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, 2000 ( )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, 2000: $2,987,596. Number of shares of common stock outstanding at August 31, 2000: 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 21, 2000. 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, 2000, the Company operated a fleet of 775 tractors and 2,280 trailers, and employed 935 people, none of whom is represented by a collective bargaining agreement. Revenues from truckload operations accounted for approximately 95% of total revenues for the year ended June 30, 2000. The Company also provides logistics services utilizing equipment and services provided by unrelated third parties in the transportation industry. Revenues from logistics services represented approximately 5% of total revenues realized for the year ended June 30, 2000. 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, 2000, Wal-Mart Stores, Inc. ("Wal-Mart") accounted for 17.9% and International Paper, Inc. accounted for 9.4% of the Company's operating revenue. During the fiscal years ended June 30, 1999 and 1998, Wal-Mart accounted for 28.9% and 47.0%, respectively, and International Paper accounted for 13.1% and 14.4%, 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 and 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 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 required that the Company also purchase new computer hardware. 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 converted its systems during the second half of calendar year 1999. Drivers and Other Employees As of June 30, 2000, the Company employed 714 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 January 1, 2000, the Company implemented an increase in drivers' starting base pay ranging from 2 to 4 cents per mile and discontinued paying its drivers a quarterly performance bonus. The Company has targeted its pay increase and its recruiting efforts toward drivers with 3 or more years driving experience. Company drivers who qualify are also paid an annual safety bonus. Company drivers were awarded approximately $238,000 in safety bonuses during fiscal 2000 as compared with approximately $1,300,000 awarded during fiscal 1999. Prior to December 1999, the Company's drivers were awarded quarterly performance bonuses, which were added into their base pay after December 1999. Like other truckload carriers, the Company experiences significant driver turnover. The Company experienced a shortage of qualified drivers during fiscal 2000. 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 an effort to improve its operating results, the Company implemented a new program during fiscal 2000 in which owner-operators may qualify to lease/purchase a truck and be paid a percentage of the Company's revenue to operate the truck 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, 2000, the Company employed: 2000 1999 Drivers and Driver Trainees (incl. Owner-Operators) 714 700 Management 16 16 Operations, Marketing, and Administration 144 142 Maintenance and Repair 61 89 Total 935 947 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, 2000, the fleet consisted of 775 tractors and 2,280 trailers, compared to 728 tractors and 2,314 trailers at June 30, 1999. During the fiscal year ended June 30, 2000, 620 tractors were sold and 667 new tractors were added to the fleet. In an effort to improve its operating results, the Company during the fiscal year ending June 30, 2000, 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. In addition, the Company added 200 new trailers and sold 234 trailers during the fiscal year ended June 30, 2000. 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, 2000, substantially all of the Company's tractors were manufactured by International, while trailers were manufactured by Pines and Great Dane. 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, 2000: MODEL OVER-the-ROAD 48-FOOT 53-FOOT YEAR TRACTORS TRAILERS TRAILERS 2001 55 - 100 2000 612 - 100 1999 100 - - 1998 - - 596 1997 - - 297 1996 2 297 - 1995 3 667 - 1994 - 141 - 1993 thru 1983 3 82 - 775 1,187 1,093 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 2000, the Company's average cost per gallon was approximately 30 cents higher than in fiscal 1999. During the 4th quarter of fiscal 2000, the Company's average price per gallon was 32 cents higher than in the same period of the previous year. Although the average price per gallon was higher, the Company's total cost of fuel decreased due to its smaller fleet and because owner operators are responsible for purchasing their own fuel. However, owner operators receive a fuel surcharge for their higher fuel costs, whether or not the Company is able to pass the surcharge on to its customers. As of September 25, 2000, the average cost of a gallon of diesel fuel was approximately 47 cents higher than in the previous year. 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. Although the Company has 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. The current cost or 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. Canadian business activities represent less than 1% of total company operations. 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 and 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, a decision has been rendered against the Company by the Equal Employment Opportunity Commission ("EEOC") for unlawful hiring practices regarding pre-employment questions about medical issues. The Company believed it was required by Department of Transportation regulations to ask these questions. The Company is unable to predict the range of any possible penalties imposed, but does believe that the resulting penalties will not have a material adverse effect on profitability or financial position of the Company. 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, 2000: First Quarter $ 3 7/16 $ 2 3/4 Second Quarter 3 5/8 2 Third Quarter 2 3/4 1 5/8 Fourth Quarter 2 5/8 1 3/8 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, 2000 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, 2000 1999 1998 1997 1996 (in thousands except per share data) Operating Revenue $91,779 $95,213 $109,245 $106,136 $89,991 Income (loss) before cumulative effect of change in accounting principle 520 (487) 1,815 1,432 2,159 Basic and diluted earnings (loss) per share(1, 2 & 3): .16 (.15) .57 .45 .69 Total assets $103,889 $75,968 $80,886 $81,188 $84,358 Long term debt, less current portion $56,648 $25,999 $29,768 $35,393 $43,964 (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. (3) Calculation for 2000 does not include effect of certain out of market options as they are antidilutive. (See Note 1 of the Notes to Consolidated Financial Statements). 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, 2000 1999 1998 Operating revenue 100.0% 100.0% 100.0% Operating expenses and costs: Salaries, wages and fringe benefits 28.1% 37.9% 33.1% Operating supplies and expenses 24.1 31.5 28.7 Operating taxes and licenses 4.5 5.8 5.4 Insurance and claims 5.2 4.5 4.7 Depreciation and amortization 4.4 10.4 11.5 Rents and purchased transportation 28.8 5.5 8.7 Other 3.0 2.4 2.0 Total operating expenses 98.1 98.0 94.1 Operating income 1.9 2.0 5.9 Other income (expense): Interest and dividend income 0.5 0.4 0.3 Gain (loss) on marketable securities (0.1) (0.0) (0.9) Interest expense (4.2) (3.2) (3.0) Income (loss) before income taxes (1.9) (0.8) 2.3 Income taxes (2.5) (0.3) 0.6 Net income (loss) 0.6% (0.5)% 1.7% RESULTS OF OPERATIONS: Fiscal year ended June 30, 2000 compared to Fiscal year ended June 30, 1999 Operating revenue for fiscal 2000 decreased 3.6% or $3,434,142 to $91,778,766. The Company's revenue continued to be negatively impacted by a shortage of qualified drivers to operate its trucks in fiscal 2000. Logistics and intermodal revenue during fiscal 2000 increased by $1,875,820, or 35.7%, over the comparable period in fiscal 1999. Management intends to continue to increase its activities in the logistics area as additional opportunities arise. Salaries, wages and fringe benefits decreased 28.4% or $10,262,802 to $25,820,469 in fiscal 2000. This decrease was largely due to the Company's smaller fleet and to the Company's implementation of its lease program for owner operators. Operating supplies and expenses decreased 26.2% or $7,858,124 to $22,088,998 in fiscal 2000. Fuel costs for the fiscal year ended June 30, 2000 averaged 30 cents per gallon higher than in the comparable period of fiscal 1999, which together with a decrease in total miles driven of 8,225,126 and the purchase of fuel by owner operators, decreased operating expense by approximately $2,560,000 during the 12 month period. Maintenance and tire costs also decreased by approximately $4,580,000 due to the increase in owner operators, who are responsible for these costs. Operating taxes and licenses decreased 26.1% or $1,446,785 to $4,091,827 in fiscal 2000 primarily due to lower fuel taxes as the result of fewer miles driven and to the increase in owner operators. Insurance and claims increased 12.4% or $527,042 to $4,790,074 in fiscal 2000. The major portion of this increase was due to workers' compensation reserves which the Company anticipates will be paid out to an ex-driver who was seriously injured in a one-vehicle accident. The Company's claims costs also increased slightly due to accident settlements which were in excess of reserve amounts. Depreciation and amortization decreased 59.4% or $5,859,622 to $4,006,992 in fiscal 2000. This decrease is primarily due to a gain on sale of equipment of $5,163,933 which was realized in fiscal 2000 as compared to a gain of $3,211,610 in fiscal 1999 as gains are netted against depreciation and amortization. Rents and purchased transportation increased 409.6% or $21,308,726 to $26,511,107 in fiscal 2000 primarily due to payments made to the Company's owner operators and to increased logistics activities. The Company's operating ratio increased to 98.1% for fiscal 2000 from 98.0% for the prior year, reflecting a decline of 0.1% for the period. Interest expense increased 27.8% or $833,937 in fiscal 2000 due to the increase in debt associated with the purchase of new equipment. 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 current income tax credit of $1,660,000 during fiscal year 2000. Net income for fiscal year ended June 30, 2000 was $520,501 ($.16 earnings per diluted share) compared to net loss of $(487,384) ($.15 loss per diluted share) during fiscal 1999, an increase of $1,007,885 or 206.8%. 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 compared to a gain of $464,552 in fiscal 1998 as the gain on sale of equipment is netted against depreciation and amortization. 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%. Liquidity and Capital Resources Cash flows from Operations - Operating activities provided cash of $2.5 million and $10.9 million in fiscal 2000 and 1999, respectively. Net cash flows from operations in fiscal 2000 were primarily the result of $0.5 million net income, $9.2 million in depreciation offset by $5.2 million from gain on disposal of assets, and a $2.0 million increase in accounts receivable and other assets. Cash flows from Investing Activities - Investing activities used net cash of $9.9 million in fiscal 2000 and provided net cash of $0.7 million in fiscal 1999. Purchases of new equipment totaling $32.1 million was offset by $22.2 million in equipment sales and other investing activities for 2000. Purchases of new equipment totaling $7.1 million was offset by $7.8 million in equipment sales and other investing activities for 1999. Cash flows from Financing Activities - Financing activities provided net cash of $6.0 million in fiscal 2000 and used net cash of $5.7 million in fiscal 1999. Working capital needs have been met primarily from cash generated from operations. During the fiscal year ended June 30, 2000, cash provided by operating activities was $2,528,822, down from $10,877,203 for the prior fiscal year ended June 30, 1999. The current ratio increased from 0.89 at June 30, 1999 to 1.64 at June 30, 2000. Working capital increased by $16.6 million to $13.7 million at June 30, 2000 from a deficit of $2.9 million at June 30, 1999. Approximately $6.6 million of this increase is due to the net investment in sales-type leases resulting from the owner-operator program. Under this program, an owner-operator may qualify to lease/purchase a truck. The current portion of lease payments due from owner-operators generates an increase in working capital. Historically, working capital needs have been met from cash generated from operations. Management believes that the Company's working capital will be sufficient for its short-term needs. During the fiscal year ended June 30, 2000, 620 tractors were sold and 667 new tractors were added to the fleet. The Company added 200 new trailers and sold 234 trailers during the fiscal year ended June 30, 2000. The Company, on April 1, 2000, launched an enterprise for trucking companies to share excess loads with each other for their mutual benefit. Carriersco- op.com is an innovative business-to-business internet-based method for carriers to increase their business, decrease expenses related to empty miles, provide more service to their customers, and decrease or eliminate the need for non-asset based third-party freight brokerage firms. Carriers will pay an annual fee for membership and the Company will receive a fee for each load accepted by a member carrier from the member carrier who posted the load. Member carriers receive discounts on their supplies from select advertisers who pay an annual fee to the Company for their representation on the Carriers Co-op website. Approximately 89,000 member trucks were represented on the co-op at June 30, 2000. The business is a wholly-owned subsidiary of the Company. The web address for Carriers Co-op is http://www.carriersco-op.com. 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. Historically, the Company's operating efficiency has decreased during the winter months due to increased maintenance costs, reduced fuel efficiency, detours and delays for weather. 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 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 None. 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 59 President and Chairman of the Board Rose Marie Cannon 59 Secretary, Treasurer and Director Larry L. Patrick 55 Vice President Duane Wormington 43 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 2000 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 21, 2000. 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 21, 2000. 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 21, 2000. 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 21, 2000. 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 28th day of September, 2000. 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 Rose Marie Cannon Director, Secretary and Treasurer By: /s/ Roy E. Stanley Roy E. Stanley 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: Report of Independent Public Accountants. Consolidated Balance Sheets as of June 30, 2000 and 1999. Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998. Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998. Notes to Consolidated Financial Statements as of June 30, 2000 and 1999. The following consolidated financial statement schedule of Cannon Express, Inc., and Subsidiaries is included in Item 14(d): 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, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. 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. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. 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 August 9, 2000 Cannon Express, Inc. and Subsidiaries Consolidated Balance Sheets June 30, June 30, 2000 1999 Assets Current assets: Cash and cash equivalents $8,351,582 $9,683,794 Receivables, less allowance for doubtful accounts (2000--$267,405; 1999--$199,579): Trade 11,987,372 8,896,331 Other 1,837,256 1,963,418 Current portion of net investment in direct financing leases 6,575,400 - Prepaid expenses and supplies 1,623,267 1,627,778 Deferred income taxes 4,919,000 1,907,000 Total current assets 35,293,877 24,078,321 Property and equipment: Land, buildings and improvements 1,257,335 1,230,945 Revenue equipment 75,340,802 80,264,223 Service, office and other equipment 2,932,135 2,885,076 79,530,272 84,380,244 Less allowance for depreciation 24,460,235 35,918,227 55,070,037 48,462,017 Other assets: Receivable from stockholders 23,406 23,406 Restricted cash 2,406,916 2,381,084 Marketable securities 346,970 593,110 Net investment in direct financing leases, less current portion 10,636,780 - Other 111,182 429,815 13,525,254 3,427,415 $103,889,168 $75,967,753 See accompanying notes. Cannon Express, Inc. and Subsidiaries Consolidated Balance Sheets (Continued) June 30, June 30, 2000 1999 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $1,529,639 $1,849,931 Accrued expenses: Insurance reserves 3,666,103 3,295,528 Other 1,865,089 2,246,756 Federal and state income taxes payable 1,414,652 2,707,890 Current portion of long-term debt 13,098,351 16,861,875 Total current liabilities 21,573,834 26,961,980 Long-term debt, less current portion 56,648,009 25,999,343 Deferred income taxes 6,849,000 4,809,000 Other liabilities 12,531 27,569 Stockholders' equity: Common stock: $.01 par value; authorized 10,000,000 shares; issued 3,265,401 shares in 2000 and 1999 32,654 32,654 Additional paid-in capital 3,747,575 3,747,575 Retained earnings 15,230,131 14,709,630 Accumulated other comprehensive income, net of income taxes (credit) of $72,262 and $(74,955)in 2000 and 1999, respectively (4,302) (119,734) 19,006,058 18,370,125 Less treasury stock, at cost (60,125 shares in 2000 and 1999) 200,264 200,264 18,805,794 18,169,861 $103,889,168 $75,967,753 See accompanying notes. Cannon Express, Inc. and Subsidiaries Consolidated Statements of Operations Years ended June 30, 2000 1999 1998 Operating revenue $91,778,766 $95,212,908 $109,244,998 Operating expenses and costs: Salaries, wages and fringe benefits 25,820,469 36,083,271 36,125,916 Operating supplies and expenses 22,088,998 29,947,122 31,376,630 Operating taxes and licenses 4,091,827 5,538,612 5,856,056 Insurance and claims 4,790,074 4,263,032 5,162,252 Depreciation and amortization 4,006,992 9,866,614 12,610,998 Rents and purchased transportation 26,511,107 5,202,381 9,477,138 Other 2,755,118 2,394,860 2,210,183 90,064,585 93,295,892 102,819,173 Operating income 1,714,181 1,917,016 6,425,825 Other income (expense): Interest expense (3,838,907) (3,004,970) (3,257,990) Interest and dividend income 469,942 361,460 346,288 Loss on marketable equity securities (99,715) (27,890) (1,025,536) (3,468,680) (2,671,400) (3,937,238) Income (loss) before income taxes (1,754,499) (754,384) 2,488,587 Federal and state income taxes: Current (Credit) (1,303,000) (292,000) 122,000 Deferred (Credit) (972,000) 25,000 552,000 (2,275,000) (267,000) 674,000 Net income (loss) $ 520,501 $ (487,384) $ 1,814,587 Basic earnings (loss) per share $ .16 $ (0.15) $ 0.57 Average shares and share equivalents outstanding 3,207,172 3,197,896 3,170,775 Diluted earnings (loss) per share $ .16 $ (0.15) $ 0.56 Diluted shares and share equivalents outstanding 3,207,172 3,197,896 3,252,931 See accompanying notes. Cannon Express, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Accumulated Additional Other Common Paid-In Retained Comprehensive Treasury Stock Capital Earnings Income Stock Total Balances at July 1, 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: Exer. 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: Exer. 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 Comprehensive income Net income - - 520,501 - - 520,501 Accumulated other comprehensive income Unrealized appreciation on marketable securities - - - 54,107 - 54,107 Realized loss on marketable securities - - - 61,325 - 61,325 Total comprehensive income 635,933 Balances at June 30, 2000 $32,654 $3,747,575 $15,230,131 $ (4,302) $(200,264) $18,805,794 See accompanying notes. Cannon Express, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended June 30 2000 1999 1998 Operating activities Net income (loss) $ 520,501 $ (487,384) $1,814,587 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,173,125 13,077,769 13,075,545 Provision for losses on accounts receivable 75,000 60,000 45,000 Provision (credit) for deferred income taxes (2,632,000) 25,000 552,000 Gain on disposal of equipment (5,163,933) (3,211,610) (464,552) Loss on sale of marketable securities 99,715 27,890 - Write-down of marketable securities - - 1,025,536 Changes in operating assets and liabilities: Receivables (3,039,879) 136,560 (1,097,068) Prepaid expenses and supplies (92,924) (205,319) (107,869) Accounts payable, accrued expenses, income taxes payable, and other liabilities (36,884) 1,454,297 (71,118) Net investment in direct financing leases 3,651,121 - - Other assets (25,020) - (11,400) Net cash provided by operating activities 2,528,822 10,877,203 14,760,661 Investing activities Purchases of property and equipment (32,112,256) (7,174,194) (12,926,251) Net decrease (increase) in restricted cash (25,832) 5,748 (176,806) Investment in outside driver training facility (37,550) (280,000) - Proceeds from sales of marketable securities 371,669 48,633 50,000 Proceeds from equipment sales 21,921,095 8,063,555 1,538,650 Net cash provided by (used in) investing activities (9,882,874) 663,742 (11,514,407) Financing activities Proceeds from long-term borrowings 31,227,405 12,506,871 11,045,720 Principal payments on long-term debt and capital lease obligations (25,205,565) (18,208,238) (14,572,779) Proceeds from exer. of stock options - 26,711 102,684 Net cash provided by (used in) financing activities 6,021,840 (5,674,656) (3,424,375) Increase (decrease) in cash and cash equivalents (1,332,212) 5,866,289 (178,121) Cash and cash equivalents at beginning of year 9,683,794 3,817,505 3,995,626 Cash and cash equivalents at end of year $ 8,351,582 $ 9,683,794 $3,817,505 See accompanying notes. Cannon Express, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2000 and 1999 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 sales of revenue equipment are recognized in the period realized. 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. The estimated useful life of revenue equipment is 3 to 7 years, and the estimated useful life of service, office and other equipment is 5 to 7 years. 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) The Company accounts for earnings (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. 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 or the exercise price of the convertible securities exceeds the market price. As the exercise price of all potentially dilutive financial instruments was less than the market price at June 30, 2000, and the Company incurred a loss from continuing operations for the year ended June 30, 1999, Basic earnings per share and Diluted earnings per share computed in the same manner. Although such financial instruments were not included due to being antidilutive, the Company does have 84,647 shares of potentially dilutive financial instruments in the form of warrants and options at June 30, 2000. 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 claims 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 $3,231,000 in letters of credit. Restricted cash of $2,406,916 and $2,381,084 at June 30, 2000 and 1999, 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 2000 1999 Cost $353,965 $787,799 Unrealized losses (6,995) (194,689) Fair value $346,970 $593,110 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% of the fair value of marketable equity securities at June 30, 1999. Proceeds from sales of available-for-sale equity securities were $371,669, $48,633 and $50,000 for 2000, 1999 and 1998, respectively. Resultant gross losses of $(99,715), $(27,890) and $(1,025,536) were recognized and included in net income for 2000, 1999 and 1998, respectively. At June 30, 1998, the Company recognized a loss on available-for-sale equity securities of approximately $1,026,000. The Company's available-for-sale equity securities were recorded at their market value as of June 30, 2000 and 1999. 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 $72,262, $(74,955), and $0 for 2000, 1999 and 1998, 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 1999 and 1998 financial statements to conform to the 2000 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 2000 1999 Equipment notes (1) $ 27,477,650 $ 17,553,870 Capitalized lease obligations (2) 42,268,710 25,307,348 69,746,360 42,861,218 Less current portion 13,098,351 16,861,875 $ 56,648,009 $ 25,999,343 (1)Represents loans on revenue equipment, payable in various installments through 2004 with a weighted average interest rate of 7.1%. Revenue equipment having a book value of approximately $19,705,240 at June 30, 2000 is pledged as collateral. The carrying amount of equipment notes payable approximates fair value at June 30, 2000. (2)Capitalized lease obligations are for revenue equipment with an aggregate net book value of approximately $31,240,156 at June 30, 2000. The leases have a weighted average interest rate of 6.8%. 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. Revenue equipment having an original cost of approximately $19 million and leased to owner operators per direct financing leases described in Note 5 are pledged as collateral in part against both the equipment notes and capital lease obligations. Annual maturities of long-term debt, excluding capitalized lease obligations (Note 6) at June 30, 2000, are: 2001 $ 6,730,130 2002 9,525,314 2003 8,852,717 2004 2,369,489 2005 - $27,477,650 Interest paid was approximately $1,682,636, $2,916,000 and $3,203,000 during 2000, 1999 and 1998, 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 2000 1999 1998 Income taxes at the statutory federal rate of 34% $ (596,000) $ (256,000) $ 846,000 Federal income tax effects of: Equipment leasing transactions (1,660,000) - (266,000) Other 50,000 19,000 17,000 Federal income taxes (2,206,000) (237,000) 597,000 State income taxes (69,000) (30,000) 77,000 $(2,275,000) $ (267,000) $ 674,000 The tax effects of temporary differences related to deferred taxes shown on the balance sheets were: June 30 2000 1999 Temporary Differences Self-insurance accruals $ 1,404,000 $ 1,264,000 Current net investment in direct financing leases 2,518,000 - Allowance/valuation reserves 254,000 498,000 Revenue recognition 56,000 84,000 Prepaids and other 687,000 61,000 Net current deferred income tax asset $ 4,919,000 $ 1,907,000 Depreciation $(13,973,000) $(14,888,000) Revenue equipment leases 16,185,000 9,690,000 Net investment in direct financing leases (9,108,000) - Valuation of available-for-sale securities 47,000 389,000 Net non-current deferred income tax liability $ (6,849,000) $ (4,809,000) The Company made income tax payments of approximately $63,000, $94,000 and $50,000 during 2000, 1999 and 1998, 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, 2000, 60,125 shares at an average price of $3.33 per share are included as treasury stock on the balance sheets. No purchases were made in fiscal years 2000, 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, 2000, 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 (SFAS No. 123). Accordingly, no compensation cost has been recognized for the stock option plan. There were no options granted during fiscal year 2000, 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): 2000 1999 1998 Wt Avg Wt Avg Wt Avg Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at July 1 139,197 $5.47 175,612 $5.33 222,821 $4.66 Granted - - - - - - Exercised - - (12,415) 2.15 (47,209) 2.17 Canceled (34,693) 3.04 (24,000) 6.17 - - Outstanding at June 30 104,504 $6.27 139,197 $5.47 175,612 $5.33 Weighted average remaining life 2.97 years Exercisable at June 30 84,647 111,180 120,967 Weighted average price $6.18 $5.23 $4.89 Price range at June 30 $5.33 to $7.59 $2.12 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 2000 1999 1998 Average shares outstanding 3,207,172 3,197,896 3,170,775 Net effect of dilutive stock options - - 82,156 Diluted shares outstanding 3,207,172 3,197,896 3,252,931 Net income (loss) for the period $ 520,501 $ (487,384) $1,814,587 Basic earnings (loss) per share $ 0.16 $ (0.15) $ 0.57 Diluted earnings (loss) per share $ 0.16 $ (0.15) $ 0.56 5. Net Investment in Direct Financing Leases The Company's net investment in direct financing leases consists of the leasing of transportation equipment acquired by a subsidiary of the Company to drivers. Terms of the direct financing leases range from 156 to 182 weeks with weekly lease payments of $450 to $550. The following lists the components of the net investment in direct financing leases as of June 30, 2000: 2000 Total minimum lease payments to be received $ 19,689,301 Less unearned revenue 2,477,121 Net investment in direct financing leases $ 17,212,180 Less current portion 6,575,400 Net investment in direct financing leases, less current portion $ 10,636,780 The future minimum lease payments under direct financing leases at June 30, 2000, consisted of the following: 2001 $ 6,575,400 2002 6,575,400 2003 5,614,026 2004 924,475 Total minimum lease payments $ 19,689,301 Cannon Express, Inc. and Subsidiaries Notes to Consolidated Financial Statements 6. Leases and Commitments The future minimum payments under capitalized leases at June 30, 2000, consisted of the following: 2001 $ 8,888,022 2002 10,624,870 2003 10,993,129 2004 11,902,283 2005 4,345,978 Thereafter 2,779,645 Total minimum lease payments 49,533,927 Amounts representing interest 7,265,217 Present value of net minimum lease payments included in long-term debt ($6,368,221 due in 2001) (Note 2) $42,268,710 Assets held under capital leases are included in property, plant and equipment as follows: 2000 1999 Revenue equipment $38,942,567 $37,936,720 Accumulated depreciation 7,702,411 13,361,624 $31,240,156 $24,575,096 During 2000, 1999 and 1998, the Company incurred capital lease obligations totaling approximately $32,611,000, $5,500,000 and $11,046,000, respectively. The capital lease obligation incurred during fiscal 1999 was the result of a sale/leaseback transaction for certain trucks which had been purchased for cash during the quarter ended December 31, 1996. The lease contained an early purchase option which was exercised during the fiscal year ended June 30, 2000. Capitalized lease amortization is included in depreciation expense. 7. 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, a decision has been rendered against the Company by the Equal Employment Opportunity Commission ("EEOC") for unlawful hiring practices regarding pre-employment questions about medical issues. The Company believed it was required by Department of Transportation regulations to ask these questions. The Company is unable to predict the range of any possible penalties imposed, but does believe that the resulting penalties will not have a material adverse effect on profitability or financial position of the Company. Cannon Express, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. 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 for each of the three years in the period ended June 30, 2000. 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. During fiscal 2000, this receivables purchase agreement was terminated. There was no outstanding balance on June 30, 2000. 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. 9. 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 18%, 29%, and 47% of revenue for fiscal 2000, 1999 and 1998, respectively. Accounts receivable as of June 30 for this customer totaled approximately $1,522,000 and $1,234,000 for 2000 and 1999, respectively. A second unaffiliated major customer accounted for approximately 9%, 13%, and 14% of revenue in 2000, 1999 and 1998, respectively. Accounts receivable as of June 30 for this customer totaled approximately $1,665,000 and $1,654,000 for 2000 and 1999, respectively. 10. 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 2000, 1999 or 1998. Cannon Express, Inc. and Subsidiaries Notes to Consolidated Financial Statements 11. Cash Flow Statement During fiscal 2000 the Company purchased with debt approximately $24.7 million in revenue equipment that was subsequently leased to owner operators under direct financing leases. This transaction is considered a noncash investing transaction for statement of cash flow purposes. 12. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS No. 133"), as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 cannot be applied retroactively and must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). Effective July 1, 2000, the Company adopted SFAS No. 133. Based on analysis performed by the Company it was determined that the Company had no outstanding derivative instruments or embedded derivatives at the adoption date. As such, the Company concluded that the adoption of SFAS 133 had no impact on its financial statements. Cannon Express, Inc. and Subsidiaries Notes to Consolidated Financial Statements 13. Quarterly Results of Operations (Unaudited) Fiscal 2000 September 30 December 31 March 31 June 30 Operating revenue $22,915,433 $21,290,792 $22,522,951 $25,049,590 Operating expenses and costs 22,231,016 21,727,416 21,450,857 24,655,296 Operating income (loss) 684,417 (436,624) 1,072,094 394,294 Other income (expense), net 106,155 76,526 208,909 (21,363) Interest expense 651,469 843,903 1,158,421 1,185,114 Income (loss) before income taxes 139,103 (1,204,001) 122,582 (812,183) Income taxes (362,000) (878,000) (368,000) (667,000) Net income (loss) $ 501,103 $ (326,001) $ 490,582 $ (145,183) Basic earnings(loss) per share $0.16 $(0.10) $0.15 $(0.05) Average shares and share equivalents outstanding 3,205,276 3,205,276 3,205,276 3,205,276 Diluted earnings (loss) per share $0.16 $(0.10) $0.15 $(0.05) Diluted shares and share equivalents outstanding 3,210,614 3,205,276 3,205,276 3,205,276 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 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 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 Accts Deductions- End of Description Period Expenses Describe Describe Period Year ended June 30, 2000: Deducted from asset accounts: Reserve for doubtful trade receivables $199,579 $75,000 $7,175(A) $267,404 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 (A)Uncollectible accounts written off, net of recoveries. Shareholder Information Form 10-K Availability A copy of the 2000 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.