 22,500 17,163
Provision for deferred income taxes 40,000 315,000
Loss on disposal of assets 15,436 30,170
Gain on sale of marketable securities (226,213) _
Changes in operating assets and liabilities:
Accounts receivable (2,688,831) (1,736,840)
Prepaid expenses and supplies (1,214,178) (908,286)
Accounts payable, accrued expenses,
taxes payable, and other liabilities 2,173,779 2,825,661
Other assets (14,160) 538,053
Net cash provided by operating activities 7,250,864 11,479,834
Investing activities
Purchases of property and equipment (15,542,770) (16,989,379)
Purchases of marketable securities (307,635) -
Proceeds from maturities of restricted
investments - 100,000
Purchases of restricted investments (2,726) (10,848)
Sales of marketable securities 375,520 -
Proceeds from the sale of equipment 6,556,908 3,927,112
Net cash used in investing activities (8,920,703) (12,973,115)
Financing activities
Proceeds from long-term borrowing 15,907,421 9,920,035
Principal payments on long-term debt and
capital lease obligations (12,127,386) (7,660,316)
Net cash provided by financing activities 3,780,035 2,259,719
Increase in cash and cash equivalents 2,110,196 766,438
Cash and cash equivalents at beginning
of period 12,324,394 8,398,287
Cash and cash equivalents at end
of period $14,434,590 $ 9,164,725
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 nine month periods ended March
31, 1996 are not necessarily indicative of the results that may be
expected for the year ended June 30, 1996. 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, 1995.
Note B - Net Income Per Share
Three Months Ended Nine Months Ended
March 31 March 31
1996 1995 1996 1995
(Unaudited) (Unaudited)
Average number of common
shares outstanding 3,147,652 3,142,652 3,147,652 3,142,652
Net effect of dilutive stock
warrants and options 86,867 132,091 97,100 127,053
Average shares and share
equivalents outstanding 3,234,519 3,274,743 3,244,752 3,269,705
Net income for the period $ 2,120 $1,344,548 $1,454,945 $4,929,336
Per share $.00 $.41 $.45 $1.51
Note: Average shares outstanding and earnings per share for current and
prior period balances reflect the effects of the Recapitalization Plan
which was approved by shareholders at a special meeting held April 10,
1996.
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 1996 (ended March 31,
1996) increased to $21,946,007 from $20,401,630 representing an increase
of $1,544,377 or 7.6% over the comparable period in fiscal 1995. The
Company's fleet expanded by 28.3% from 678 trucks at March 31, 1995 to 870
trucks at March 31, 1996. The increase in operating revenue over the
same period of fiscal 1995 is primarily attributable to the increased
number of shipments to existing customers transported by the Company's
larger fleet of trucks and trailers. Operations of the Company
continued to be affected in the third quarter of fiscal 1996 by excess
capacity in the truckload industry, which led to downward pressure on
rate per-mile caused by increased competition for freight. Therefore, the
increase in operating costs related to the fleet expansion was not offset
by increased revenue. Although the number of shipments increased by 27.8%
the Company's capacity continued to exceed the demand for services forcing
per-mile revenue lower as the Company focused on moving available freight,
in many cases servicing less profitable lanes, and in other cases,
reducing its rates to customers to meet competition. In addition, the
Company experienced a shortage of qualified drivers which impaired its
ability to produce revenue. The Company is increasing its sales efforts
and is undertaking steps which it believes will increase the demand for
its services.
Salaries, wages, and fringe benefits, made up primarily of drivers' wages,
increased as a percentage of revenue to 35.4% in the third quarter of
fiscal 1996 from 31.3% in the third quarter of fiscal 1995. Company
drivers were awarded approximately $466,000 in bonuses for the three-month
period ended March 31, 1996 as compared with $470,000 awarded during the
three-month period ended March 31, 1995. Higher per-mile costs in fiscal
1995 were substantially passed through to the Company's customers in the
form of rate increases. However, during fiscal 1996 the Company
experienced reduced revenue per-mile with no reduction in its per-mile
expense. The Company expects that competition for drivers will continue
and that future pay increases may be necessary to attract and retain
qualified drivers.
Operating supplies and expenses, as a percentage of revenue, increased to
30.7% in the third quarter of fiscal 1996 from 28.2% in the comparable
period of fiscal 1995, due primarily to higher fuel costs and the
increased number of trucks and trailers. Insurance, taxes, and licenses
increased to 12.0% of revenue in fiscal 1996 from 9.5% in fiscal 1995 due
to the timing of new equipment additions during fiscal 1996. Depreciation
and amortization increased to 12.7% of revenue in fiscal 1996 from 10.1%
in the same period of fiscal 1995. This increase is attributable to the
expansion of the Company's fleet during fiscal 1996. Rents and purchased
transportation decreased to 4.3% of revenue in fiscal 1996 from 5.7% in
fiscal 1995 due to a proportionate decrease in revenue from intermodal
activities.
Although operating revenue for the third quarter of 1996 grew by 7.6% over
the comparable period of 1995, operating expenses increased by $3,670,679
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Cont'd.
or 20.8%. Accordingly, the Company's operating ratio increased to 97.2% in
the third fiscal quarter of 1996 from 86.5% in the same period of fiscal
1995.
Interest expense increased to 4.3% of revenue in the third quarter of
fiscal 1996 from 3.1% recorded in the third quarter of fiscal 1995, due to
new loans and capital leases incurred as a result of the expansion of the
Company's fleet.
Net income for the third quarter of fiscal 1996 ended March 31, 1996 was
$2,120 ($.00 per share) compared to $1,344,548 ($.41 per share) during the
comparable period of fiscal 1995, a decrease of $1,342,428 or 99.8% for
the period.
Results of Operations --Nine Month Period
Operating revenue for the first nine months of fiscal 1996 ended March 31,
1996 increased to $65,778,832 from $58,498,399 in the comparable period of
fiscal 1995 representing an increase of 12.5%. As in the three-month
period, the increase in operating revenue over the same period of fiscal
1995 is primarily attributable to the increased number of shipments
transported by the Company's larger fleet of trucks and trailers.
Salaries, wages, and fringe benefits increased to 34.8% of revenues in the
nine-month period of fiscal 1996 up from the 30.6% reported in the nine-
month period of fiscal 1995. Higher driver wages were only partially
offset by rate increases to the Company's customers, as such, increased
competition for freight within the industry resulted in a continuing
decrease in per-mile operating revenue for the first nine months of fiscal
1996. Operating supplies and expenses increased to 28.9% of revenue in
fiscal 1996 from 27.6% in fiscal 1995. Insurance, taxes and licenses
increased to 11.5% of revenue during fiscal 1996 from 9.2% in fiscal 1995
due to increased costs associated with the Company's larger fleet of
revenue equipment. Depreciation and amortization, as a percentage of
revenue, increased to 11.7% in fiscal 1996 from 9.3% in the same period of
fiscal 1995 due principally to the addition of new equipment.
Rents and purchased transportation decreased to 4.6% in the first nine
months of fiscal 1996 from 5.5% during the comparable period of fiscal
1995 due primarily to a proportionate decrease in revenue from intermodal
activities. Other expenses increased slightly to 1.8% of revenue in
fiscal 1996 from 1.6% during the same fiscal period in 1995.
As in the three month period, operating expenses increased relative to the
additional fixed costs associated with adding new equipment. Competition
for freight led to decreased margins. Additionally, a shortage of
qualified drivers led to idle equipment. Operating income declined to
$4,489,428 in the nine months ended March 31, 1996 from $9,449,249 during
the comparable period of fiscal 1995, a decrease of 52.5%.
Interest expense increased to 4.2% of revenue in the nine-month period of
fiscal 1996 from 2.7% recorded in the nine-month period of fiscal 1995
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Contd.
representing an increase of 76.0%. As in the three-month period, the
increase in interest expense over the same period of fiscal 1995 is due to
new loans and capital leases incurred as a result of the expansion of the
Company's fleet.
The Company's effective tax rate remained steady at 38.5% of pre-tax net
income in the nine-month period of fiscal 1996 as well as in the
comparable period of fiscal 1995.
Net income for the first nine months of fiscal 1996 ended March 31, 1996
was $1,454,945 ($.45 per share) compared to $4,929,336 ($1.51 per share)
during the comparable period of fiscal 1995, a decline of $3,474,391 or
70.5% 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. Although diesel fuel costs
remained relatively stable during the first two quarters of fiscal 1996,
the price of fuel rose significantly during the latter part of the quarter
ended March 31, 1996. Average price per gallon increased 6.7% during the
third quarter of fiscal 1996 over the comparable period in fiscal 1995.
Historically, most increases 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. However, in the current rate
environment, fuel surcharges met customer resistance. Through April 1996
fuel costs continued to increase with the industry's average cost at April
30, 1996 up 16.5% over April 30, 1995. In April 1996, the Company has
been able to implement a fuel surcharge for most of its customers.
Implementation of fuel surcharges is intended to offset some of the
effects of fuel price increases. However, further 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 $7.3 million for the first
nine months of fiscal 1996 compared to $11.5 million for the same period
of fiscal 1995. Cash flows from operations in the first three quarters of
fiscal 1996 were the result of $1.5 million in net income, $7.7 million in
depreciation and $1.9 million net use of other working capital assets and
liabilities. Investing activities used net cash of $8.9 million during
the first nine months of fiscal 1996 compared to $13.0 million net cash
used in the same period of fiscal 1995. Purchases of new equipment and
marketable securities totaling $15.8 million were offset by $6.9 million
in proceeds from equipment and security sales for 1996. Financing
activities provided net cash of $3.8 million during the third quarter of
fiscal 1996 compared to $2.3 million cash provided in the third quarter of
1995. During fiscal 1996, proceeds from long-term borrowings of $15.9
million were offset by repayment on long-term debt and capital leases of
$12.1 million.
The Company's working capital at March 31, 1996 was $14.8 million compared
to $14.8 million at June 30, 1995. The Company will use approximately
$11.3 million in working capital to fund the recapitalization proposal
detailed below. 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. However, to the
extent additional capital is necessary for the Company's operations,
management believes it would be available through additional borrowings or
equity offerings.
The Company added 50 new trucks to its fleet in the quarter ended March
31, 1996 and was unable to hire enough qualified drivers during that
period for those trucks. The Company will take delivery of 40 additional
trucks during the fourth quarter of its fiscal year ending June 30, 1996.
The Company believes that it will be able to staff these additional trucks
with qualified drivers, although it expects the competition for qualified
drivers to continue. The Company expects that it will not add additional
trucks to its fleet in the fiscal year ending June 30, 1997, although it
may replace older trucks with new ones during that period.
Stock Recapitalization
On January 29, 1996 the Company announced that its Board of Directors had
approved a recapitalization plan which would take private its Class B
Common Stock and reclassify its two existing classes of common stock into
a new, single class of publicly traded common stock. The Company's
existing Class A Common Stock and Class B Common Stock are currently
traded on the NASDAQ National Market System under the symbols CANXA and
CANXB.
The recapitalization plan would effect a 1-for-500,000 reverse split of
the Company's non-voting Class B Common Stock and convert each whole share
of Class B Common Stock outstanding after the reverse stock split into
493,150 shares of voting Class A Common Stock. All shareholders who own
fewer than 500,000 shares of Class B Common Stock on January 26, 1996 will
be paid a cash price of $9.00 per share. The Company is funding these
payments with existing working capital.
Over the past year the Board of Directors had been exploring alternatives
to increase shareholder value, and ultimately determined to eliminate the
dual class structure and to return to a single, publicly-traded class of
common stock. On January 26, 1996 a special committee of the Board of
Directors concluded that the recapitalization plan was in the best
interests of both the Company and the shareholders. The special committee
considered various factors before recommending that the Board approve the
recapitalization plan, including the opinion of its financial advisor,
Llama Company, that the $9.00 per share of Class B Common Stock price is
fair to the shareholders of Class B Common Stock.
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 10, 1996, a Special Meeting of Stockholders was held in
Springdale, Arkansas. The only matter submitted to a vote of the
stockholders was a proposal to amend Article Fourth of the Company's
Certificate of Incorporation, (Stock Recapitalization Proposal). The
proposal was approved as presented.
ITEM 5. Other Information
The Company announced on April 24, 1996 that Dean G. and Rose Marie
Cannon, majority stockholders of the Company, have entered into a stock
purchase agreement with Alice L. Walton, who is Chairman and General
Partner of Llama Company, an Arkansas investment banking firm, whereby Ms.
Walton will purchase, for an undisclosed price, approximately 9% of the
total outstanding shares of common stock of the Company. As part of this
transaction, it is expected that Ms. Walton will be nominated to serve as
a member of the Company's Board of Directors.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits, as listed in the Exhibit Index, are submitted as a separate
section of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
INDEX TO EXHIBITS.
Exhibit
Number Description
3(i) Certificate of Incorporation, which has been
restated to reflect the Certificate of Incorporation, effective August 26,
1986, as amended by a Certificate of Amendment to Certificate of
Incorporation, effective November 17, 1986, as further amended by a
Certificate of Amendment to Certificate of Incorporation, effective
January 19, 1993, and as further amended by a Certificate of Amendment to
Certificate of Incorporation, effective April 10, 1996.
3(ii) Bylaws of the Company. (1)
27 Financial Data Schedules.
<F1>
(1) Incorporated by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
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 14, 1996 Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: May 14, 1996 Rose Marie Cannon
Secretary, Treasurer and Director