<PAGE>
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, 1998
( )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 30,
1998: 3,192,861
<PAGE>
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of September 30, 1998 and June 30, 1998.......................1
Consolidated Statements of Income and Retained Earnings
for the Three Months Ended September 30, 1998 and 1997...........3
Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 1998 and 1997...........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......*
ITEM 5 -- Other Information........................................*
ITEM 6 -- Exhibits and Reports on Form 8-K.........................9
*No information submitted under this caption.<PAGE>
PART 1.
ITEM 1. Financial Statements (Unaudited)
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 June 30
1998 1998
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $4,625,734 $3,817,505
Receivables, net of allowance for doubtful
accounts (September 30, 1998-$152,398;
June 30, 1998-$158,656):
Trade 10,403,468 9,582,372
Other 175,825 1,473,937
Prepaid expenses and supplies 1,046,908 1,325,024
Deferred income taxes 1,821,000 1,875,000
Total current assets 18,072,935 18,073,838
Property and equipment:
Land, buildings and improvements 1,210,138 1,210,138
Revenue equipment 92,366,235 92,546,207
Service, office and other equipment 2,842,271 2,743,709
96,418,644 96,500,054
Less allowances for depreciation 40,539,912 37,193,306
55,878,732 59,306,748
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,387,236 2,386,832
Marketable securities 489,363 584,322
Other 452,384 511,332
Total other assets 3,352,389 3,505,892
$77,304,056 $80,886,478
Note: The balance sheet at June 30, 1998 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.
<PAGE>
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
September 30 June 30
1998 1998
(Unaudited) (Note)
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $1,650,099 $1,609,825
Accrued expenses:
Insurance reserves 2,789,440 3,144,259
Other 1,969,804 1,758,047
Federal and state income taxes payable 2,706,597 2,208,632
Current portion of long-term debt 23,008,693 18,794,463
Total current liabilities 32,124,633 27,515,226
Long-term debt, less current portion 22,166,161 29,768,122
Deferred income taxes 4,179,000 4,752,000
Other liabilities 80,200 100,862
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,252,986 shares 32,530 32,530
Additional paid-in capital 3,720,988 3,720,988
Retained earnings 15,259,206 15,197,014
Unrealized depreciation on marketable
securities, net of income taxes (58,398) -
18,954,326 18,950,532
Less treasury stock, at cost (60,125 shares) 200,264 200,264
18,754,062 18,750,268
$77,304,056 $80,886,478
Note: The balance sheet at June 30, 1998 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.
<PAGE>
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Three Months Ended
September 30
1998 1997
(Unaudited)
Operating revenue $24,662,417 $28,057,837
Operating expenses and costs:
Salaries, wages and fringe benefits 8,656,097 9,349,914
Operating supplies and expense 7,872,648 8,537,989
Operating taxes and licenses 1,315,407 1,397,485
Insurance and claims 848,041 1,697,163
Depreciation and amortization 3,450,919 3,246,335
Rents and purchased transportation 1,098,621 2,002,322
Other 574,640 359,402
23,816,373 26,590,610
Operating income 846,044 1,467,227
Other income (expense):
Interest expense (812,368) (901,770)
Other income 67,516 98,808
(744,852) (802,962)
Income before income taxes 101,192 664,265
Federal and state income taxes:
Current 522,000 321,000
Deferred (483,000) (278,000)
39,000 43,000
Net income 62,192 621,265
Retained earnings at beginning of period 15,197,014 13,382,427
Retained earnings at end of period $15,259,206 $14,003,692
Basic earnings per share $0.02 $0.20
Average shares and share equivalents outstanding 3,192,861 3,146,522
Diluted earnings per share $0.02 $0.19
Diluted shares and share equivalents outstanding 3,244,877 3,225,826
See notes to consolidated financial statements.
<PAGE>
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
September 30
1998 1997
(Unaudited)
Operating activities
Net income $ 62,192 $ 621,265
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,516,751 3,219,628
Provision for losses on accounts receivable 15,000 7,500
Credit for deferred income taxes (483,000) (278,000)
Loss (gain) on disposal of equipment (65,338) 26,706
Changes in operating assets and liabilities:
Accounts receivable 462,016 (183,877)
Prepaid expenses and supplies 278,119 205,660
Accounts payable, accrued expenses,
taxes payable, and other liabilities 395,735 1,272,845
Net cash provided by operating activities 4,181,475 4,891,727
Investing activities
Purchases of property and equipment (101,211) (48,590)
Net increase in restricted cash (404) (705)
Proceeds from sales of marketable securities - 50,000
Proceeds from equipment sales 116,100 1,800
Net cash provided by investing activities 14,485 2,505
Financing activities
Principal payments on long-term debt and
capital lease obligations (3,387,731) (2,839,822)
Net cash used in financing activities (3,387,731) (2,839,822)
Increase in cash and cash equivalents 808,229 2,054,410
Cash and cash equivalents at beginning of period 3,817,505 3,995,626
Cash and cash equivalents at end of period $4,625,734 $6,050,036
See notes to consolidated financial statements.
<PAGE>
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, 1998 are not necessarily
indicative of the results that may be expected for the year ended June 30,
1999. 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, 1998.
Note B - Net Income Per Share
Three Months Ended
September 30
1998 1997
(Unaudited)
Average shares outstanding 3,192,861 3,146,522
Net effect of dilutive stock options 52,016 79,304
Diluted shares outstanding 3,244,877 3,225,826
Net income for the period $ 62,192 $ 621,265
Basic earnings per share $.02 $.20
Diluted earnings per share $.02 $.19
<PAGE>
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 1999 (ended September 30,
1998 was $24,662,417 compared to $28,057,837 for the first quarter of fiscal
1998, representing a decrease of $3,395,420 or 12.1% for the period. At
September 30, 1998, the Company's fleet consisted of 879 trucks and 2,538
trailers, while on September 30, 1997, the Company's fleet consisted of 906
trucks and 2,119 trailers. Logistics and intermodal revenue for the first
quarter of fiscal 1999 decreased by $1,550,605, or 59.5%, over the comparable
period in fiscal 1998. 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,
increased as a percentage of revenue to 35.1% in the first quarter of fiscal
1999 from 33.3% in the comparable period of fiscal 1998. Company drivers
were awarded approximately $243,000 in bonuses for the three-month period
ended September 30, 1998 as compared with $225,000 awarded during the three-
month period ended September 30, 1997.
Operating supplies and expenses, as a percentage of revenue, increased to
31.9% in the first quarter of fiscal 1999 from 30.4% in the comparable
period of fiscal 1998. Operating taxes and licenses also increased to 5.3% of
revenue in fiscal 1999 from 5.0% in fiscal 1998. Insurance and claims were
3.4% of revenue in fiscal 1999, decreasing from 6.0% in fiscal 1998,
substantially due to lower insurance premiums and favorable claims
experience. Depreciation and amortization increased to 14.0% of revenue in
fiscal 1999 from 11.6% in the same period of fiscal 1998 due to new equipment
additions. A gain on disposal of equipment of $65,338 was included in the
first quarter of fiscal 1999 as compared to a loss of $26,706 in the first
quarter of fiscal 1998. Rents and purchased transportation decreased to 4.5%
of revenue in fiscal 1999 from 7.1% in fiscal 1998 due to a decrease in
short-term trailer rentals.
Operating revenue for the first quarter of 1999 decreased by 12.1% over the
comparable period of 1998, while operating expenses decreased by $2,774,237
or 10.4%. Accordingly, the Company's operating ratio increased to 96.6% in
the first fiscal quarter of 1999 from 94.8% in the same period
of fiscal 1998.
Interest expense increased slightly to 3.3% of revenue in the first quarter
of fiscal 1999 from 3.2% recorded in the first quarter of fiscal 1998.
The Company's effective income tax rate increased to 38.5% of income before
income taxes in fiscal 1999 from 6.5% in fiscal 1998. During fiscal 1998,
income tax consequences of certain equipment leasing transactions were
recorded in the financial statements in reliance on opinion of tax counsel.
Net income for the first quarter of fiscal 1999 ended September 30, 1998 was
$62,192 ($.02 per share) compared to $621,265 ($.19 per share) during the
comparable period of fiscal 1998, a decrease of $559,073 or 90.0% for the
period.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
Fuel Cost and Availability
The Company, and the motor carrier industry as a whole, is dependent upon the
availability and cost of diesel fuel. Average fuel costs were 14 cents per
gallon lower in the quarter ended September 30, 1998 than in the same period
of the prior year. 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. 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 $4.2 million for the first three
months of fiscal 1999 compared to $4.9 million for the same period of fiscal
1998. Cash flows from operations in the first quarter of fiscal 1999 were
the result of $0.06 million in net income, $3.5 million in depreciation and
$0.64 million provided by other working capital assets and liabilities.
Investing activities provided net cash of $.014 million during the first
three months of fiscal 1999 compared to $0.002 million for the same period of
fiscal 1998. Financing activities used net cash of $3.4 million during the
first quarter of fiscal 1999 compared to $2.8 million cash used in the first
quarter of 1998.
The Company's working capital decreased by $4.7 million to a deficit of $14.1
million at September 30, 1998 from a deficit of $9.4 million at June 30,
1998. These deficits were due to the Company's decision to purchase
equipment for cash in the quarter ended December 31, 1996. The Company has
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.
The Company's current maturities of long-term debt includes approximately
$14.4 million which will be due on final note or lease payments for revenue
equipment. Approximately $12.9 million will be due for trucks which are
planned to be traded in or sold during fiscal 1999. Historically, the
Company has received slightly more in cash when equipment is sold than the
amount paid on final note or lease payments. The Company expects that its
obligation for these final equipment payments will be approximately offset by
cash received when the equipment is sold.
<PAGE>
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.
Management of the Company intends, in the long-term, to continue to grow,
however, the current shortage of qualified drivers for its trucks may limit
the opportunity for expansion of its fleet. The Company may increase its
logistics and intermodal activities, although Management of the Company
believes that its best opportunities for growth may be the acquisition of one
or more other trucking companies which compliment the Company's current
business activities. At September 30, 1998, the Company did not have any
non-cancelable commitments to purchase trucks or trailers, although it
anticipates that its 1995 model trucks will be traded in for new models and
its 1992 model trailers will be sold during fiscal 1999. Management believes
that revenue generated from operations will continue to be sufficient to
amortize obligations related to such replacement equipment. However, to the
extent that such revenue is insufficient for this purpose, the Company may be
required to rely on additional borrowings or equity offerings to meet its
working capital needs.
Year 2000 Issues
The Company has completed an assessment of its internal systems with regard to
Year 2000 compliance. All of its computer hardware and internal software is
compliant. The Company will convert its EDI format to ASC X12, version 4010
which is year 2000 compliant during the fourth quarter of 1998. The Company's
communication systems which include telephones, on-board computers for trucks,
voice mail, and electronic mail (E-mail) are certified compliant, with the
exception of the on-board computers installed on its trucks which are scheduled
by the vendor to be compliant by early 1999.
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 will seek written assurance from its customers and vendors of their
Year 2000 compliance during the early part of 1999 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
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cont'd
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 has not developed a contingency plan based on a possible worst-
case scenario, and such scenario has not yet been clearly identified. The
company currently plans to complete such analysis and contingency planning by
September 30, 1999. The Company does not plan to engage an independent expert
to evaluate its Year 2000 efforts.
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, 1998.
There can be no assurance that the Company's assessment of the Year 2000 risk
will be accurate, and actual results could differ materially from those
anticipated.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form-K
No reports on Form 8-K were filed during the three months ended September 30,
1998.
<PAGE>
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 12, 1998 /s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: November 12, 1998 /s/ Rose Marie Cannon
Secretary, Treasurer and Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 4,625,734
<SECURITIES> 489,363
<RECEIVABLES> 10,731,691
<ALLOWANCES> 152,398
<INVENTORY> 0
<CURRENT-ASSETS> 18,072,935
<PP&E> 96,418,644
<DEPRECIATION> 40,539,912
<TOTAL-ASSETS> 77,304,056
<CURRENT-LIABILITIES> 32,124,633
<BONDS> 0
0
0
<COMMON> 32,530
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 77,304,056
<SALES> 24,662,417
<TOTAL-REVENUES> 24,662,417
<CGS> 0
<TOTAL-COSTS> 23,816,373
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812,368
<INCOME-PRETAX> 101,192
<INCOME-TAX> 39,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,192
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
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