SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X )QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-16386
CANNON EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0650141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1457 Robinson
P.O. Box 364
Springdale, Arkansas 72765
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 751-9209
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of $.01 par value common stock outstanding at October 29,
1999: 3,205,276
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of September 30, 1999 and June 30, 1999.................1
Consolidated Statements of Income and Retained Earnings
for the Three Months Ended September 30, 1999 and 1998.....3
Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 1999 and 1998.....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 .................................10
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...................10
*No information submitted under this caption.
PART 1.
ITEM 1. Financial Statements (Unaudited)
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 June 30
1999 1999
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $5,933,266 $9,683,794
Receivables, net of allowance for doubtful accounts
(September 30, 1999-$202,115; June 30, 1999-$199,579):
Trade 9,769,827 8,896,331
Other 2,369,292 1,963,418
Current portion of net investment
in sales-type leases 4,662,167 -
Prepaid expenses and supplies 1,305,455 1,627,778
Deferred income taxes 2,182,000 1,907,000
Total current assets 26,222,007 24,078,321
Property and equipment:
Land, buildings and improvements 1,230,945 1,230,945
Revenue equipment 68,850,477 80,264,223
Service, office and other equipment 2,956,009 2,885,076
73,037,431 84,380,244
Less allowances for depreciation 30,458,160 35,918,227
42,579,271 48,462,017
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,381,084 2,381,084
Marketable securities 498,964 593,110
Net investment in sales-type leases,
less current portion 9,324,333 -
Other 371,529 429,815
Total other assets 12,599,316 3,427,415
$81,400,594 $75,967,753
Note: The balance sheet at June 30, 1999 has been derived from the audited
consolidated balance sheet at that date but it does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
September 30 June 30
1999 1999
(Unaudited) (Note)
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 2,271,338 $ 1,849,931
Accrued expenses:
Insurance reserves 3,534,684 3,295,528
Other 2,105,963 2,246,756
Federal and state income taxes payable 2,177,683 2,707,890
Current portion of long-term debt 12,434,630 16,861,875
Total current liabilities 22,524,298 26,961,980
Long-term debt, less current portion 33,339,690 25,999,343
Deferred income taxes 5,194,000 4,809,000
Other liabilities 1,729,542 27,569
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 15,210,733 14,709,630
Unrealized depreciation on marketable
securities, net of income taxes (177,634) (119,734)
18,813,328 18,370,125
Less treasury stock, at cost (60,125 shares) 200,264 200,264
18,613,064 18,169,861
$81,400,594 $75,967,753
Note: The balance sheet at June 30, 1999 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
September 30
1999 1998
(Unaudited)
Operating revenue $22,915,433 $24,662,417
Operating expenses and costs:
Salaries, wages and fringe benefits 7,297,950 8,656,097
Operating supplies and expense 6,035,251 7,872,648
Operating taxes and licenses 1,125,569 1,315,407
Insurance and claims 1,489,954 848,041
Depreciation and amortization 747,486 3,450,919
Rents and purchased transportation 4,801,812 1,098,621
Other 732,994 574,640
22,231,016 23,816,373
Operating income 684,417 846,044
Other income (expense):
Interest expense (651,469) (812,368)
Other income 106,155 67,516
(545,314) (744,852)
Income before income taxes 139,103 101,192
Federal and state income taxes:
Current (114,000) 522,000
Deferred (248,000) (483,000)
(362,000) 39,000
Net income 501,103 62,192
Retained earnings at beginning of period 14,709,630 15,197,014
Retained earnings at end of period $15,210,733 $15,259,206
Basic earnings per share $0.16 $0.02
Average shares and share equivalents outstanding 3,205,276 3,192,861
Diluted earnings per share $0.16 $0.02
Diluted shares and share equivalents outstanding 3,210,614 3,244,877
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
September 30
1999 1998
(Unaudited)
Operating activities
Net income $ 501,103 $ 62,192
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,059,798 3,516,751
Provision for losses on accounts receivable 15,000 15,000
Credit for income taxes (305,000) (483,000)
Gain on disposal of equipment (1,310,112) (65,338)
Changes in operating assets and liabilities:
Accounts receivable (1,294,370) 462,016
Prepaid expenses and supplies 322,323 278,119
Accounts payable, accrued expenses,
taxes payable, and other liabilities 299,727 395,735
Other assets 574,480 -
Net cash provided by operating activities 862,949 4,181,475
Investing activities
Purchases of property and equipment (70,933) (101,211)
Net increase in restricted cash - (404)
Proceeds from equipment sales 5,283,540 116,100
Net cash provided by investing activities 5,212,607 14,485
Financing activities
Principal payments on long-term debt and
capital lease obligations (9,826,084) (3,387,731)
Net cash used in financing activities (9,826,084) (3,387,731)
Increase (decrease)in cash and cash equivalents (3,750,528) 808,229
Cash and cash equivalents at beginning of period 9,683,794 3,817,505
Cash and cash equivalents at end of period $ 5,933,266 $ 4,625,734
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10 - Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended June 30,
2000. 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, 1999.
Note B - Net Income Per Share
Three Months Ended
September 30
1999 1998
(Unaudited)
Average shares outstanding 3,205,276 3,192,861
Net effect of dilutive stock options 5,338 52,016
Diluted shares outstanding 3,210,614 3,244,877
Net income for the period $ 501,103 $ 62,192
Basic earnings per share $.16 $.02
Diluted earnings per share $.16 $.02
Note C - 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, the Company has been
charged by the Equal Employment Opportunity Commission ("EEOC") with
discriminatory hiring practices. The Company is unable to predict the final
outcome of this charge or the range of any possible penalties imposed.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations --First Quarter
Operating revenue for the first quarter of fiscal 2000 (ended September 30,
1999) was $22,915,433 compared to $24,662,417 for the first quarter of fiscal
1999, a decrease of $1,746,984 or 7.1% for the period. At September 30,
1999, the Company's fleet consisted of 716 trucks and 2,241 trailers, while
on September 30, 1998, the Company's fleet consisted of 879 trucks and 2,538
trailers. Logistics and intermodal revenue for the first quarter of fiscal
2000 increased by $1,179,775, or 112.0%, over the comparable period in fiscal
1999. 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 31.8% in the first quarter of fiscal
2000 from 35.1% in the comparable period of fiscal 1999. The Company
implemented a new owner-operator program which resulted in a decrease in
wages paid to Company drivers. Company drivers were awarded approximately
$167,000 in bonuses for the three-month period ended September 30, 1999 as
compared with $243,000 awarded during the three-month period ended September
30, 1998.
Operating supplies and expenses, as a percentage of revenue, decreased to
26.3% in the first quarter of fiscal 2000 from 31.9% in the comparable
period of fiscal 1999. Maintenance costs decreased 26.1% due to fewer non-
warranty repairs necessary on the Company's new trucks. Operating taxes and
licenses also decreased to 4.9% of revenue in fiscal 2000 from 5.3% in fiscal
1999. Insurance and claims were 6.5% of revenue in fiscal 2000, increasing
from 3.4% in fiscal 1999, substantially due to an increase in claims
frequency. Depreciation and amortization decreased to 3.3% of revenue in
fiscal 2000 from 14.0% in the same period of fiscal 1999. This decrease was
due to a gain on sale of equipment of $1,312,313 which was realized in the
first quarter of fiscal 2000 as compared to a gain of $65,338 in the first
quarter of fiscal 1999. Rents and purchased transportation increased to
21.0% of revenue in fiscal 2000 from 4.5% in fiscal 1999 due primarily to
payments made to the Company's owner operators and to increased logistics
activities.
Operating revenue for the first quarter of 2000 decreased by 7.1% over the
comparable period of 1999, while operating expenses decreased by $1,585,357
or 6.7%. Accordingly, the Company.s operating ratio increased to 97.0% in the
first fiscal quarter of 2000 from 96.6% in the same period
of fiscal 1999.
Interest expense decreased to 2.8% of revenue in the first quarter of
fiscal 2000 from 3.3% recorded in the first quarter of fiscal 1999.
The Company recognized a previously unrealized tax benefit, the result of a
revenue equipment leasing transaction entered into during fiscal year 1995.
Consequently, the Company recognized a deferred income tax credit of $415,000
during the quarter ended September 30, 1999. During fiscal 1998, income tax
consequences of certain equipment leasing transactions were recorded in the
financial statements in reliance on opinion of tax counsel.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Net income for the first quarter of fiscal 2000 ended September 30, 1999 was
$501,103 ($.16 per diluted share) compared to $62,192 ($.02 per diluted
share) during the comparable period of fiscal 1999, an increase of $438,911
or 705.7% for the 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 average price per gallon was
17 cents higher in the quarter ended September 30, 1999 than in the same
period of the prior year, the Company's total cost of fuel decreased due to
the smaller fleet and because owner operators are responsible for purchasing
their own fuel. 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. 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. 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 $0.9 million for the first three
months of fiscal 2000 compared to $4.2 million for the same period of fiscal
1999. Cash flows from operations in the first quarter of fiscal 2000 were
the result of $0.5 million in net income, $2.1 million in depreciation offset
by $1.3 million from gain on sale of equipment, and $0.4 million used by
other working capital assets and liabilities. Investing activities provided
net cash of $5.2 million during the first three months of fiscal 2000
compared to $0.014 million for the same period of fiscal 1999. Financing
activities used net cash of $9.8 million during the first quarter of fiscal
2000 compared to $3.3 million cash used in the first quarter of 1999.
The Company's working capital increased by $6.6 million to $3.7 million at
September 30, 1999 from a deficit of $2.9 million at June 30, 1999.
Approximately $4.6 million of this increase is due to the net investment in
sales-type leases resulting from the owner-operator program. 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.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
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.
The Company was caught in a cycle of large demand for new trucks and long
lead times for new truck orders. Due to the manufacturer's lead time for new
trucks, the Company was unable to secure any replacement trucks on schedule
and was forced to make expensive non-warranty repairs to its older equipment.
During the first quarter of fiscal 2000, the Company has taken delivery of
170 new trucks and has sold 181 trucks, reducing its fleet to 716 at September
30, 1999. The sale of these trucks resulted in a gain of $921,323. The Company
has entered into an agreement to purchase 630 new trucks for its fleet with
deliveries beginning in October of 1999 and continuing through June of 2000.
The Company will sell approximately 440 of its older trucks, which will
return the Company's fleet to its former size of 900 trucks. The cost of the
new trucks, net of trade-ins, will be approximately $31,250,000. The new
truck specifications include features that afford the driver a higher level
of comfort and appeal than the older models being traded in. Management
believes that these new trucks, when placed in service, will reduce
maintenance costs and time lost for repairs. In order to improve its
operating results, the Company is implementing a new program in which owner-
operators may qualify to lease/purchase a truck and be paid a percentage of
the Company's revenue to operate it under a contract with the Company to haul
freight for its customers. Management believes that an owner-operator fleet
will improve results in the Company's driver retention efforts.
Additionally, certain costs associated with truck ownership will pass from
the Company to the owner-operator.
The Company also sold 73 of its 48 foot trailers resulting in a gain of
$388,789. 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 896 of
the 53 foot trailers and 1,345 of the 48 foot trailers.
Year 2000 Issues
The Company has completed an assessment of its internal systems with regard
to Year 2000 compliance and has determined that its computer hardware and
critical software applications are compliant. The Company will convert its
EDI format to ASC X12, version 4010 which is year 2000 compliant. The
Company's communication systems which include telephones, on-board computers
for trucks, voice mail, and electronic mail (E-mail) are certified compliant.
Although the Company believed that its systems would be Year 2000 compliant,
in April of 1999, the Company determined that it would purchase new computer
software for its business. This decision was made primarily due to the
increased cost and inefficiency of maintaining the
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cont'd
Company's own software. The new software requires that the Company also
purchase new computer hardware. This new computer system will cost
approximately $900,000; however, the Company has entered into a lease
agreement to fund this purchase. The new system will be certified Year
2000 compliant by the manufacturer of the computer and the developer of
the software. Management believes that the new system will enable the Company
to better manage its business and to utilize new technologies as they are
developed. The Company's information systems were migrated to the new system
in October of 1999.
The Company will continue to operate its old system for archival purposes.
In the event the new software does not perform as expected, the old system
will be available for backup.
The Company has assurances from its utilities providers of an implementation
plan in place. Backup power generators are certified compliant. However, the
Company's business requires that it operate in all regions of the United
States, and the Company may rely indirectly on utility providers over which
it has no control. Infrastructure failures could significantly reduce the
Company's ability to serve its customers.
The Company's trucks are certified compliant for the year 2000 by the
manufacturer. The Company has conducted a survey of other internal
electronic devices which may have embedded technology likely to be affected
by the Year 2000 and believes that no critical devices will fail.
The Company has requested written assurance from its customers and vendors of
their Year 2000 compliance to determine the extent of any effect on the
Company's operations. The Company has not received written assurances from
its significant customers and vendors that their systems will be timely
converted and would not have an adverse effect on the Company. It is not
possible at this time to quantify the amount of business that might be lost
or other costs that could be incurred by the Company as a result of the
Company's customers' and vendors' failure to remediate their Year 2000
issues.
The Company believes that the most likely worst-case scenario which it may
face would be the inability of one or more of its major customers to
communicate electronically through EDI (Electronic Data Interchange). In
that event, the Company believes that it would be able to continue its
business as it did prior to EDI until those customers' systems return to
normal.
The Company estimates that its cost of becoming Year 2000 compliant will be
less than $50,000, with the majority of the expense accounted for in the cost
of operations through June 30, 1999.
The Company's contingency plans relative to the Year 2000 have not been
finalized. These plans are evolving as the testing of systems progresses.
During the testing and conversion phase, management will develop and modify a
worst-case scenario contingency plan based on testing and conversion results.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
The Company subscribes to a service called Year 2000 Stocks via the internet
at www.year2000stocks.com as one of the ways to stay abreast of the Year 2000
issues.
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, accounting matters, and Year
2000 readiness. 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, 1999 for details on the Company's long-term debt.
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, the Company has been
charged by the Equal Employment Opportunity Commission ("EEOC") with
discriminatory hiring practices. The Company is unable to predict the final
outcome of this charge or the range of any possible penalties imposed.
ITEM 6. Exhibits and Reports on Form-K
No reports on Form 8-K were filed during the three months ended September 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANNON EXPRESS, INC.
(Registrant)
Date: November 11, 1999 /s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: November 11, 1999 /s/ Rose Marie Cannon
Secretary, Treasurer and Director