SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 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 E. Robinson 72764
P. O. Box 364 (Zip Code)
Springdale, Arkansas
(Address of principal executive offices)
Registrant's telephone number, including Area Code: (501) 751-9209
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
Yes X No
Aggregate market value of voting stock held by non-affiliates of the
registrant at August 31, 1999: $2,802,107.
Number of shares of common stock outstanding at August 31, 1999:
Common Stock - 3,205,276
Documents incorporated by reference: Company's Notice and Proxy Statement
for its annual meeting of stockholders to be held on Tuesday, November 16,
1999.
Part I
Item 1. Business
Cannon Express, Inc. (the "Company" or "Registrant") is an irregular route,
truckload carrier with headquarters in Springdale, Arkansas, transporting a
wide range of general commodities in the United States pursuant to nationwide
operating authorities granted by the Department of Transportation ("DOT"),
and in Canada through operating authorities granted by the Canadian
provinces. At June 30, 1999, the Company operated a fleet of 728 tractors
and 2,314 trailers, and employed 941 people, none of whom is represented by
a collective bargaining agreement.
The Company also provides logistics services utilizing equipment and services
provided by unrelated third parties in the transportation industry.
Marketing and Customers
The Company's marketing strategy is to be one of a select group of carriers
serving financially sound customers who provide shipments to and from
locations within the Company's operating area. The Company's sales effort is
carried out by salespersons domiciled in strategic locations and by its
telemarketing staff consisting of salespersons who solicit new customers and
customer coordinators who arrange shipments for existing customers.
The Company publishes its own freight rates instead of using rates published
for a group of carriers by freight rate publishing bureaus. This practice
permits pricing that is responsive to changing market conditions as well as
to a particular customer's needs. Most arrangements for transportation are
made in the form of contracts with customers.
During the fiscal year ended June 30, 1999, Wal-Mart Stores, Inc. ("Wal-
Mart") accounted for 28.9% and International Paper, Inc. accounted for 13.14%
of the Company's operating revenue. During the fiscal years ended June 30,
1998 and 1997, Wal-Mart accounted for 47.0% and 51.0%, respectively, and
International Paper accounted for 14.4% and 15.8%, respectively, of
operating revenue. In March of 1998 the Company made a decision not to
continue some of the freight movements at the rates then being offered by
Wal-Mart. Management of the Company believes that its longer-term interests
will be best served by diversifying its customer base. The Company does not
have long-term contracts with its customers, and, accordingly, there is no
assurance that the current volume of business from these major customers will
continue. Management believes that the sudden loss of a significant customer
could have a material adverse effect on revenue, equipment utilization and
operating efficiencies.
The principal types of freight transported by the Company include: retail and
wholesale goods primarily for discount merchandisers, paper goods, automotive
supplies and parts, and non-perishable food products.
Operations
A customer's initial contact with the Company is through one of the Company's
salespersons. This initial contact will involve computerized collection of
information regarding the customer's financial condition and its payment
history together with information on its loads, including the volume of
freight to be delivered, the origins and destinations of shipments, the
schedule in which such shipments are to be made and any special needs. Once
this information has been collected, the Company and the shipper will
negotiate and agree upon the shipment rates.
One or more of the Company's customer coordinators is then assigned to the
shipper's account. Customer coordinators are assigned to a specific region
of the United States and are responsible for matching a shipper's load with a
truck located within the customer coordinator's assigned region. The customer
coordinator then assigns a shipment to a dispatcher.
Dispatchers are responsible for conveying shipment information to assigned
drivers. Dispatchers and drivers communicate with one another either by
telephone as the driver makes routine stops in transit, or, through on-board
computers and a satellite link. This link also enables the dispatcher to
monitor the progress of a particular shipment. At the shipment's origin, the
driver notifies the dispatcher when the shipment has been loaded and then
proceeds to the shipment's destination. When the shipment has reached its
destination, the driver is assigned another shipment by the dispatcher.
Once documents (such as driver's log, bill of lading, fuel tickets) have been
received by the Company, they are examined by the fuel and safety departments
and then by the billing department, which verifies shipment and billing
information previously entered into the computer by operations personnel.
Computer-generated bills are typically sent to the customer on the same day
shipment documents are received. The Company transmits freight bills and
shipment status information electronically through "EDI" ("Electronic Data
Interchange") for certain customers.
Through the use of its computer system, complimentary software and inter-
computer linkage with a fuel billing network, the Company monitors and
coordinates routes and shipments. This system also enables dispatchers and
customer coordinators to instantaneously send and receive shipment
information. The computer system is also used for payroll, billing and
bookkeeping. The complimentary software used with the computer system for
the above purpose was designed and implemented by Company management.
The Company has purchased new computer software for its business. This
decision was made primarily due to the increased cost and inefficiency of
maintaining the Company's own software. The new software requires that the
Company also purchase new computer hardware. 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 expects to convert its
systems during the second half of calendar year 1999.
Drivers and Other Employees
As of June 30, 1999, the Company employed 700 drivers and driver trainees.
All drivers are selected in accordance with Company guidelines relating
primarily to safety record, driving experience and personal evaluation. The
Company requires all drivers to meet experience requirements or to
satisfactorily complete a training program, which pairs a trainee with one of
the Company's proven driver trainers. Trainees sharpen the skills necessary
for success and are evaluated daily by their trainer. Once selected, a driver
or driver trainee is instructed in all phases of Company policies and
operations as well as safety techniques and fuel efficient operation of the
equipment.
The Company's drivers are compensated on the basis of miles driven, loading,
unloading and delivery stops, plus bonuses. Base pay per mile increases with
a driver's completion of a specified number of miles safely driven. 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 qualified
received a 2 cent 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 who qualify are also paid an annual safety bonus.
Company drivers were awarded approximately $1,300,000 in performance and
safety bonuses during fiscal 1999 as compared with approximately $1,150,000
awarded during fiscal 1998.
Like other truckload carriers, the Company experiences significant driver
turnover. The Company experienced a shortage of qualified drivers during
fiscal 1999. 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 experience a shortage of drivers in the future. 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.
As of June 30, 1999, the Company employed:
1999 1998
Drivers and Driver Trainees 700 843
Management 16 16
Operations, Marketing, and Administration 142 162
Maintenance and Repair 89 81
Total 941 1,102
Management considers relations with its employees to be satisfactory and has
not experienced collective bargaining efforts in the past, nor does it
anticipate any collective bargaining by employees in the future. The Company
has a 401(K) plan for its drivers and other employees. Company contributions,
if any, are determined annually by its Board of Directors.
Tractors and Trailers
At June 30, 1999, the fleet consisted of 728 tractors and 2,314 trailers,
compared to 880 tractors and 2,561 trailers at June 30, 1998. During the
fiscal year ended June 30, 1999, 252 tractors were sold and 100 new tractors
were added to the fleet. 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. The Company has entered into an agreement to
purchase 800 new trucks for its fleet with deliveries beginning in July of
1999 and continuing through June of 2000. The Company will sell
approximately 625 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 $40,541,000. 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 sold
247 trailers with no new trailers added during the fiscal year ended June 30,
1999.
Tractors are acquired primarily with driver comfort, fuel efficiency and
overall economy in mind. All tractors operated by the Company are
conventionals, rather than cab-overs. Management believes that this type of
tractor will provide the driver greater comfort and will require less overall
maintenance because of the tractor's easier ride on the road. As of June 30,
1999, substantially all of the Company's tractors were manufactured by
International, while trailers were manufactured by Pines. The Company has
negotiated extended warranties on many of its tractors and intends to trade-
in such tractors on approximately a three-year cycle. Manufacturers of
tractors are required to certify to the Company that new tractors meet
federal emissions standards. All trailers in the fleet measure 48 or 53
feet in length by 102 inches in width.
The Company has a comprehensive preventive maintenance program for its
tractors and trailers. Inspections and different levels of repair or
maintenance are performed at regular intervals. At each inspection,
diagnostic tests are performed to ensure proper operation of equipment.
The following table shows the type and age of equipment operated by the
Company at June 30, 1999:
MODEL OVER-the-ROAD 48-FOOT 53-FOOT
YEAR TRACTORS TRAILERS TRAILERS
1999 100 - -
1998 - - 598
1997 225 - 298
1996 325 297 -
1995 74 681 -
1994 - 180 -
1993 - 247 -
1990 thru 1983 4 13 -
728 1,418 896
Fuel
The Company, and the motor carrier industry as a whole, is dependent upon the
availability and cost of diesel fuel. Both the availability and the cost of
diesel fuel are influenced by economic and political events not within the
Company's control. The Company does not presently participate in any program
to insure price stability. During fiscal 1999, the Company's average fuel
costs were approximately 10 cents per gallon lower than in fiscal 1998.
However, fuel costs have increased recently and are approximately 10 cents
per gallon higher than they were at June 30, 1999. 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. There is no assurance that any future increases in fuel costs may be
passed through to the Company's customers. Future cost increases or
shortages of fuel could affect the Company's future profitability.
Governmental Regulation
The Company is a motor common and contract carrier previously regulated by
both the Interstate Commerce Commission ("ICC") and various state agencies.
Although the "ICC Termination Act of 1995" effectively eliminated the ICC as
of January 1, 1996, most functions of the ICC were transferred to the
Department of Transportation ("DOT"). These regulatory authorities have broad
powers generally governing matters such as authority to engage in motor
carrier operations, rates and charges, accounting systems, certain mergers,
consolidations and acquisitions and periodic financial reporting. In
addition, the Company's Canadian business activities are subject to similar
requirements imposed by provincial and Canadian regulations.
The Company, like other motor carriers, is subject to certain safety
requirements governing interstate operations prescribed by the United States
Department of Transportation ("DOT") and by Canadian provincial authorities.
In addition, vehicle weight and dimensions are subject to federal, state,
and provincial regulations. Management believes that the Company is in
compliance in all material respects with applicable regulatory requirements
relating to its operations. The failure of the Company to comply with
regulations of the DOT, state or provincial agencies could result in
substantial fines or revocation of operating authorities. Federal, state and
local environmental laws and regulations impose requirements relating to,
among other things, contingency planning for spills of petroleum products,
disposal of waste oil and maintenance and testing of underground storage
tanks. Management believes that future compliance with such laws and
regulations will not have a material effect upon the Company's capital
expenditures, earnings, or competitive position.
Competition
The trucking industry as a whole is highly competitive. The Company competes
primarily with other irregular route, truckload carriers. To a lesser degree,
railroads, less-than-truckload carriers and contract carriers also provide
competition. Competition from any one of these sources, however, may be
significant in one geographic area or at any one time. Competition for
freight is based primarily on service and efficiency and, to a lesser degree,
upon freight rates. A number of other irregular route, truckload carriers
have substantially greater financial resources, own more equipment or carry a
larger volume of freight than the Company.
Safety and Insurance
The Company is self insured up to certain limits for workers' compensation,
cargo loss and damage, and certain property damage and liability claims.
Provision has been made for the estimated liabilities for such claims as
incurred, including liabilities for claims incurred but not reported. The
amount of actual losses incurred could differ materially from the estimates
reflected in these financial statements.
The Company maintains cargo loss and damage insurance and collision coverage
on owned or leased equipment. In addition, with the assistance of its third-
party administrator, workers' compensation claims are self-insured up to
$300,000. The Company also has excess general liability coverage in amounts
substantially exceeding minimum legal requirements and believed to be
sufficient to protect the Company against material loss. Management believes
that current insurance coverage adequately protects the Company from
liability arising from normal operations. Although coverage is currently
available from multiple sources, a material decrease in availability, or a
substantial increase in costs, could have a material adverse effect on the
Company's profitability.
Item 2. Properties
The Company's executive offices and its maintenance facility are located at
1457 & 1457A E. Robinson, respectively, in Springdale, Arkansas.
The office facility is located on a 3.6 acre tract of land. It is leased
from Dean G. Cannon and Rose Marie Cannon, President and Secretary/Treasurer
of the Company, respectively.
The Company's maintenance facility, purchased in 1987, is located on a 17-
acre tract of land adjacent to the office facility. The 13,000 square foot
facility contains 7 drive through bays and other improvements, and is used by
the Company for equipment maintenance, repairs, and refueling.
The Company owns approximately 31 acres of land adjacent to the above
locations to be used for future expansion.
Item 3. 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
None.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Prior to March 3, 1998 the Company's common stock was traded on the
NASDAQ National Market System under the symbol CANX.
On March 3, 1998, the Company transferred its listing from the NASDAQ
National Market System to the American Stock Exchange under the symbol
AB.
The range of high and low sales prices for the last eight fiscal
quarters is as follows:
COMMON STOCK
HIGH LOW
YEAR ENDED JUNE 30, 1998:
First Quarter $ 8 5/8 $ 6 3/16
Second Quarter 10 1/2 7 1/4
Third Quarter 12 1/8 8 3/8
Fourth Quarter 10 1/4 7 5/8
YEAR ENDED JUNE 30, 1999:
First Quarter $ 8 9/16 $ 6 5/8
Second Quarter 6 1/2 4 7/8
Third Quarter 6 3/8 2
Fourth Quarter 4 1/2 2 1/4
(b) The approximate number of holders of common stock as of August 31, 1999
was 1600.
(c) The Company has not paid any dividends on its Common Stock. The present
policy of the Company is to retain cash earnings to provide funds for
operations and expansion of the Company's business.
Item 6. Selected Financial Data
The following table provides a summary of selected financial data for Cannon
Express, Inc.
FISCAL YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
(in thousands except per share data)
Operating Revenue $95,213 $109,245 $106,136 $89,991 $79,030
Income (loss) before
cumulative effect of
change in accounting
principle (487) 1,815 1,432 2,159 6,016
Basic earnings (loss) per share(1 & 2):
Income (loss) before
cumulative effect
of change in accounting
principle (.15) .57 .45 .69 1.91
Total assets $75,968 $80,886 $81,188 $84,358 $77,263
Long term debt,
less current portion $25,999 $29,768 $35,393 $43,964 $35,353
(1) Earnings per share have been restated to give effect to the stock
recapitalization effected on April 10, 1996.
(2) Basic earnings per share is computed based on the weighted average
number of shares outstanding during the year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following table sets forth the percentage relationship of certain revenue
and expense items for the fiscal years indicated.
Percentages of
Operating Revenue
Year Ended June 30,
1999 1998 1997
Operating revenue 100.0% 100.0% 100.0%
Operating expenses and costs:
Salaries, wages and fringe benefits 37.9% 33.1% 34.0%
Operating supplies and expenses 31.5 28.7 31.0
Operating taxes and licenses 5.8 5.4 5.9
Insurance and claims 4.5 4.7 5.3
Depreciation and amortization 10.4 11.5 11.3
Rents and purchased transportation 5.5 8.7 6.0
Other 2.4 2.0 1.6
Total operating expenses 98.0 94.1 95.1
Operating income 2.0 5.9 4.9
Other income (expense):
Interest and dividend income 0.4 0.3 0.3
Gain (loss) on marketable securities (0.0) (0.9) 0.0
Interest expense (3.2) (3.0) (3.6)
Income (loss) before income taxes (0.8) 2.3 1.6
Income taxes (0.3) 0.6 0.3
Net income (loss) (0.5)% 1.7% 1.3%
RESULTS OF OPERATIONS:
Fiscal year ended June 30, 1999 compared to Fiscal year ended June 30, 1998
Operating revenue for fiscal 1999 decreased 12.8% or $14,032,090 to
$95,212,908. This decrease was primarily due to a reduction in the amount of
business the Company received from its major customer (Wal-Mart). In March
of 1998 the Company made a decision not to continue some of the freight
movements at the rates then being offered. Management of the Company
believes that its longer-term interests will be best served by diversifying
its customer base. During fiscal 1999, Wal-Mart revenue was $27,528,084 or
28.9% of total revenue compared to $51,479,789, or 47.0% of total revenue
during the same period of fiscal 1998, representing a decrease of $23,951,705
for the period. The Company has hired 3 salespersons to replace the lost
business, however, to date the shortfall in revenue has not been totally
replaced. The Company also saw a decrease in its logistics and intermodal
revenue from $11,038,945 in fiscal 1998 to $5,248,368 in fiscal 1999. This
decrease was due to the Company's need to retain freight for its own trucks
and not offering the same amount of excess freight to other companies' trucks
as in the prior year. The Company believes that its sales efforts will be
rewarded in the future through higher rates and with equipment utilization
returning to historical levels.
Salaries, wages and fringe benefits decreased .1% or $42,645 to $36,083,271
in fiscal 1999.
Operating supplies and expenses decreased 4.6% or $1,429,508 to $29,947,122
in fiscal 1999. Fuel costs for the fiscal year ended June 30, 1999 averaged
10 cents per gallon lower than in the comparable period of fiscal 1998, which
together with a decrease in total miles driven of 9,570,602, decreased
operating expense by approximately $2,660,000 during the 12 month period.
Maintenance costs increased 10.61% due to the average age of the Company's
equipment.
Operating taxes and licenses decreased 5.4% or $317,444 to $5,538,612 in
fiscal 1999 primarily due to lower fuel taxes as the result of fewer miles
driven.
Insurance and claims decreased 17.4% or $899,220 to $4,263,032 in fiscal 1999
due to lower insurance premiums and favorable claims experience.
Depreciation and amortization decreased 21.8% or $2,744,384 to $9,866,614 in
fiscal 1999. This decrease is due to a gain on sale of equipment of
$3,211,610 which was realized in fiscal 1999 as compared to a gain of
$464,552 in fiscal 1998.
Rents and purchased transportation decreased 45.1% or $4,274,757 to
$5,202,381 in fiscal 1999 due primarily to decreased logistics activities.
The Company's operating ratio increased to 98.0% for fiscal 1999 from 94.1%
for the prior year, reflecting a decline of 3.9% for the period. This
decline was primarily attributable to higher maintenance costs during fiscal
1999.
Interest expense decreased 7.8% or $253,020 in fiscal 1999 due to lower
average debt balances.
The Company's effective income tax rate increased to 35.4% of income before
income taxes in fiscal 1999 from 27.1% 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 loss for fiscal year ended June 30, 1999 was $(487,384) ($.15 loss per
diluted share) compared to net income of $1,814,587 ($.56 earnings per
diluted share) during fiscal 1998, a decrease of $2,301,971 or 126.9%.
Fiscal year ended June 30, 1998 compared to Fiscal year ended June 30, 1997
Operating revenue for fiscal 1998 increased 2.9% or $3,108,730 to
$109,244,998. The increase was primarily attributable to the increased
revenue resulting from logistics operations. Logistics and intermodal
revenue during fiscal 1998 increased by $6,055,795, or 122%, over the
comparable period in fiscal 1997. The Company's ability to produce revenue
continued to be impaired by a shortage of qualified drivers.
Salaries, wages and fringe benefits increased .1% or $18,907 to $36,125,916
in fiscal 1998.
Operating supplies and expenses decreased 4.5% or $1,474,068 to $31,376,630
in fiscal 1998. Fuel costs for the fiscal year ended June 30, 1998 averaged
13 cents per gallon lower than in the comparable period of fiscal 1997, which
together with a decrease in total miles driven of 8,316,204, decreased
operating expense by approximately $3,470,000 during the 12 month period.
Maintenance costs increased 19.0% due to the average age of the Company's
equipment.
Operating taxes and licenses decreased 7.1% or $447,439 to $5,856,056 in
fiscal 1998 primarily due to lower fuel taxes as the result of fewer miles
driven.
Insurance and claims decreased 8.7% or $489,977 to $5,162,252 in fiscal 1998
due to lower insurance premiums and favorable claims experience.
Depreciation and amortization increased 5.6% or $666,121 to $12,610,998 in
fiscal 1998. This increase is due to new equipment additions.
Rents and purchased transportation increased 49.0% or $3,117,738 to
$9,477,138 in fiscal 1998 due primarily to increased logistics activities.
The Company's operating ratio decreased to 94.1% for fiscal 1998 from 95.1%
for the prior year, reflecting an improvement of 1.0% during the period. The
decrease was primarily attributable to lower fuel costs during fiscal 1998.
Interest expense decreased 14.1% or $535,229 in fiscal 1998 due to lower
average debt balances.
At June 30, 1998, the Company revalued its available-for-sale equity
securities at their market value. This write-down resulted in a loss before
income tax effect of $1,025,536. Although the Company's net income decreased
by $631,000 as a result of this write-down, this adjustment had no effect on
cash flow.
The Company's effective income tax rate increased to 27.1% of income before
income taxes in fiscal 1998 from 14.8% in fiscal 1997. Income tax
consequences of certain equipment leasing transactions were recorded in the
financial statements in reliance on opinion of tax counsel.
Net income increased 26.7% or $382,726 in fiscal 1998 to $1,814,587 or $.56
per share from $1,431,861 or $.44 per share in fiscal 1997.
Liquidity and Capital Resources
Cash flows from Operations - Operating activities provided cash of $10.9
million and $14.8 million in fiscal 1999 and 1998, respectively. Net cash
flows from operations in fiscal 1999 were primarily the result of $0.5
million net loss, $13.1 million in depreciation offset by 3.2 million from
gain on disposal of assets, and a $1.5 million increase in accounts payable
and other liabilities.
Cash flows from Investing Activities - Investing activities provided net cash
of $0.7 million in fiscal 1999 and used net cash of $11.5 million in fiscal
1998. Purchases of new equipment totaling $7.1 million was offset by $7.8
million in equipment sales and other investing activities for 1999.
Purchases of new equipment totaling $12.9 million was offset by $1.4 million
in equipment sales and other investing activities for 1998.
Cash flows from Financing Activities - Financing activities used net cash of
$5.7 and $3.4 million in fiscal 1999 and 1998, respectively.
Working capital needs have been met primarily from cash generated from
operations. During the fiscal year ended June 30, 1999, cash provided by
operating activities was $10,877,203, down from $14,760,661 for the prior
fiscal year ended June 30, 1998. The current ratio increased from 0.66 at
June 30, 1998 to 0.89 at June 30, 1999. Working capital increased by $6.5
million to a deficit of $2.9 million at June 30, 1999 from a deficit of $9.4
million at June 30, 1998. The deficit at June 30, 1999 is primarily due to
final note or lease payments on equipment. This equipment will be sold or
refinanced when these payments are due. 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 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 fiscal 1999, the Company has taken delivery of 100 new trucks and has
sold 252 trucks, reducing its fleet to 728 at June 30, 1999. The Company has
entered into an agreement to purchase 800 new trucks for its fleet with
deliveries beginning in July of 1999 and continuing through June of 2000.
The Company will sell approximately 625 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 $40,541,000. 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.
Inflation
Inflation continues to have a minimal impact on operations.
Seasonality
In the trucking industry generally, results of operations show a seasonal
pattern because customers reduce shipments during the winter. The Company's
operating efficiency historically decreases during the winter months due to
increased maintenance costs, reduced fuel efficiency, detours and delays for
weather.
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 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
expects to convert its systems during the fourth quarter of calendar year
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.
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 7a. 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 of the Notes to
Consolidated Financial Statements for details on the Company's long-term
debt.
Item 8. Financial Statements and Supplementary Data
The response to this Item is presented in a separate section of this report.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 11, 1998, the Company dismissed its independent auditors, Baird,
Kurtz & Dobson, and on the same date engaged the firm of Arthur Andersen LLP
as its independent auditors for the fiscal year ending June 30, 1998. Each
of these actions was approved by the Board of Directors of the Company.
The reports of Baird, Kurtz & Dobson on the financial statements of the
Company for the fiscal year ended June 30, 1997 did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audit of the Company's financial statements for the
fiscal year ended June 30, 1997, and in the subsequent interim period prior
to the dismissal of Baird, Kurtz & Dobson, there were no disagreements with
Baird, Kurtz & Dobson on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Baird, Kurtz & Dobson,
would have caused it to make reference to the subject matter of the
disagreement in its report.
Part III
Item 10. Directors and Executive Officers of Registrant
Certain information about directors and executive officers of the Company is
set forth below:
Name Age Position
Dean G. Cannon 58 President and Chairman of the Board
Rose Marie Cannon 58 Secretary, Treasurer and Director
Larry L. Patrick 54 Vice President
Duane Wormington 42 Vice President of Finance
Dean G. Cannon has been the President and a Director of Cannon Express Corp.,
the wholly-owned operating subsidiary of the Company, from 1981 to the
present and has served as President and as Director of the Company since its
inception. Dean G. Cannon is the husband of Rose Marie Cannon.
Rose Marie Cannon has been the Secretary, Treasurer and a Director of Cannon
Express Corp., from 1981 to the present and has served as Secretary,
Treasurer and Director of the Company since its inception. Rose Marie Cannon
is the wife of Dean G. Cannon.
Larry L. Patrick has been Vice-President of Cannon Express Corp. from 1991 to
the present. Prior to his employment with Cannon Express Corp., Mr. Patrick
was employed by Wal-Mart Stores, Inc. in Bentonville, Arkansas.
Duane Wormington has been Vice-President of Finance of Cannon Express Corp.
from 1987 to the present. Mr. Wormington is a graduate of Southwest Baptist
University in Bolivar, Missouri and is a Certified Public Accountant.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file with the Securities and Exchange
Commission reports of ownership and changes in ownership of common stock and
other equity securities of the Company. Officers, directors and greater than
10% shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such reports furnished to the
Company, or written representations from certain reporting persons, the
Company believes that, during the 1999 fiscal year, all filing requirements
were complied with as they apply to its officers, directors and greater than
10% beneficial owners. The remainder of this item is incorporated by
reference from the Company's Notice and Proxy Statement for its annual
meeting of stockholders to be held on Tuesday, November 16, 1999.
Item 11. Executive Compensation
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday,
November 16, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday,
November 16, 1999.
Item 13. Certain Relationships and Related Transactions
This item is incorporated by reference from the Company's Notice and Proxy
Statement for its annual meeting of stockholders to be held on Tuesday,
November 16, 1999.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and
(2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) The exhibits as listed in the Exhibit Index, are submitted as a
separate section of this report. In accordance with SEC Rules,
the following is a list of all Compensatory Plans or Arrangements
of the Company:
Cannon Express 401(k)
Cannon Express, Inc. Incentive Stock Option Plan
(b) On June 11, 1998, the Company filed a Form 8-K reporting Item 4 -
Change in Registrant's Certifying Accountant.
(c) See Item 14(a)(3) above.
(d) The response to this portion of Item 14 is submitted as a separate
section of this report.
INDEX TO EXHIBITS
3. (a) Certificate of Incorporation(1)
3. (b) Certificate of Amendment of Certificate of Incorporation(1)
3. (c) Bylaws of the Company(1)
3. (d) Amended Bylaws(1)
10.(a) Lease between the Company and Dean G. Cannon and Rose Marie
Cannon(2)
10.(b) Incentive Stock Option Plan(2)
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-18, dated February 26, 1987.
(2) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1988.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. Dated this 24th
day of September, 1999.
Cannon Express, Inc.
By: /s/ Dean G. Cannon
Dean G. Cannon,
Chairman, Chief Executive Officer
(Principal Executive Officer and
Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Rose Marie Cannon By: /s/ Roy E. Stanley
Rose Marie Cannon Roy E. Stanley
Director, Secretary and Treasurer Director
By: /s/ Uvalde R. Lindsey
Uvalde R. Lindsey
Director
FORM 10-K-ITEM 8, ITEM 14(a)(1) AND (2)CANNON EXPRESS, INC., AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Cannon Express, Inc., and
Subsidiaries are included in Item 8:
Independent Accountants' Reports
Consolidated Balance Sheets as of June 30, 1999 and 1998.
Consolidated Statements of Income for the years ended June 30, 1999,
1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
1998 and 1997.
Notes to Consolidated Financial Statements-June 30, 1999.
The following consolidated financial statement schedule of Cannon Express,
Inc., and Subsidiaries is included in Item 14(d):
Independent Accountants' Report
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of Cannon Express, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Cannon
Express, Inc. and Subsidiaries (a Delaware corporation) as of June 30, 1999
and 1998, and the related statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The
consolidated financial statements of Cannon Express, Inc. and Subsidiaries
for the year ended June 30, 1997, were audited by other auditors whose report
dated August 20, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cannon Express, Inc. and
Subsidiaries as of June 30, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index as
item 14(d) is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Fayetteville, Arkansas
July 28, 1999
Independent Accountants' Report
Board of Directors and Stockholders
Cannon Express, Inc. and Subsidiaries
Springdale, Arkansas
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of CANNON EXPRESS, INC. AND
SUBSIDIARIES for the year ended June 30, 1997. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of CANNON EXPRESS, INC. AND SUBSIDIARIES for the year ended June 30,
1997, in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Fayetteville, Arkansas
August 20, 1997
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 June 30
1999 1998
Assets
Current assets:
Cash and cash equivalents $9,683,794 $3,817,505
Receivables, less allowance for doubtful accounts
(1999--$199,579; 1998--$158,656):
Trade 8,896,331 9,582,372
Other 1,963,418 1,473,937
Prepaid expenses and supplies 1,627,778 1,325,024
Deferred income taxes 1,907,000 1,875,000
Total current assets 24,078,321 18,073,838
Property and equipment:
Land, buildings and improvements 1,230,945 1,210,138
Revenue equipment 80,264,223 92,546,207
Service, office and other equipment 2,885,076 2,743,709
84,380,244 96,500,054
Less allowance for depreciation 35,918,227 37,193,306
48,462,017 59,306,748
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,381,084 2,386,832
Marketable securities 593,110 584,322
Other 429,815 511,332
3,427,415 3,505,892
$75,967,753 $80,886,478
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
June 30 June 30
1999 1998
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $1,849,931 $1,609,825
Accrued expenses:
Insurance reserves 3,295,528 3,144,259
Other 2,246,756 1,758,047
Federal and state income taxes payable 2,707,890 2,208,632
Current portion of long-term debt 16,861,875 18,794,463
Total current liabilities 26,961,980 27,515,226
Long-term debt, less current portion 25,999,343 29,768,122
Deferred income taxes 4,809,000 4,752,000
Other liabilities 27,569 100,862
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,265,401 shares in
1999 and 3,252,986 shares in 1998 32,654 32,530
Additional paid-in capital 3,747,575 3,720,988
Retained earnings 14,709,630 15,197,014
Accumulated other comprehensive income,
net of income tax credit of $(74,955) in 1999 (119,734) -
18,370,125 18,950,532
Less treasury stock, at cost (60,125 shares in 1999
and 1998) 200,264 200,264
18,169,861 18,750,268
$75,967,753 $80,886,478
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended June 30
1999 1998 1997
Operating revenue $95,212,908 $109,244,998 $106,136,268
Operating expenses and costs:
Salaries, wages and fringe benefits 36,083,271 36,125,916 36,107,009
Operating supplies and expenses 29,947,122 31,376,630 32,850,698
Operating taxes and licenses 5,538,612 5,856,056 6,303,495
Insurance and claims 4,263,032 5,162,252 5,652,229
Depreciation and amortization 9,866,614 12,610,998 11,944,877
Rents and purchased transportation 5,202,381 9,477,138 6,359,400
Other 2,394,860 2,210,183 1,695,537
93,295,892 102,819,173 100,913,245
Operating income 1,917,016 6,425,825 5,223,023
Other income (expense):
Interest expense (3,004,970) (3,257,990) (3,793,219)
Interest and dividend income 361,460 346,288 290,495
Loss on marketable equity securities (27,890) (1,025,536) (40,438)
(2,671,400) (3,937,238) (3,543,162)
Income (loss) before income taxes (754,384) 2,488,587 1,679,861
Federal and state income taxes:
Current (292,000) 122,000 289,000
Deferred (Credit) 25,000 552,000 (41,000)
(267,000) 674,000 248,000
Net income (loss) $ (487,384) $ 1,814,587 $ 1,431,861
Basic earnings (loss) per share $ (0.15) $ 0.57 $ 0.45
Average shares and share
equivalents outstanding 3,197,896 3,170,775 3,147,458
Diluted earnings (loss) per share $ (0.15) $ 0.56 $ 0.44
Diluted shares and share
equivalents outstanding 3,197,896 3,252,931 3,233,063
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Additional Accumulated
Common Paid-In Retained Other Comp. Treasury
Stock Capital Earnings Income Stock Total
Balances at
July 1, 1996 $32,058 $3,542,356 $11,950,566 $906,836 $(185,887) $16,245,929
Comprehensive income
Net income - - 1,431,861 - - 1,431,861
Accumulated other
comprehensive income
Unrealized depreciation
on marketable
securities - - - (1,456,530) - (1,456,530)
Realized loss on
marketable
securities - - - 40,438 - 40,438
Total comprehensive income 15,769
Purchase of
treasury stock - - - - (14,377) (14,377)
Balances at
June 30, 1997 32,058 3,542,356 13,382,427 (509,256)(200,264) 16,247,321
Comprehensive income
Net income - - 1,814,587 - - 1,814,587
Accumulated other
comprehensive income
Write-down of marketable
securities - - - 509,256 - 509,256
Total comprehensive income 2,323,843
Stock issued:
Exercise of
options 472 102,212 - - - 102,684
Tax benefit of
stock options - 76,420 - - - 76,420
Balances at
June 30, 1998 32,530 3,720,988 15,197,014 - (200,264) 18,750,268
Comprehensive income
Net loss - - (487,384) - - (487,384)
Accumulated other
comprehensive income
Unrealized depreciation
on marketable
securities - - - (147,624) - (147,624)
Realized loss on
marketable
securities - - - 27,890 - 27,890
Total comprehensive income (607,118)
Stock issued:
Exercise of
options 124 26,587 - - - 26,711
Balances at
June 30,1999 $32,654 $3,747,575 $ 14,709,630 $(119,734) (200,264) $18,169,861
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30
1999 1998 1997
Operating activities
Net income (loss) $(487,384) $ 1,814,587 $ 1,431,861
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,077,769 13,075,545 12,071,467
Provision for losses on
accounts receivable 60,000 45,000 30,000
Provision (credit) for
deferred income taxes 25,000 552,000 (41,000)
Gain on disposal of equipment (3,211,610) (464,552) (126,590)
Loss on sale of marketable
securities 27,890 - 40,438
Write-down of marketable securities - 1,025,536 -
Changes in operating assets
and liabilities:
Receivables 136,560 (1,097,068) 4,296,971
Prepaid expenses and supplies (205,319) (107,869) 253,784
Accounts payable, accrued expenses,
income taxes payable, and other
liabilities 1,454,297 (71,118) 1,451,874
Other assets - (11,400) 137,329
Net cash provided by
operating activities 10,877,203 14,760,661 19,546,134
Investing activities
Purchases of property and equipment (7,174,194) (12,926,251) (19,456,822)
Net decrease (increase)
in restricted cash 5,748 (176,806) (1,440,000)
Investment in outside
driver training facility (280,000) - -
Purchases of marketable securities - - (89,509)
Proceeds from sales of marketable
securities 48,633 50,000 103,313
Proceeds from equipment sales 8,063,555 1,538,650 5,333,239
Net cash provided by (used in)
investing activities 663,742 (11,514,407) (15,549,779)
Financing activities
Proceeds from long-term borrowings 12,506,871 11,045,720 16,358,829
Principal payments on long-term debt
and capital lease obligations (18,208,238) (14,572,779) (20,515,100)
Proceeds from exercise of
stock options 26,711 102,684 -
Purchase of treasury stock - - (14,377)
Net cash used in
financing activities (5,674,656) (3,424,375) (4,170,648)
Increase (decrease) in cash and
cash equivalents 5,866,289 (178,121) (174,293)
Cash and cash equivalents
at beginning of year 3,817,505 3,995,626 4,169,919
Cash and cash equivalents
at end of year $ 9,683,794 $ 3,817,505 $ 3,995,626
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
1. Nature of Operations and Summary of Significant Accounting Policies
Consolidation and Business - The consolidated financial statements include
the accounts of Cannon Express, Inc. (the "Company" ) and its subsidiaries.
All intercompany accounts and transactions have been eliminated.
The Company operates as an irregular route, truckload carrier.
Property and Equipment - Property and equipment are recorded at cost. For
financial reporting purposes, the cost of such property is depreciated by the
straight-line method. For tax reporting purposes, accelerated cost recovery
methods are used. Gains on exchanges of revenue equipment are used to reduce
the basis of the replacement equipment. Tires purchased with revenue
equipment have been capitalized as a part of the cost of such equipment;
however, replacement tires are expensed when placed in service.
Income Taxes - Deferred tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of
assets and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax asset
will not be realized.
Revenue Recognition - The Company recognizes revenue and related direct
expenses when freight is delivered.
Comprehensive Income - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, during fiscal year
ending June 30, 1999. This statement establishes standards for reporting and
display of comprehensive income and its components. The Company has
reclassified all years presented to reflect comprehensive income and its
components in the Consolidated Statements of Changes in Stockholders' Equity.
Earnings per Share - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, effective June 30, 1998, and
all earnings per share amounts disclosed herein have been calculated under
the provisions of the SFAS No. 128. Basic earnings per share is computed
based on the weighted average number of shares outstanding during the year,
while diluted earnings per share is based on the weighted average number of
shares adjusted to include common stock equivalents attributable to dilutive
warrants and stock options.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
In computing Diluted earnings per share, only potential common shares that
are dilutive - those that reduce earnings per share or increase loss per
share - are included. Exercise of options and warrants or conversion of
convertible securities is not assumed if the result would be antidilutive,
such as when a loss from continuing operations is reported. The "control
number" for determining whether including potential common shares in the
Diluted earnings per share computation would be antidilutive is income from
continuing operations. As a result, if there is a loss from continuing
operations, Diluted earnings per share would be computed in the same manner
as Basic earnings per share is computed, even if an entity has net income
after adjusting for discontinued operations, an extraordinary item or the
cumulative effect of an accounting change. The Company has incurred a loss
from continuing operations and a net loss for the year ended June 30, 1999.
Therefore, Basic earnings per share and Diluted earnings per share are computed
in the same manner. Although such financial instruments were not included due
to being antidilutive, the Company does have potentially dilutive financial
instruments in the form of warrants and options.
Insurance -The Company is self insured up to certain limits for workers'
compensation, cargo loss and damage, and certain property damage and
liability claims. Provision has been made for the estimated liabilities for
such claims as incurred, including liabilities for claims incurred but not
reported. The amount of actual losses incurred could differ materially from
the estimates reflected in these financial statements.
The Company's insurance activities are secured by $2,731,000 in letters of
credit. Restricted cash of $2,381,084 and $2,386,832 at June 30, 1999 and
1998, respectively, represents certificates of deposit held as collateral for
these letters of credit.
Cash Equivalents - The Company considers all highly liquid investments, with
a maturity of three months or less when purchased, to be cash equivalents.
Marketable Equity Securities - Noncurrent marketable equity securities for
which the Company has no immediate plan to sell are classified as available-
for-sale and carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in stockholders'equity.
Realized gains and losses, based on the specifically identified cost of the
security, are included in net income.
The amortized cost and approximate fair values of noncurrent marketable
equity securities classified as available-for-sale are as follows:
June 30
1999 1998
Cost $ 787,799 $ 584,322
Unrealized losses (194,689) -
Fair value $ 593,110 $ 584,322
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
A single equity security accounted for approximately 48% and 95% of the fair
value of marketable equity securities at June 30, 1999 and June 30, 1998,
respectively.
Proceeds from sales of available-for-sale equity securities were $48,633,
$50,000 and $103,313 for 1999, 1998 and 1997, respectively. Resultant gross
losses of $(27,890), $(1,025,536) and $(40,438) were recognized and included
in net income for 1999, 1998 and 1997, respectively. At June 30, 1998, the
Company recognized a loss on available-for-sale equity securities of
$1,025,000. The Company's available-for-sale equity securities were recorded
at their market value as of June 30, 1999 and 1998.
Deferred income taxes (Note 3) related to the net change in unrealized
appreciation (depreciation) on available-for-sale securities, shown in
stockholders' equity, were approximately $(74,955), $0 and $(886,000) for
1999, 1998 and 1997, respectively.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification - Certain reclassifications have been made to the 1998 and
1997 financial statements to conform to the 1999 financial statement
presentation. These reclassifications had no effect on net income.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Long-term Debt
June 30
1999 1998
Equipment notes (1) $ 17,553,870 $ 16,250,382
Capitalized lease obligations (2) 25,307,348 32,312,203
42,861,218 48,562,585
Less current portion 16,861,875 18,794,463
$ 25,999,343 $ 29,768,122
(1)Represents loans on revenue equipment, payable in various installments
through 2002 with a weighted average interest rate of 6.72%. Revenue
equipment having a book value of approximately $17,505,822 at June 30, 1999
is pledged as collateral. The carrying amount of equipment notes payable
approximates fair value at June 30, 1999.
(2)Capitalized lease obligations are for revenue equipment with an aggregate
net book value of approximately $24,575,096 at June 30, 1999. The leases
have a weighted average interest rate of 5.9%. The leases extend from three
to seven years and contain renewal or fixed price purchase options. The
lease agreements require the Company to pay property taxes, maintenance and
operating expenses.
Annual maturities of long-term debt, excluding capitalized lease obligations
(Note 5) at June 30, 1999, are:
2000 $ 7,514,816
2001 3,741,272
2002 6,297,782
2003 -
2004 -
$17,553,870
Interest paid was approximately $2,916,000, $3,203,000 and $3,737,000 during
1999, 1998 and 1997, respectively.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Federal and State Income Taxes
A reconciliation between the effective income tax rate and the statutory
federal income tax rate is presented in the following table:
Years ended
June 30
1999 1998 1997
Income taxes at the statutory
federal rate of 34% $ (256,000) $ 846,000 $ 571,000
Federal income tax effects of:
Equipment leasing transactions - (266,000) (376,000)
Other 19,000 17,000 25,000
Federal income taxes (237,000) 597,000 220,000
State income taxes (30,000) 77,000 28,000
$ (267,000) $ 674,000 $ 248,000
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
June 30
1999 1998
Temporary Differences
Self-insurance accruals $ 1,264,000 $ 1,189,000
Allowance/valuation reserves 498,000 419,000
Revenue recognition 84,000 112,000
Prepaids and other 61,000 155,000
Net current deferred income tax asset $ 1,907,000 $ 1,875,000
Depreciation $(14,888,000) $(17,517,000)
Revenue equipment leases 9,690,000 12,372,000
Valuation of available-for-sale securities 389,000 393,000
Net non-current deferred income
tax liability $ (4,809,000) $ (4,752,000)
The Company made income tax payments of approximately $94,000, $50,000 and
$209,000 during 1999, 1998 and 1997, respectively.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Common Stock
Treasury Stock - In March 1990, the Board of Directors approved the purchase
from time to time in open market transactions of up to 150,000 shares of
common stock. As of June 30, 1999, 60,125 shares at an average price of
$3.33 per share are included as treasury stock on the balance sheets. During
the year ended June 30, 1997, 2,000 shares of treasury stock were purchased
at an average price of $7.19 per share. No purchases were made in fiscal
1999 and 1998.
Stock Options - The Company has reserved 1,000,000 shares of common stock for
issuance under the Company's Incentive Stock Option Plan. Options are granted
for five to ten year terms and are exercisable in cumulative increments of 10
to 20% annually, commencing one year after the date of grant, except for
certain options which vest 100% after five years from the date of grant.
Additionally, from time to time, the Company issues stock options to non-
employee directors and a consultant. At June 30, 1999, there were 16,932
common stock options outstanding for non-employee directors. These options
have been included in the following summary information.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plan. There were no options granted during fiscal year 1999 and
1998. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the effect on the Company's
net income and earnings per share would not be materially different from
amounts reported.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0%; expected
volatility of 50.6%; risk-free interest rate of 6.25% and expected lives
range from 7 to 10 years.
Option transactions are summarized as follows (adjusted for all stock
distributions, redemptions and splits):
1999 1998 1997
Common Common Common
Wt Avg Wt Avg Wt Avg
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at July 1 175,612 $5.33 222,821 $4.66 178,157 $4.34
Granted - - - - 56,500 6.47
Exercised (12,415) 2.15 (47,209) 2.17 - -
Canceled (24,000) 6.17 - - (11,836) 8.50
Outstanding at June 30 139,197 $5.47 175,612 $ 5.33 222,821 $4.66
Weighted average remaining life 3.32 years
Exercisable at June 30 111,180 120,967 158,417
Weighted average price $5.23
Price range at June 30 $2.12 to $7.59 $1.93 to $7.59 $1.93 to $7.59
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Common Stock (Continued)
Earnings Per Share
June 30
1999 1998 1997
Average shares outstanding 3,197,896 3,170,775 3,147,458
Net effect of dilutive stock options - 82,156 85,605
Diluted shares outstanding 3,197,896 3,252,931 3,233,063
Net income (loss) for the period $ (487,384) $ 1,814,587 $ 1,431,861
Basic earnings (loss) per share $ (0.15) $ 0.57 $ 0.45
Diluted earnings (loss) per share $ (0.15) $ 0.56 $ 0.44
5. Leases and Commitments
The future minimum payments under capitalized leases at June 30, 1999,
consisted of the following:
2000 $10,436,795
2001 3,947,600
2002 6,367,549
2003 1,500,497
2004 1,500,497
Thereafter 5,031,638
Total minimum lease payments 28,784,576
Amounts representing interest 3,477,228
Present value of net minimum lease
payments included in long-term debt
($9,347,059 due in 2000) (Note 2) $25,307,348
Assets held under capital leases are included in property, plant and equipment
as follows:
1999 1998
Revenue equipment $37,936,720 $50,754,631
Accumulated depreciation 13,361,624 19,764,355
$24,575,096 $30,990,276
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Leases and Commitments (Continued)
During 1999 and 1998, the Company incurred capital lease obligations totaling
approximately $5,500,000 and $11,046,000, respectively. No capital lease
obligations were incurred in 1997.
The capital lease obligation incurred during fiscal 1999 was the result of a
sale/leaseback transaction for certain of its trucks which had been purchased
for cash during the quarter ended December 31, 1996. The 37 month lease
requires approximate future minimum lease payments of approximately
$1,128,000, $1,185,000 and $2,532,000 for the years ending June 30, 2000,
June 30, 2001 and June 30, 2002, respectively. The lease contains an early
purchase option which may be exercised in the fiscal year ending June 30,
2000.
Capitalized lease amortization is included in depreciation expense.
6. 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.
7. Related Party Transactions
The Company leases a facility from the majority stockholders of the Company.
The lease provides for monthly rental payments of $3,000. Rent totaled
$36,000, $36,000 and $30,000 for the years ended June 30, 1999, 1998 and
1997, respectively. The Company pays all insurance, taxes and maintenance
costs with respect to the facility. The lease is cancelable by the Company on
30 days notice.
In September 1996, the Company entered into a receivables purchase agreement
for up to $6 million of certain of its accounts receivable with CUSA, Inc., a
limited partnership which includes Alice L. Walton as one of its partners.
Ms. Walton, who owns approximately 9% of the outstanding shares of the
Company, is a 9.9% limited partner in CUSA, Inc.
In 1999, the Company paid financial advisory fees totaling $75,000 to Llama
Company in return for services rendered to the Company. Alice L. Walton is
the Chairman and General Partner of Llama.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Concentration of Business and Credit Risk
The Company provides services to customers throughout the United States and
Canada. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Historically, credit losses have not
been significant.
One unaffiliated customer (Wal-Mart Stores, Inc.) accounted for approximately
29%, 47%, and 51% of revenue for fiscal 1999, 1998 and 1997, respectively.
Accounts receivable as of June 30 for this customer totaled approximately
$1,234,000 and $3,040,000 for 1999 and 1998, respectively. A second
unaffiliated major customer accounted for approximately 13%, 14%, and 16% of
revenue in 1999, 1998 and 1997, respectively. Accounts receivable as of June
30 for this customer totaled approximately $1,654,000 and $1,454,000 for 1999
and 1998, respectively.
9. Profit-Sharing Plan
The Company has a profit-sharing plan covering all employees who have been
employed a minimum of one year and attained the age of twenty-one. The
Company's contributions to the plan are determined annually by the Board of
Directors. Contributions are limited to 10% of total compensation paid to
participants during the plan year. Participant interests are 100% vested
after completion of three years of service. No contributions were made to
the plan in 1999, 1998 or 1997.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Quarterly Results of Operations (Unaudited)
Fiscal 1999
September 30 December 31 March 31 June 30
Operating revenue $24,662,417 $24,091,602 $22,700,681 $23,758,208
Operating expenses
and costs 23,816,373 23,631,151 23,072,915 22,775,453
Operating income (loss) 846,044 460,451 (372,234) 982,755
Other income(expense),net 67,516 60,317 101,434 104,303
Interest expense 812,368 748,908 743,133 700,561
Income (loss) before
income taxes 101,192 (228,140) (1,013,933) 386,497
Income taxes 39,000 (88,000) (390,000) 172,000
Net income (loss) $ 62,192 $ (140,140) $ (623,933) $ 214,497
Basic earnings(loss)
per share $ 0.02 $ (0.04) $ (0.19) $ 0.07
Average shares and share
equivalents outstanding 3,192,861 3,192,861 3,200,586 3,205,276
Diluted earnings(loss)
per share $ 0.02 $ (0.04) $ (0.19) $ 0.07
Diluted shares and share
equivalents outstanding 3,244,877 3,192,861 3,200,586 3,212,161
Fiscal 1998
September 30 December 31 March 31 June 30
Operating revenue $28,057,837 $30,884,078 $26,023,161 $24,279,922
Operating expenses
and costs 26,590,610 28,214,790 24,716,760 23,297,013
Operating income 1,467,227 2,669,288 1,306,401 982,909
Other income(expense), net 98,808 77,929 104,865 (960,850)
Interest expense 901,770 863,009 766,899 726,312
Income (loss) before
income taxes 664,265 1,884,208 644,367 (704,253)
Income taxes 43,000 654,000 248,000 (271,000)
Net income (loss) $ 621,265 $1,230,208 $396,367 $ (433,253)
Basic earnings (loss)
per share $ 0.20 $ 0.39 $ 0.13 $ (0.14)
Average shares and share
equivalents outstanding 3,146,552 3,167,621 3,176,097 3,192,861
Diluted earnings (loss)
per share $ 0.19 $ 0.38 $ 0.12 $ (0.14)
Diluted shares and share
equivalents outstanding 3,225,826 3,266,308 3,257,935 3,192,861
Independent Accountants' Report
Board of Directors and Stockholders
Cannon Express, Inc. and Subsidiaries
Springdale, Arkansas
In connection with our audit of the consolidated financial statements of
CANNON EXPRESS, INC. AND SUBSIDIARIES for the year ended June 30, 1997,
we have also audited the following financial statement schedule. This
financial statement schedule is the responsibility of the Companies'
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit of the basic financial statements. The
schedule is presented for purposes of complying with the Securities and
Exchange Commission's rules and regulations and is not a required part of the
consolidated financial statements.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
BAIRD, KURTZ & DOBSON
Fayetteville, Arkansas
August 20, 1997
Cannon Express, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E Column F
Additions
(1) (2)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Accounts Deductions- End of
Description Period Expenses Describe Describe Period
Year ended June 30, 1999:
Deducted from asset accounts:
Reserve for doubtful trade
receivables $158,656 $ 60,000 $ 19,077(A) $ 199,579
Year ended June 30, 1998:
Deducted from asset accounts:
Reserve for doubtful trade
receivables $183,411 $ 45,000 $ 69,755(A) $ 158,656
Year ended June 30, 1997:
Deducted from asset accounts:
Reserve for doubtful trade
receivables $171,175 $ 30,000 $ 17,764(A) $ 183,411
(A)Uncollectible accounts written off, net of recoveries.
Shareholder Information
Form 10-K Availability
A copy of the 1999 Form 10-K filed with the Securities and Exchange
Commission will be forwarded, upon request, to any shareholder. Requests
should be directed to:
Dean G. Cannon
Cannon Express, Inc.
P.O. Box 364
Springdale, Arkansas 72765
Transfer Agent and Registrar
Continental Stock Transfer
and Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Stock Listing
American Stock Exchange
Symbol:
AB
Independent Auditors
Arthur Andersen LLP
Fayetteville, Arkansas
Communications Directory
Corporate Offices: Cannon Express, Inc., 1457 E. Robinson, Springdale,
Arkansas 72764.
Mailing Address: Post Office Box 364, Springdale, Arkansas 72765.
Telephone: (501) 751-9209.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 9683794
<SECURITIES> 593110
<RECEIVABLES> 11059328
<ALLOWANCES> 199579
<INVENTORY> 0
<CURRENT-ASSETS> 24078321
<PP&E> 84380244
<DEPRECIATION> 35918227
<TOTAL-ASSETS> 75967753
<CURRENT-LIABILITIES> 26961980
<BONDS> 0
0
0
<COMMON> 32654
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 75967753
<SALES> 95212908
<TOTAL-REVENUES> 95212908
<CGS> 0
<TOTAL-COSTS> 93295892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3004970
<INCOME-PRETAX> (754384)
<INCOME-TAX> (267000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (487384)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
