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, 1997
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission File No. 0-16386
CANNON EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0650141
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
1457 Robinson
P.O. Box 364
Springdale, Arkansas 72765
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 751-9209
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of $.01 par value common stock outstanding at January 30,
1998: 3,171,611
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of December 31, 1997 and June 30, 1997...............................1
Consolidated Statements of Income and Retained Earnings
for the Three Months and Six Months Ended December 31, 1997 and 1996.....3
Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 1997 and 1996......................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 ...............................................9
ITEM 2 -- Changes in Securities............................................*
ITEM 3 -- Defaults Upon Senior Securities..................................*
ITEM 4 -- Submission of Matters to a Vote of Security-Holders..............9
ITEM 5 -- Other Information................................................*
ITEM 6 -- Exhibits and Reports on Form 8-K.................................*
*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
1997 1997
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $5,953,799 $3,995,626
Receivables, net of allowance for
doubtful accounts(December 31, 1997-
$115,917; June 30, 1997-$183,411):
Trade 9,590,253 9,845,402
Other 136,560 158,839
Prepaid expenses and supplies 691,907 1,217,155
Deferred income taxes 2,388,000 1,793,000
Total current assets 18,760,519 17,010,022
Property and equipment:
Land, buildings and improvements 1,176,563 1,176,563
Revenue equipment 83,464,665 82,802,562
Service, office and other equipment 2,561,808 2,483,375
87,203,036 86,462,500
Less allowances for depreciation 32,273,833 26,085,500
54,929,203 60,377,000
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,210,777 2,210,026
Marketable securities 527,744 831,797
Other 629,226 735,721
Total other assets 3,391,153 3,800,950
$77,080,875 $81,187,972
Note: The balance sheet at June 30, 1997 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
1997 1997
(Unaudited) (Note)
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $1,773,091 $1,043,333
Accrued expenses:
Insurance reserves 3,454,924 3,489,814
Other 1,945,259 2,167,473
Federal and state income taxes payable 2,791,278 2,167,879
Current portion of long-term debt 14,370,602 16,696,510
Total current liabilities 24,335,154 25,565,009
Long-term debt, less current portion 30,264,747 35,393,134
Deferred income taxes 4,344,000 3,799,000
Other liabilities 142,185 183,508
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,231,736 shares
at December 31, 1997 and 3,205,777 shares
at June 30, 1997 32,318 32,058
Additional paid-in capital 3,594,333 3,542,356
Retained earnings 15,233,900 13,382,427
Unrealized depreciation on marketable
securities, net of income taxes (665,498) (509,256)
18,195,053 16,447,585
Less treasury stock, at cost (60,125 shares) 200,264 200,264
17,994,789 16,247,321
$77,080,875 $81,187,972
Note: The balance sheet at June 30, 1997 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 Six Months Ended
December 31 December 31
1997 1996 1997 1996
(Unaudited) (Unaudited)
Operating revenue $30,884,078 $26,356,862 $58,941,915 $53,919,717
Operating expenses and costs:
Salaries, wages
and fringe benefits 9,613,819 8,821,531 18,963,733 17,901,434
Operating supplies
and expense 8,348,014 8,058,311 16,886,003 16,557,144
Taxes and licenses 1,504,755 1,657,190 2,902,240 3,210,852
Insurance & claims 1,314,732 1,023,303 3,011,895 2,262,962
Depreciation and
amortization 3,290,667 2,925,951 6,537,002 5,761,328
Rents and purchased
transportation 3,538,088 1,952,720 5,540,410 4,210,420
Other 604,715 509,943 964,117 911,187
28,214,790 24,948,949 54,805,400 50,815,327
Operating income 2,669,288 1,407,913 4,136,515 3,104,390
Other income(expense)
Interest expense (863,009) (937,439) (1,764,779) (1,873,754)
Other income 77,929 57,686 176,737 134,055
(785,080) (879,753) (1,588,042) (1,739,699)
Income before income taxes 1,884,208 528,160 2,548,473 1,364,691
Federal and state income taxes
Current 328,000 798,000 649,000 1,535,000
Deferred 326,000 (595,000) 48,000 (1,010,000)
654,000 203,000 697,000 525,000
Net income 1,230,208 325,160 1,851,473 839,691
Retained earnings at
beginning of period 14,003,692 12,465,097 13,382,427 11,950,566
Retained earnings at
end of period $15,233,900 $12,790,257 $15,233,900 $12,790,257
Earnings per share $0.39 $0.10 $0.59 $0.27
Average shares outstanding 3,167,621 3,147,652 3,157,072 3,147,652
Diluted earnings per share $0.38 $0.10 $0.57 $0.26
Diluted shares outstanding 3,266,308 3,239,597 3,246,067 3,244,795
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
December 31
1997 1996
(Unaudited)
Operating activities
Net income $ 1,851,473 $ 839,691
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,436,107 5,742,149
Provision for losses on accounts receivable (67,494) (2,991)
Provision for deferred income taxes 48,000 1,010,000
Loss on disposal of equipment 100,895 19,179
Gain on sale of marketable securities - 40,438
Changes in operating assets and liabilities:
Accounts receivable 344,922 5,196,318
Prepaid expenses and supplies 525,248 570,706
Accounts payable, accrued expenses,
taxes payable, and other liabilities 1,095,864 (872,110)
Other assets (11,400) (19,881)
Net cash provided by operating activities 10,323,615 12,523,499
Investing activities
Purchases of property and equipment (1,019,783) (25,122,914)
Purchases of marketable securities (751) (62,743)
Net increase in restricted cash - (500,000)
Proceeds from sales of marketable securities 50,000 109,044
Proceeds from equipment sales 7,150 14,528,064
Net cash used in investing activities (963,384) (11,048,549)
Financing activities
Proceeds from long-term borrowing - 22,820,747
Principal payments on long-term debt and
capital lease obligations (7,454,295) (26,551,496)
Proceeds from exercise of stock options 52,237 -
Net cash used in financing activities (7,402,058) (3,730,749)
Increase (decrease) in cash and cash equivalents 1,958,173 (2,255,799)
Cash and cash equivalents at beginning of period 3,995,626 4,169,919
Cash and cash equivalents at end of period $ 5,953,799 $ 1,914,120
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, 1997
are not necessarily indicative of the results that may be expected for the
year ended June 30, 1998. 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, 1997.
Note B - Net Income Per Share
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
(Unaudited) (Unaudited)
Average shares outstanding 3,167,621 3,147,652 3,157,072 3,147,652
Net effect of dilutive
stock options 98,687 91,945 88,995 97,143
Diluted shares outstanding 3,266,308 3,239,597 3,246,067 3,244,795
Net income for the period $1,230,208 $325,160 $1,851,473 $839,691
Earnings per share $.39 $.10 $.59 $.27
Diluted earnings per share $.38 $.10 $.57 $.26
Note C - Legal Proceedings
The Company has settled claims resulting from an accident which occurred in
May of 1996. The associated costs and settlement amounts have been recognized
in prior periods. The Company believes that its reserve for accidents would
be sufficient to cover any liability for other claims, although the amount of
actual losses incurred could differ materially from the estimates reflected in
these financial statements.
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 1998 (ended December 31,
1997) increased to $30,884,078 from $26,356,862 representing an increase of
$4,527,216 or 17.2% over the comparable period in fiscal 1997. At December
31, 1997, the Company's fleet consisted of 904 trucks and 2,114 trailers,
while on December 31, 1996, the Company's fleet consisted of 909 trucks and
2,033 trailers. The increase in operating revenue over the same period of
fiscal 1997 is primarily attributable to increased revenue from logistics
operations. Management intends to continue to increase its activities in
the logistics area as additional opportunities arise. Although demand for
the Company's services was strong, a continued shortage of qualified drivers
impaired its ability to produce revenue.
Salaries, wages, and fringe benefits, made up primarily of drivers' wages,
decreased as a percentage of revenue to 31.1% in the second quarter of
fiscal 1998 from 33.5% in the second quarter of fiscal 1997. This decrease
was due to the increased revenue from logistics operations. Effective July 1,
1997, the Company increased its mileage pay scale by a minimum of 3 cents per
mile and implemented a graduated scale for newly hired drivers based on their
past experience. Additionally, those drivers who qualify will receive a 2 cents
per mile performance bonus paid quarterly in fiscal 1998, as compared to a 5
cents per mile performance bonus paid quarterly in fiscal 1997. Company drivers
were awarded approximately $234,000 in bonuses for the three-month period ended
December 31, 1997 as compared with $657,000 awarded during the three-month
period ended December 31, 1996.
Operating supplies and expenses, as a percentage of revenue, decreased to
27.0% in the second quarter of fiscal 1998 from 30.6% in the comparable
period of fiscal 1997. This decrease was primarily due to the Company's
average fuel costs which were 14 cents per gallon lower in the second
quarter of fiscal 1998 than in the second quarter of fiscal 1997. Taxes
and licenses decreased to 4.9% of revenue in fiscal 1998 from 6.3% in
fiscal 1997. Insurance and claims were 4.3% of revenue in fiscal 1998,
increasing from 3.9% of revenue in fiscal 1997. Depreciation and
amortization decreased to 10.7% of revenue in fiscal 1998 from 11.1% in
the same period of fiscal 1997. A loss on disposal of equipment of
$74,189 was included in the second quarter of fiscal 1998 as compared to a
gain of $53,784 in the second quarter of 1997. Rents and purchased
transportation increased to 11.5% of revenue in fiscal 1998 from 7.4% in
fiscal 1997 due to increased logistics operations. Other expenses were
2.0% of revenue in the second quarter of fiscal 1998 and 1.9% in the
comparable period of fiscal 1997.
Operating revenue for the second quarter of 1998 grew by 17.2% over the
comparable period of 1997, while operating expenses increased by $3,265,841
or 13.1%. Accordingly, the Company's operating ratio decreased to 91.4% in
the second fiscal quarter of 1998 from 94.7% in the same period of fiscal
1997.
Interest expense declined to 2.8% of revenue in the second quarter of
fiscal 1998 from 3.6% recorded in the second quarter of fiscal 1997.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Cont'd
The Company's effective income tax rate decreased to 34.7% of income before
income taxes during the second quarter of fiscal 1998 from 38.5% in the
second quarter of fiscal 1997 as a result of certain equipment leasing
transactions consummated during the prior fiscal year.
Net income for the second quarter of fiscal 1998 ended December 31, 1997
was $1,230,208 ($.38 per share) compared to $325,160 ($.10 per share)
during the comparable period of fiscal 1997, an increase of $905,048 or
278.3% for the period.
Management believes that the Company's systems will be ready for the Year
2000 in the very near future. Expenses associated with the changes to the
Company's computer hardware and software have been included in results of
operations as incurred and future costs are not expected to have a material
effect on the Company's financial performance. The Company will request
assurance from its trading partners of their Year 2000 compliance.
Results of Operations - Six Month Period
Operating revenue for the first six months of fiscal 1998 ended December
31, 1997 increased to $58,941,915 from $53,919,717 in the comparable period
of fiscal 1997 representing an increase of $5,022,198 or 9.3%. As in the
three-month period, the increase in operating revenue over the same period
of fiscal 1997 is primarily attributable to the increased revenue resulting
from logistics operations. Operating income increased to $4,136,515 in the
six months ended December 31, 1997 from $3,104,390 during the comparable
period of fiscal 1997, an increase of 33.2%.
Salaries, wages, and fringe benefits decreased to 32.2% of revenues in the
six-month period of fiscal 1998 from the 33.2% reported in the six-month
period of fiscal 1997. This decrease, as in the three-month period, is due
to the additional revenue from logistics operations. Operating supplies
and expenses decreased to 28.6% of revenue in fiscal 1998 from 30.7% in
fiscal 1997. During the six- month period, the Company's average cost of
fuel was approximately 11 cents per gallon lower than in the same period of
fiscal 1997. Taxes and licenses decreased to 4.9% of revenue during fiscal
1998 from 6.0% in fiscal 1997. Insurance and claims were 5.1% of revenue
in fiscal 1998, increasing from 4.2% of revenue in fiscal 1997.
Depreciation and amortization, as a percentage of revenue, increased to
11.1% of revenue in fiscal 1998 from 10.7% in the same period of fiscal
1997. A loss on disposal of equipment of $100,895 was included in the six-
month period of fiscal 1998 as compared to a loss of $19,179 in the same
period of 1997.
Rents and purchased transportation increased to 9.4% of revenue in the
first six months of fiscal 1998 from 7.8% during the comparable period of
fiscal 1997. As was the case in the three-month period, this increase was
caused primarily to the increased logistics activities. Other expenses
were 1.6% of revenue in the six-month period of fiscal 1998 and 1.7% in
the comparable period of 1997.
Interest expense declined to 3.0% of revenue in the first six months of
fiscal 1998 from 3.5% recorded in the first six months of fiscal 1997.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
The Company's effective income tax rate decreased to 27.3% of income before
income taxes for the first six months of fiscal 1998 from 38.5% for the
first six months of fiscal 1997. As in the three-month period, this
benefit is a result of certain equipment leasing transactions consummated
during the prior fiscal year.
Net income for the first six months of fiscal 1998 ended December 31, 1997
was $1,851,473 ($.57 per share) compared to $839,691 ($.26 per share)
during the comparable period of fiscal 1997, an increase of $1,011,782 or
120.5% 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. Diesel fuel costs, as mentioned
above, have declined during the first two quarters of fiscal 1998 over the
same period of fiscal 1997. Fuel costs in the quarter ended December 31,
1997 were approximately 11.0% lower than in the same period of the prior
year. For the six-month period of fiscal 1998, fuel costs were
approximately 9.1% lower than in the six-month period of fiscal 1997.
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. Future cost increases or
shortages of fuel could affect the Company's future profitability.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash flows generated
from operations and proceeds from borrowings. The Company typically
extends credit to its customers, billing freight charges after delivery.
Accordingly, the ability of the Company to generate cash to satisfactorily
meet its ongoing cash needs is substantially dependent upon timely payment
by its customers. The Company has not experienced significant uncollectible
accounts receivable.
Operating activities provided cash flows of $10.3 million for the first six
months of fiscal 1998 compared to $12.5 million for the same period of fiscal
1997. Cash flows from operations in the first two quarters of fiscal 1998
were the result of $1.9 million in net income, $6.4 million in depreciation
and $2.0 million provided by other working capital assets and liabilities.
Investing activities used net cash of $1.0 million during the first six months
of fiscal 1998 compared to $11.1 million net cash used in the same period of
fiscal 1997. Financing activities used net cash of $7.4 million during the
first two quarters of fiscal 1998 compared to $3.7 million in fiscal 1997.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
The Company's working capital at December 31, 1997 was a deficit of $5.6
million compared to a deficit of $8.6 million at June 30, 1997. These
deficits were due to the Company's decision to purchase equipment for cash
in the quarter ended December 31, 1996. The Company has non-binding
commitments from various lenders to finance these acquisitions in the future
if it is determined that the Company has the need for additional working
capital. Management has deviated from its past policy of maintaining large cash
balances in an effort to reduce interest expense. Management believes that it
is unlikely that the cost and availability of financing will be adversely
affected by this working capital deficit in the near future.
Like other truckload carriers, the Company experiences significant driver
turnover. Management anticipates that competition for qualified drivers
will intensify. 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 quarter ended December 31, 1997, the Company began installing
on-board computers and mobile communication devices on its trucks. These
devices will enable the Company to stay in touch with its drivers and to
update its customers on shipment status. Management expects that it will
fund the acquisition with existing cash although funds are available from
lenders to fund this purchase if necessary.
Management of the Company intends, in the long-term, to continue to expand
its fleet, although the Company did not make any additions to its fleet during
the quarter ended December 31, 1997. The Company is presently negotiating
for the purchase of approximately 600 new trailers with an expected cost of
approximately $10,800,000 and will sell or trade in approximately 110 of its
older model trailers. The Company expects to finance these equipment
acquisitions through long-term debt or lease agreements, the terms of which
are not presently known, although management anticipates that financing with
favorable terms will be available. Management believes that net revenues
derived from the operation of this new equipment will be sufficient to meet
the debt or lease payment obligations and working capital needs related
thereto. However, to the extent that such revenues are insufficient for such
purposes, the Company may be required to rely on additional borrowings or
equity offerings to meet its capital asset needs.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company has settled claims resulting from an accident which occurred in
May of 1996. The associated costs and settlement amounts have been recognized
in prior periods. The Company believes that its reserve for accidents would
be sufficient to cover any liability for other claims, although the amount of
actual losses incurred could differ materially from the estimates reflected in
these financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
On November 18, 1997, the Annual Meeting of Stockholders was held in
Springdale, Arkansas. The only matter submitted to a vote of the
stockholders was the reelection of Dean G. Cannon, Rose Marie Cannon, Uvalde
R. Lindsey, and Roy E. Stanley to the Company's current Board of Directors
whose terms expire in 1997. Over 99% of the shares present or represented
by proxy were voted in favor of management's nominees.
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 13, 1998
/s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: February 13, 1998
/s/ Rose Marie Cannon
Secretary, Treasurer and Director