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, 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 February 4,
2000: 3,192,861
INDEX
CANNON EXPRESS, INC. and SUBSIDIARIES
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements (Unaudited)
Consolidated Balance Sheets
as of December 31, 1999 and June 30, 1999...............................1
Consolidated Statements of Income and Retained Earnings
for the Three Months and Six Months Ended December 31, 1999 and 1998.....3
Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 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 ...............................................*
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................................................*
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
December 31 June 30
1999 1999
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $8,366,607 $9,683,794
Receivables, net of allowance for doubtful accounts
(December 31, 1999-$222,405; June 30, 1999-$199,579):
Trade 10,943,864 8,896,331
Other 977,073 1,963,418
Current portion of net investment in
sales-type leases 9,482,733 -
Prepaid expenses and supplies 2,049,729 1,627,778
Deferred income taxes 1,973,000 1,907,000
Total current assets 33,793,006 24,078,321
Property and equipment:
Land, buildings and improvements 1,238,523 1,230,945
Revenue equipment 57,958,532 80,264,223
Service, office and other equipment 2,960,486 2,885,076
62,157,541 84,380,244
Less allowances for depreciation 23,990,283 35,918,227
38,167,258 48,462,017
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,381,084 2,381,084
Marketable securities 542,550 593,110
Net investment in sales-type leases,
less current portion 18,965,467 -
Other 288,223 429,815
Total other assets 22,200,730 3,427,415
$94,160,994 $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)
December 31 June 30
1999 1999
(Unaudited) (Note)
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $1,330,594 $1,849,931
Accrued expenses:
Insurance reserves 3,684,874 3,295,528
Other 5,151,821 2,246,756
Federal and state income taxes payable 1,995,993 2,707,890
Current portion of long-term debt 13,345,022 16,861,875
Total current liabilities 25,508,304 26,961,980
Long-term debt, less current portion 46,072,865 25,999,343
Deferred income taxes 4,269,000 4,809,000
Other liabilities 20,050 27,569
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,252,986 shares 32,654 32,654
Additional paid-in capital 3,747,575 3,747,575
Retained earnings 14,884,732 14,709,630
Unrealized depreciation on marketable
securities, net of income taxes (173,922) (119,734)
18,491,039 18,370,125
Less treasury stock, at cost (60,125 shares) 200,264 200,264
18,290,775 18,169,861
$94,160,994 $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 Six Months Ended
December 31 December 31
1999 1998 1999 1998
(Unaudited) (Unaudited)
Operating revenue $21,290,792 $24,091,602 $44,206,225 $48,754,019
Operating expenses and costs:
Salaries, wages and
fringe benefits 6,245,036 9,489,795 13,542,986 18,145,892
Operating supplies
and expenses 4,878,073 7,359,623 10,913,324 15,232,271
Taxes and licenses 1,014,838 1,451,409 2,140,407 2,766,816
Insurance & claims 1,269,907 1,419,018 2,759,861 2,267,059
Depreciation and
amortization 774,500 2,483,914 1,521,986 5,934,833
Rents and purchased
transportation 6,776,925 880,475 11,578,737 1,979,096
Other 768,137 546,917 1,501,131 1,121,557
21,727,416 23,631,151 43,958,432 47,447,524
Operating income (loss) (436,624) 460,451 247,793 1,306,495
Other income(expense)
Interest expense (843,903) (748,908) (1,495,372) (1,561,276)
Other income 76,526 60,317 182,681 127,833
(767,377) (688,591) (1,312,691) (1,433,443)
Income (loss) before
income taxes (1,204,001) (228,140) (1,064,898) (126,948)
Federal and state income taxes
Current 277,000 820,000 163,000 1,342,000
Deferred (1,155,000) (908,000) (1,403,000) (1,391,000)
(878,000) (88,000) (1,240,000) (49,000)
Net income (loss) (326,001) (140,140) 175,102 (77,948)
Retained earnings at beginning
of period 15,210,733 15,259,206 14,709,630 15,197,014
Retained earnings at end
of period $14,884,732 $15,119,066 $14,884,732 $15,119,066
Basic earnings (loss)
per share ($0.10) ($0.04) $0.05 ($0.02)
Average shares outstanding 3,205,276 3,192,861 3,205,276 3,192,861
Diluted earnings (loss)
per share ($0.10) ($0.04) $0.05 ($0.02)
Diluted shares outstanding 3,205,276 3,219,236 3,209,069 3,232,057
See notes to consolidated financial statements.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
December 31
1999 1998
(Unaudited)
Operating activities
Net income (loss) $ 175,102 $ (77,948)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,974,200 6,975,842
Provision for losses on accounts receivable 30,000 30,000
Benefit for deferred income taxes (1,436,000) (1,391,000)
Gain on disposal of equipment (2,450,013) (1,041,008)
Changes in operating assets and liabilities:
Accounts receivable (1,091,188) (1,031,649)
Prepaid expenses and supplies (421,951) 540,399
Accounts payable, accrued expenses,
taxes payable, and other liabilities (1,147,901) 854,159
Other assets 2,243,180 -
Net cash provided by (used in) operating activities (124,571) 4,858,795
Investing activities
Purchases of property and equipment (3,682,474) (114,290)
Investment in outside driver training facility (37,550) (280,000)
Net increase in restricted cash - (564)
Proceeds from equipment sales 12,612,140 2,306,120
Net cash provided by investing activities 8,892,116 1,911,266
Financing activities
Proceeds from long-term borrowing 3,599,485 5,500,000
Principal payments on long-term debt and
capital lease obligations (13,684,217) (6,410,791)
Net cash used in financing activities (10,084,732) (910,791)
Increase (decrease) in cash and cash equivalents (1,317,187) 5,859,270
Cash and cash equivalents at beginning of period 9,683,794 3,817,505
Cash and cash equivalents at end of period $ 8,366,607 $ 9,676,775
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, 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 Six Months Ended
December 31 December 31
1999 1998 1999 1998
(Unaudited) (Unaudited)
Average shares outstanding 3,205,276 3,192,861 3,205,276 3,192,861
Net effect of dilutive stock options - 26,375 3,793 39,196
Diluted shares outstanding 3,205,276 3,219,236 3,209,069 3,232,057
Net income (loss) for the period ($326,001) ($140,140) $175,102 ($77,948)
Basic earnings (loss) per share ($.10) ($.04) $.05 ($.02)
Diluted earnings (loss) per share ($.10) ($.04) $.05 ($.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 -- Second Quarter
Operating revenue for the second quarter of fiscal 2000 (ended December 31,
1999) was $21,290,792 compared to $24,091,602 for the second quarter of
fiscal 1999, representing a decrease of $2,800,810 or 11.6% for the period.
At December 31, 1999, the Company's fleet consisted of 728 trucks and 2,165
trailers, while on December 31, 1998, the Company's fleet consisted of 848
trucks and 2,345 trailers. Logistics and intermodal revenue for the second
quarter of fiscal 2000 increased by $718,719 from $861,649 for the second
quarter of fiscal 1999 to $1,580,368 for the same period of fiscal 2000. The
Company's revenue continued to be negatively impacted by a shortage of
qualified drivers to operate its trucks during the second quarter of fiscal
2000. The Company traded in some of its trucks early due to the driver
shortage and is replacing its older trucks with new trucks emphasizing driver
comfort and convenience. In January of 2000 the Company implemented an
increase in drivers' starting base pay ranging from 2 to 4 cents per mile.
The Company believes that it may be necessary to provide additional pay
increases for its drivers in the future.
Salaries, wages, and fringe benefits, made up primarily of drivers. wages,
decreased as a percentage of revenue to 29.3% in the second quarter of fiscal
2000 from 39.4% in the second quarter of fiscal 1999. This decrease was largely
due to the Company's smaller fleet and to the Company's implementation of its
lease program for owner operators. Company drivers were awarded approximately
$163,000 in bonuses for the three-month period ended December 31, 1999 as
compared with $256,000 awarded during the three-month period ended December
31, 1998. Additionally, an annual safety bonus of $265,000 was paid in
December 1999, as compared to $337,000 paid in December 1998.
Operating supplies and expenses, as a percentage of revenue, decreased to
22.9% in the second quarter of fiscal 2000 from 30.5% in the comparable
period of fiscal 1999. Operating taxes and licenses also decreased to 4.8% of
revenue in fiscal 2000 from 6.0% in fiscal 1999. Insurance and claims were
6.0% of revenue in fiscal 2000, increasing from 5.9% of revenue in fiscal
1999. Depreciation and amortization decreased to 3.6% of revenue in fiscal
2000 from 10.3% in the same period of fiscal 1999. This decrease was due to
a gain on sale of equipment of $1,137,700 which was realized in the second
quarter of fiscal 2000 as compared to a gain of $975,670 in the second
quarter of 1999. Rents and purchased transportation increased to 31.8% of
revenue in fiscal 2000 from 3.7% in fiscal 1999 primarily due to payments
made to the Company's owner operators and to increased logistics activities.
Operating revenue for the second quarter of 2000 decreased by 11.6% over the
comparable period of 1999, while operating expenses decreased by $1,903,735
or 8.1%. Accordingly, the Company.s operating ratio increased to 102.1% in
the second fiscal quarter of 2000 from 98.1% in the same period of fiscal
1999.
Interest expense increased to 4.0% of revenue in the second quarter of fiscal
2000 from 3.1% recorded in the second quarter of fiscal 1999 due to the
increase in long term debt.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cont'd
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 December 31, 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.
Net loss for the second quarter of fiscal 2000 ended December 31, 1999 was
($326,001) ($.10 loss per share) compared to net loss of ($140,140) ($.04
loss per share) during the comparable period of fiscal 1999, a decrease of
$185,861 or 132.6% for the period.
Results of Operations - Six Month Period
Operating revenue for the first six months of fiscal 2000 ended December 31,
1999 was $44,206,225 compared to $48,754,019 for the comparable period of
fiscal 1999, representing a decrease of $4,547,794 or 9.3%. Logistics and
intermodal revenue for the six-month period of fiscal 2000 increased by
$1,898,494 over the comparable period in fiscal 1999. As in the three-month
period, a continued shortage of qualified drivers impaired the Company's
ability to produce revenue.
Salaries, wages, and fringe benefits decreased to 30.6% of revenue in the
six-month period of fiscal 2000 from the 37.2% reported in the six-month
period of fiscal 1999. Operating supplies and expenses decreased to 24.7% of
revenue in fiscal 2000 from 31.2% in fiscal 1999. Taxes and licenses
decreased to 4.8% of revenue during fiscal 2000 from 5.7% in fiscal 1999.
Insurance and claims were 6.2% of revenue in fiscal 2000, increasing from
4.6% of revenue in fiscal 1999. Depreciation and amortization, as a
percentage of revenue, decreased to 3.4% of revenue in fiscal 2000 from 12.2%
in the same period of fiscal 1999. This decrease was due to a gain on sale
of equipment of $2,450,013 which was realized in the six-month period of
fiscal 2000 as compared to a gain of $1,041,008 in the six-month period of
1999. Rents and purchased transportation increased to 26.2% of revenue in
the first six months of fiscal 2000 from 4.1% during the comparable period of
fiscal 1999. As was the case in the three-month period, this increase was
caused primarily by payments made to the Company's owner operators and by
increased logistics activities.
Operating revenue for the first six months of 2000 decreased by 9.3% over the
comparable period of 1999, while operating expenses decreased by $1,058,702
or 81.0%. Accordingly, the Company's operating ratio increased to 99.4% for
the first six months of 2000 from 97.3% in the same period of fiscal 1999.
Interest expense increased to 3.4% of revenue in the first six months of
fiscal 2000 from 3.2% recorded in the first six months 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 $830,000
during the six-month period ended December 31, 1999.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Cont'd
Net income for the first six months of fiscal 2000 ended December 31, 1999
was $175,102 ($.05 earnings per diluted share) compared to net loss of
($77,948) ($.02 loss per share) during the comparable period of fiscal 1999,
an increase of $253,050 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. Fuel costs continued to increase in
the second quarter of fiscal 2000, averaging 26 cents per gallon higher than
in the same quarter of fiscal 1999. For the six months period ended December
31, 1999, the average cost per gallon was 22 cents higher than in the same
period of fiscal 1999. Although average price per gallon was higher, 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 used cash flows of $.1 million for the first six months
of fiscal 2000 compared to $4.9 million provided during the same period of
fiscal 1999. Cash flows from operations in the first two quarters of fiscal
2000 were the result of $.2 million net income, $4.0 million in depreciation
offset by $2.5 million from gain on sale of equipment, and $1.8 million used
in other working capital assets and liabilities. Investing activities
provided net cash of $8.9 million during the first six months of fiscal 2000
compared to $1.9 million net cash used in the same period of fiscal 1999.
Financing activities used net cash of $10.1 million during the first two
quarters of fiscal 2000 compared to $1.0 million in fiscal 1999.
The Company's working capital increased by $11.2 million to $8.3 million at
December 31, 1999 from a deficit of $2.9 million at June 30, 1999.
Approximately $9.5 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 six months of fiscal 2000, the Company has taken delivery
of 408 new trucks and has sold 408 trucks, causing no change in its fleet of
728 at December 31, 1999. The sale of these trucks resulted in a gain of
approximately $1,650,000. The Company has entered into an agreement to
purchase 390 new trucks for its fleet with deliveries beginning in January of
2000 and continuing through October of 2000. The cost of the new trucks, net
of trade-ins, will be approximately $20,088,000. 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 has
implemented 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.
During the first six months of fiscal 2000, the Company also sold 149 of its
48 foot trailers resulting in a gain of approximately $800,000. The Company
plans to convert the majority of its trailer fleet to 53 foot trailers in the
future in order to allow it to compete for freight from the increasing number
of customers who require 53 foot trailers for some or all of their shipments.
The Company has entered into an agreement to purchase 200 new 53 foot trailers
beginning in March of 2000. The Company currently owns and operates 896 of the
53 foot trailers and 1,269 of the 48 foot trailers.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions
made by management from information currently available to management. These
statements address future plans, expectations and events or conditions
concerning various matters such as the results of the Company's sales efforts
as set forth in the discussion of results of operations, capital
expenditures, litigation and capital resources, and accounting matters.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results could differ
materially from those currently reported.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to cash flow and interest rate risk due to changes in
interest rates with respect to its long-term debt. 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 4. Submission of Matters to a Vote of Security Holders
On November 16, 1999, 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 expired in 1999. Over 99% of the shares present or represented
by proxy were voted in favor of management's nominees.
ITEM 6. Exhibits and Reports on Form-8K
No reports on Form 8-K were filed during the three months ended December 31,
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: February 14, 2000 /s/ Dean G. Cannon
President, Chairman of the Board,
Chief Executive Officer and Chief
Accounting Officer
Date: February 14, 2000 /s/ Rose Marie Cannon
Secretary, Treasurer and Director
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