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, 1998
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-16386
CANNON EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0650141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1457 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, 1998: $6,919,063.
Number of shares of common stock outstanding at August 31, 1998:
Common Stock - 3,192,861
Documents incorporated by reference: Company's Notice and Proxy Statement
for its annual meeting of stockholders to be held on Tuesday, November 17,
1998.
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, 1998, the Company operated a fleet of 880 tractors
and 2,561 trailers, and employed 1,102 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, 1998, Wal-Mart Stores, Inc. ("Wal-
Mart") accounted for 47.0% and International Paper, Inc. accounted for 14.4%
of the Company's operating revenue. During the fiscal years ended June 30,
1997 and 1996, Wal-Mart accounted for 51.0% and 49.5%, respectively, and
International Paper accounted for 15.8% and 10.2%, respectively, of
operating revenue. 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.
Drivers and Other Employees
As of June 30, 1998, the Company employed 843 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 were awarded approximately $900,000 in bonuses during
fiscal 1998 as compared with approximately $2,576,000 awarded during fiscal
1997.
Like other truckload carriers, the Company experiences significant driver
turnover. The Company has also experienced shortages of qualified drivers
from time to time. 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.
As of June 30, 1998, the Company employed:
1998 1997
Drivers and Driver Trainees 843 924
Management 16 15
Operations, Marketing, and Administration 162 139
Maintenance and Repair 81 78
Total 1,102 1,156
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, 1998, the fleet consisted of 880 tractors and 2,561 trailers,
compared to 908 tractors and 2,119 trailers at June 30, 1997. During the
fiscal year ended June 30, 1998, 28 tractors were sold with no new tractors
added to the fleet. The Company was unable to obtain replacement trucks due
to manufacturer's lag time, however, the Company plans to replace those
trucks along with its remaining 1995 model trucks in the spring of 1999. In
addition, the Company added 600 new trailers and sold 158 trailers for a net
addition to its fleet of 442 trailers during the fiscal year ended June 30,
1998.
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,
1998, substantially all of the Company's tractors were manufactured by
International, while trailers were manufactured by various trailer
manufacturers. The Company has negotiated extended warranties on many of its
tractors and intends to trade-in such tractors on approximately a four-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, 1998:
MODEL OVER-the-ROAD 48-FOOT 53-FOOT
YEAR TRACTORS TRAILERS TRAILERS
1998 - - 600
1997 225 - 300
1996 326 298 -
1995 318 685 -
1994 - 200 -
1993 - 250 -
1992 - 193 -
1991 1 5 -
1990 1 13 -
1989 thru 1983 9 17 -
880 1,661 900
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. Fuel costs during fiscal 1998 were significantly
lower than during fiscal year 1997. During fiscal 1998, the Company's average
fuel costs were 13 cents per gallon lower than in fiscal 1997. 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. 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 $250,000 of cargo loss and damage insurance per claim
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 has settled claims resulting from an accident which occurred in
May of 1996. 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.
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 31, 1996 the Company's common stock was traded on the
NASDAQ National Market System under the symbols CANXA and CANXB.
Subsequent to a third quarter stock recapitalization plan, the Company's
two classes of common stock were reclassified into a new, single class
of common stock 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, 1997:
First Quarter $11 $9 7/8
Second Quarter 10 8
Third Quarter 8 3/4 6 3/4
Fourth Quarter 7 1/4 5 1/2
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
(b) The approximate number of holders of common stock as of August 31, 1998
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,
1998 1997 1996 1995 1994
(in thousands except per share data)
Operating Revenue $109,245 $106,136 $89,991 $79,030 $59,177
Income before
cumulative
effect of change
in accounting
principle 1,815 1,432 2,159 6,016 3,808
Basic earnings per share(1 & 2):
Income before
cumulative effect
of change in
accounting principle .57 .45 .69 1.91 1.21
Total assets $80,886 $81,188 $84,358 $77,263 $44,931
Long term debt,
less current portion $29,768 $35,393 $43,964 $35,353 $12,954
(1) Earnings per share have been restated to give effect to the stock
recapitalizations effected on January 26, 1993 and 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,
1998 1997 1996
Operating revenue 100.0% 100.0% 100.0%
Operating expenses and costs:
Salaries, wages and fringe benefits 33.1% 34.0% 34.4%
Operating supplies and expenses 28.7 31.0 29.5
Operating taxes and licenses 5.4 5.9 6.3
Insurance and claims 4.7 5.3 5.6
Depreciation and amortization 11.5 11.3 11.6
Rents and purchased transportation 8.7 6.0 4.2
Other 2.0 1.6 1.7
Total operating expenses 94.1 95.1 93.3
Operating income 5.9 4.9 6.7
Other income (expense):
Interest and dividend income 0.3 0.3 0.6
Gain (loss) on marketable securities (0.9) 0.0 0.7
Interest expense (3.0) (3.6) (4.1)
Income before income taxes 2.3 1.6 3.9
Income taxes 0.6 0.3 1.5
Net income 1.7% 1.3% 2.4%
RESULTS OF OPERATIONS:
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. Management intends to continue to increase
its activities in the logistics area as additional opportunities arise. 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.
Fiscal year ended June 30, 1997 compared to Fiscal year ended June 30, 1996
Operating revenue for fiscal 1997 increased 17.9% or $16,145,194 to
$106,136,268. The increase was primarily attributable to the increased
number of shipments transported by the Company's larger fleet of tractors and
trailers. The Company operated an average of 906 tractors during fiscal
1997, compared to an average of 815 tractors in fiscal 1996. Additionally,
the Company's revenue from intermodal activities increased to $4,638,665 from
$2,433,681, or 90.6%, for fiscal 1997. The Company's intermodal activities
generally involve interline agreements between Company trucks and railroads.
The Company also experienced a shortage of drivers during the period. As a
result, the increase in operating costs related to the fleet expansion was
not offset by increased revenue.
Salaries, wages and fringe benefits increased 16.8% or $5,181,575 to
$36,107,009 in fiscal 1997. This increase is attributable to additional wages
paid to drivers and support personnel due to the Company's expanded fleet.
Operating supplies and expenses increased 23.8% or $6,314,569 to $32,850,698
in fiscal 1997, also a result of the Company's expanded fleet. Fuel costs
for the fiscal year ended June 30, 1997 averaged 7 cents per gallon higher
than in the comparable period of fiscal 1996, adding approximately $1,285,000
in additional expense for the fleet during the 12 month period. Maintenance
costs increased 19.0%, approximating the percentage increase in operating
revenue.
Operating taxes and licenses increased 11.0% or $625,361 to $6,303,495 in
fiscal 1997 due to the Company's larger average fleet.
Insurance and claims increased 11.5% or $584,310 to $5,652,229 in fiscal 1997
due to increased costs associated with the Company's larger fleet of revenue
equipment.
Depreciation and amortization increased 14.7% or $1,531,759 to $11,944,877 in
fiscal 1997. This increase is due to new equipment additions.
Rents and purchased transportation increased 68.3% or $2,580,632 to
$6,359,400 in fiscal 1997 due primarily to increased intermodal activities.
The Company's operating ratio increased to 95.1% for fiscal 1997 from 93.3%
for the prior year, reflecting a decline of 1.8% during the period.
Interest expense increased 2.9% or $108,616 in fiscal 1997 due to the
financing of new revenue equipment associated with the expansion of the
Company's fleet in 1997 and 1996.
The Company's effective income tax rate decreased to 14.8% of income before
income taxes in fiscal 1997 as a result of certain equipment transactions.
The income tax consequences of these transactions have been recorded in the
financial statements in reliance on opinion of tax counsel.
Net income decreased 33.7% or $727,077 in fiscal 1997 to $1,431,861 or $.44
per share from $2,158,938 or $.67 per share in fiscal 1996.
Liquidity and Capital Resources
Cash flows from Operations - Operating activities provided cash of $14.8
million and $19.5 million in fiscal 1998 and 1997, respectively. Net cash
flows from operations in fiscal 1998 were primarily the result of $1.8
million provided from results of operations, $12.6 million in depreciation, a
$0.5 million decrease in accounts receivable and other assets, and a $0.1
million decrease in accounts payable and other liabilities.
Cash flows from Investing Activities - Investing activities used net cash of
$11.5 million and $15.5 million in fiscal 1998 and 1997, respectively.
Purchases of new equipment totaling $12.9 million was offset by $1.4 million
in equipment sales and other investing activities for 1998. Purchases of new
equipment and marketable securities totaling $19.5 million was offset by $4.0
million in equipment sales and other investing activities for 1997.
Cash flows from Financing Activities - Financing activities used net cash of
$3.4 and $4.2 million in fiscal 1998 and 1997, respectively.
Working capital needs have been met primarily from cash generated from
operations. During the fiscal year ended June 30, 1998, cash provided by
operating activities was $14,760,661, down from $19,546,134 for the prior
fiscal year ended June 30, 1997. The current ratio declined from 0.67 at June
30, 1997 to 0.66 at June 30, 1998. Working capital decreased by $0.8 million
to a deficit of $9.4 million at June 30, 1998 from a deficit of $8.6 million
at June 30, 1997. These deficits at June 30, 1998 and 1997 were due to the
company's decision to purchase equipment for cash in the quarter ended
December 31, 1996. The Company has commitments from various lenders to
finance these acquisitions in the future if it is determined that the Company
has the need for additional working capital. Management has deviated from
its past policy of maintaining large cash balances in an effort to reduce
interest expense. Management believes that it is unlikely that the cost and
availability of financing will be adversely affected by this working capital
deficit in the near future.
Management of the Company intends, in the long-term, to continue to grow,
however, the current shortage of qualified drivers for its trucks may limit
the opportunity for expansion of its fleet. The Company may increase its
logistics and intermodal activities, although Management of the Company
believes that its best opportunities for growth may be the acquisition of one
or more other trucking companies which compliment the Company's current
business activities. At June 30, 1998, the Company did not have any
contracts to purchase trucks or trailers, although it anticipates that its
1995 model trucks and some older trailers may be traded in for new models
during fiscal 1999. Management believes that revenue generated from
operations will continue to be sufficient to amortize obligations related to
such replacement equipment. However, to the extent that such revenue is
insufficient for this purpose, the Company may be required to rely on
additional borrowings or equity offerings to meet its working capital needs.
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 believes that its internal systems will be ready for the Year
2000 before the end of 1998. The Company will continue testing through the
year 1999 to insure that its multiple inter-related systems will continue to
operate on the first day of the year 2000 and beyond. Although Management of
the Company believes that it will not suffer equipment failure on January 1,
2000, certain factors outside the Company's control may affect the Company's
ability to operate. The Company is requiring that its vendors and suppliers
provide assurance of Year 2000 compliance, and is furnishing assurance to its
customers. 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 cost of operations through June 30, 1998.
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 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 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 past two fiscal years 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 audits of the Company's financial statements for each
of the two fiscal years ended June 30, 1997 and 1996, 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.
Baird, Kurtz & Dobson has furnished the Company with a letter addressed to
the Securities and Exchange Commission stating that it agrees with the above
statements, a copy of which has been filed as an exhibit to the Current
Report on Form 8-K dated June 11, 1998.
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 57 President and Chairman of the Board
Rose Marie Cannon 57 Secretary, Treasurer and Director
Larry L. Patrick 53 Vice President
Ted W. Easley 58 Director of Operations
Roy E. Stanley 54 Director
Uvalde R. Lindsey 58 Director
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.
Ted W. Easley has been the Director of Operations of Cannon Express Corp.
since 1982. Prior to his employment with Cannon Express Corp., Mr. Easley
was a co-owner of Scheduled Truckways in Rogers, Arkansas.
Roy E. Stanley holds Bachelor of Science and Master of Arts degrees from
Memphis State University and received the degree of Juris Doctor, with
honors, in 1978 from the University of Arkansas School of Law at
Fayetteville. After engaging in the private practice of law in Springdale,
Arkansas for sixteen years, in 1994 Mr. Stanley became president of Lindsey
Management Company, Inc., a real estate management company with its main
offices in Fayetteville, Arkansas.
Uvalde R. Lindsey is an economic development consultant and Director of the
Northwest Arkansas Council, a regional organization dedicated to the economic
enhancement of Northwest Arkansas. After graduating from the University of
Arkansas, Mr. Lindsey owned and operated a chain of automotive parts stores
in Arkansas, Missouri and Oklahoma. After selling his businesses in 1983,
Mr. Lindsey served as Budget Officer to the Governor of the State of
Arkansas and as Executive Director of the Northwest Arkansas Economic
Development District.
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 1998 fiscal year, all filing requirements
were complied with as they apply to its officers, directors and greater than
10% beneficial owners.
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 17, 1998.
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 17, 1998.
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 17, 1998.
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, 1998.
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, 1998 and 1997.
Consolidated Statements of Income for the years ended June 30, 1998,
1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements-June 30, 1998.
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 sheet of Cannon
Express, Inc. and Subsidiaries (a Delaware corporation) as of June 30, 1998,
and the related statements of income, stockholders' equity and cash flows for
the year 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 audit. The consolidated financial
statements of Cannon Express, Inc. and Subsidiaries as of June 30, 1997,
and for the two years in the period 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cannon Express, Inc. and
Subsidiaries as of June 30, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was 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 audit 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 31, 1998
Independent Accountants' Report
Board of Directors and Stockholders
Cannon Express, Inc. and Subsidiaries
Springdale, Arkansas
We have audited the accompanying consolidated balance sheet of CANNON
EXPRESS, INC. AND SUBSIDIARIES as of June 30, 1997 and the related
consolidated statements of income, changes in stockholders' equity and
cash flows for each of the two years in the period 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 audits.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CANNON
EXPRESS, INC. AND SUBSIDIARIES as of June 30, 1997, and the results
of its operations and its cash flows for each of the two years in the period
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
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 3,817,505 $ 3,995,626
Receivables, less allowance for
doubtful accounts (1998--$158,656;
1997--$183,411):
Trade 9,582,372 9,845,402
Other 1,473,937 158,839
Prepaid expenses and supplies 1,325,024 1,217,155
Deferred income taxes 1,875,000 1,793,000
Total current assets 18,073,838 17,010,022
Property and equipment:
Land, buildings and improvements 1,210,138 1,176,563
Revenue equipment 92,546,207 82,802,562
Service, office and other equipment 2,743,709 2,483,375
96,500,054 86,462,500
Less allowance for depreciation 37,193,306 26,085,500
59,306,748 60,377,000
Other assets:
Receivable from stockholders 23,406 23,406
Restricted cash 2,386,832 2,210,026
Marketable securities 584,322 831,797
Other 511,332 735,721
3,505,892 3,800,950
$80,886,478 $81,187,972
See accompanying notes.
June 30 June 30
1998 1997
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $1,609,825 $1,043,333
Accrued expenses:
Insurance reserves 3,144,259 3,489,814
Other 1,758,047 2,167,473
Federal and state income taxes payable 2,208,632 2,167,879
Current portion of long-term debt 18,794,463 16,696,510
Total current liabilities 27,515,226 25,565,009
Long-term debt, less current portion 29,768,122 35,393,134
Deferred income taxes 4,752,000 3,799,000
Other liabilities 100,862 183,508
Stockholders' equity:
Common stock: $.01 par value; authorized
10,000,000 shares; issued 3,252,986
shares in 1998 and 3,205,777 shares
in 1997 32,530 32,058
Additional paid-in capital 3,720,988 3,542,356
Retained earnings 15,197,014 13,382,427
Unrealized depreciation on marketable
securities, net of income tax credit
of $(318,802) in 1997 - (509,256)
18,950,532 16,447,585
Less treasury stock, at cost
(60,125 shares in 1998 and 1997) 200,264 200,264
18,750,268 16,247,321
$80,886,478 $81,187,972
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Income
Years ended June 30
1998 1997 1996
Operating revenue $109,244,998 $106,136,268 $89,991,074
Operating expenses and costs:
Salaries, wages and fringe benefits 36,125,916 36,107,009 30,925,434
Operating supplies and expenses 31,376,630 32,850,698 26,536,129
Operating taxes and licenses 5,856,056 6,303,495 5,678,134
Insurance and claims 5,162,252 5,652,229 5,067,919
Depreciation and amortization 12,610,998 11,944,877 10,413,118
Rents and purchased transportation 9,477,138 6,359,400 3,778,768
Other 2,210,183 1,695,537 1,522,439
102,819,173 100,913,245 83,921,941
Operating income 6,425,825 5,223,023 6,069,133
Other income (expense):
Interest expense (3,257,990) (3,793,219) (3,684,603)
Interest and dividend income 346,288 290,495 500,439
Gain (loss) on marketable
equity securities (1,025,536) (40,438) 625,969
(3,937,238) (3,543,162) (2,558,195)
Income before income taxes 2,488,587 1,679,861 3,510,938
Federal and state income taxes:
Current 122,000 289,000 2,268,000
Deferred (Credit) 552,000 (41,000) (916,000)
674,000 248,000 1,352,000
Net income $ 1,814,587 $ 1,431,861 $ 2,158,938
Basic earnings per share $ 0.57 $ 0.45 $ 0.69
Average shares and share
equivalents outstanding 3,170,775 3,147,458 3,147,652
Diluted earnings per share $ 0.56 $ 0.44 $ 0.67
Diluted shares and share
equivalents outstanding 3,252,931 3,233,063 3,246,397
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Unrealized Appreciation
Additional (Depreciation)
Common Stock Paid-In Retained On Marketable Treasury
Class A Class B Capital Earnings Securities Stock
Balances at
July 1, 1995 $22,195 $22,245 $3,542,356 $21,181,034 $927,220 $(371,775)
Net income - - - 2,158,938 - -
Unrealized appreciation on
marketable sec. - - - - 605,585 -
Realized gain on marketable
securities - - - - (625,969) -
Stock recapital-
ization plan 9,863 (22,245) - (11,389,406) - 185,888
Balances at
June 30, 1996 32,058 -0- 3,542,356 11,950,566 906,836 (185,887)
Net income - - - 1,431,861 - -
Unrealized depreciation
on marketable
securities - - - -(1,456,530) -
Realized loss on marketable
securities - - - - 40,438 -
Purchase of
treasury stock - - - - - (14,377)
Balances at
June 30, 1997 32,058 -0- 3,542,356 13,382,427 (509,256) (200,264)
Net income - - - 1,814,587 - -
Write-down of marketable
securities - - - - 509,256 -
Stock issued:
Exercise of
options 472 - 102,212 - - -
Tax benefit of
stock options - - 76,420 - - -
Balances at
June 30, 1998 $32,530 $ -0- $3,720,988 $15,197,014 $ -0- $(200,264)
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30
1998 1997 1996
Operating activities
Net income $1,814,587 $1,431,861 $2,158,938
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,075,545 12,071,467 10,574,311
Provision(credit) for losses on
accounts receivable 45,000 30,000 -
Provision(credit) for deferred
income taxes 552,000 (41,000) (916,000)
Gain on disposal of equipment (464,552) (126,590) (161,193)
Loss (gain) on sale of marketable
securities - 40,438 (625,969)
Write-down in marketable securities 1,025,536 - -
Changes in operating assets and liabilities:
Receivables (1,097,068) 4,296,971 (4,584,733)
Prepaid expenses and supplies (107,869) 253,784 209,508
Accounts payable, accrued expenses,
income taxes payable,
and other liabilities (71,118) 1,451,874 4,014,724
Other assets (11,400) 137,329 (19,196)
Net cash provided by
operating activities 14,760,661 19,546,134 10,650,390
Investing activities
Purchases of property and equipment (12,926,251) (19,456,822) (15,618,199)
Net increase (decrease)
in restricted cash (176,806) (1,440,000) 43,645
Purchases of marketable securities - (89,509) (307,635)
Proceeds from sales of
marketable securities 50,000 103,313 1,205,020
Proceeds from equipment sales 1,538,650 5,333,239 6,551,567
Net cash used in
investing activities (11,514,407) (15,549,779) (8,125,602)
Financing activities
Proceeds from long-term borrowings 11,045,720 16,358,829 15,907,421
Principal payments on long-term debt and
capital lease obligations (14,572,779) (20,515,100) (15,370,784)
Proceeds from exercise of stock options 102,684 - -
Net effect stock recapitalization plan - - (11,215,900)
Purchase of treasury stock - (14,377) -
Net cash used in
financing activities (3,424,375) (4,170,648) (10,679,263)
Decrease in cash and cash equivalents (178,121) (174,293) (8,154,475)
Cash and cash equivalents at
beginning of year 3,995,626 4,169,919 12,324,394
Cash and cash equivalents at
end of year $3,817,505 $3,995,626 $4,169,919
See accompanying notes.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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.
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. Earnings per share amounts for prior
periods, as well as average shares outstanding, have been restated to give
effect to a 1996 stock recapitalization plan, as more fully described in
Note 4.
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 has settled claims resulting from an accident which occurred in
May of 1996.
Restricted cash of $2,386,832 and $2,210,026 at June 30, 1998 and 1997,
respectively, represents certificates of deposit held as collateral for the
Company's insurance activities.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 - Non-current 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
1998 1997
Cost $584,322 $1,659,855
Unrealized losses - (828,058)
Fair value $584,322 $ 831,797
A single equity security accounted for approximately 95% of the fair value of
marketable equity securities at June 30, 1998 and June 30, 1997.
Proceeds from sales of available-for-sale equity securities were $50,000,
$103,313 and $1,205,020 for 1998, 1997 and 1996, respectively. Resultant
gross gains (losses) of $(1,025,536), $(40,438), and $625,969 were recognized
and included in net income for 1998, 1997 and 1996, 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
are recorded at their market value as of June 30, 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 $0, ($886,000) and ($12,000) for
1998, 1997 and 1996, 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 1997 and
1996 financial statements to conform to the 1998 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
1998 1997
Equipment notes (1) $16,250,382 $23,195,615
Capitalized lease obligations (2) 32,312,203 28,894,029
48,562,585 52,089,644
Less current portion 18,794,463 16,696,510
$29,768,122 $35,393,134
(1)Represents loans on revenue equipment, payable in various installments
through 2002 with a weighted average interest rate of 6.9%. Revenue
equipment having a book value of approximately $15,844,000 at June 30, 1998
is pledged as collateral. The carrying amount of equipment notes payable
approximates fair value at June 30, 1998.
(2)Capitalized lease obligations are for revenue equipment with an aggregate
net book value of approximately $31,294,000 at June 30, 1998. The leases
have a weighted average interest rate of 6.3%. 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, 1998, are:
1999 $ 7,078,742
2000 4,694,609
2001 2,563,000
2002 1,914,031
2003 -
$16,250,382
Interest paid was approximately $3,203,000, $3,737,000 and $3,643,000 during
1998, 1997 and 1996, 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
1998 1997 1996
Income taxes at the statutory
federal rate of 34% $ 846,000 $ 571,000 $1,194,000
Federal income tax effects of:
Equipment leasing transactions (266,000) (376,000) -
Other 17,000 25,000 (177,000)
Federal income taxes 597,000 220,000 1,017,000
State income taxes 77,000 28,000 335,000
$ 674,000 $ 248,000 $1,352,000
June 30
1998 1997
Total deferred tax assets $ 2,675,000 $2,480,000
Total deferred tax liabilities (5,542,000) (4,486,000)
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
June 30
1998 1997
Temporary Differences
Self-insurance accruals $ 1,189,000 $ 1,336,000
Allowance/valuation reserves 419,000 380,000
Revenue recognition 112,000 141,000
Prepaids and other 155,000 (64,000)
Net current deferred income tax asset $ 1,875,000 $ 1,793,000
Depreciation $(17,517,000) $(15,181,000)
Revenue equipment leases 12,372,000 11,065,000
Valuation of available-for-sale securities 393,000 317,000
Net non-current deferred income tax
liability $ (4,752,000) $ (3,799,000)
The Company made income tax payments of approximately $50,000, $209,000 and
$1,087,000 during 1998, 1997 and 1996, respectively.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Common Stock
Recapitalization - In November 1992, the shareholders approved an amendment
of the Certificate of Incorporation to (i) reclassify the existing common
stock as Class A Common Stock; (ii) authorize a new non-voting Class B Common
Stock; (iii) increase the authorized shares of common stock from 10 million
to 20 million, consisting of 10 million shares of Class A Common Stock and 10
million shares of Class B Common Stock; and (iv) establish the rights, powers
and limitations of the Class A Common Stock and the Class B Common Stock.
During 1996, the Company's Board of Directors explored alternatives to
increase shareholder value, and ultimately determined to eliminate the dual
class common stock structure and to return to a single, publicly-traded class
of common stock. On January 29, 1996, the Company announced that its Board
of Directors had approved a recapitalization plan which would take private
its Class B Common Stock and reclassify its two existing classes of common
stock into a new, single class of publicly traded common stock. The
Company's Class A Common Stock and Class B Common Stock were traded on the
NASDAQ National Market System under the symbols CANXA and CANXB. The
Company's common stock traded on the NASDAQ under the symbol CANX. Effective
March 3, 1998, the Company's common stock began trading on the American Stock
Exchange under the symbol AB.
The recapitalization plan effected a 1-for-500,000 reverse split of the
Company's non-voting Class B Common Stock and converted each whole share of
Class B Common Stock outstanding after the reverse stock split into 493,150
shares of voting Class A Common Stock. All shareholders who owned fewer than
500,000 shares of Class B Common Stock on January 26, 1996, were paid a cash
price of $9.00 per share. The Company funded these payments with working
capital.
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, 1998, 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
1998 and 1996. Class B Common Shares previously held as treasury shares were
canceled as a result of the recapitalization plan described above.
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, 1998, there were 29,347
Common Stock Options outstanding for non-employee directors. These options
have been included in the following summary information.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Common Stock (continued)
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 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):
1998 1997 1996
Common Common Class A Class B
Wt Avg Wt Avg Wt Avg Wt Avg
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
Outstanding at
July 1 222,821 $4.66 178,157 $4.34 81,250 $4.34 98,250 $4.34
Granted - - 56,500 6.47 - - - -
Exercised (47,209) 2.17 - - - - - -
Canceled - - (11,836) 8.50 - - - -
Converted to
A Shares - - - - 96,907 4.34 (98,250) 4.34
Outstanding at
June 30 175,612 $5.33 222,821 $4.66 178,157 $4.34 0 $ 0
Weighted average
remaining life 4.74 years
Exercisable at
June 30 120,967 158,417 139,248 0
Weighted average
price $4.89
1998 1997 1996
Price range at
June 30 $1.93 to $7.59 $1.93 to $7.59 $1.93 to $8.50
Earnings Per Share
June 30
1998 1997 1996
Average shares outstanding 3,170,775 3,147,458 3,147,652
Net effect of dilutive
stock options 82,156 85,605 98,745
Diluted shares outstanding 3,252,931 3,233,063 3,246,397
Net income for the period $ 1,814,587 $ 1,431,861 $ 2,158,938
Basic earnings per share $0.57 $0.45 $0.69
Diluted earnings per share $0.56 $0.44 $0.67
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Leases and Commitments
The future minimum payments under capitalized leases at June 30, 1998,
consisted of the following:
1999 $13,311,897
2000 9,236,180
2001 2,616,959
2002 3,787,532
2003 1,505,477
Thereafter 6,550,193
Total minimum lease payments 37,008,238
Amounts representing interest 4,696,035
Present value of net minimum lease payments included
in long-term debt($11,715,721 due in 1999) (Note 2) $32,312,203
Assets held under capital leases are included in property, plant and equipment
as follows:
1998 1997
Revenue equipment $51,406,019 $46,212,586
Accumulated depreciation 20,111,873 16,588,728
$31,294,146 $29,623,858
During 1998 and 1996, the Company incurred capital lease obligations totaling
approximately $11,046,000 and $11,629,000, respectively. No capital lease
obligations were incurred in 1997.
Capitalized lease amortization is included in depreciation expense.
6. 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, $30,000 and $24,000 for the years ended June 30, 1998, 1997 and
1996, 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 1996, the Company paid financial advisory fees totaling $600,000 to Llama
Company in return for services rendered to the Company and to a special
committee of its Board of Directors (See Note 4 Recapitalization). Alice L.
Walton is the Chairman and General Partner of Llama.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. 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
47%, 51%, and 50% of revenue for fiscal 1998, 1997 and 1996, respectively.
Accounts receivable as of June 30 for this customer totaled approximately
$3,040,000 and $5,760,000 for 1998 and 1997, respectively. A second
unaffiliated major customer accounted for approximately 14%, 16%, and 10% of
revenue in 1998, 1997 and 1996, respectively. Accounts receivable as of June
30 for this customer totaled approximately $1,454,000 and $2,420,000 for 1998
and 1997, respectively.
8. 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
participants during the plan year. Participant interests are 100% vested
after completion of three years of service. No contributions to the Plan
were made in 1998, 1997 or 1996.
9. New Accounting Pronouncement
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability at its fair value. The Company
has determined that the adoption of this statement will have no effect on its
financial statements.
Cannon Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Quarterly Results of Operations (Unaudited)
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 before income taxes 664,265 1,884,208 644,367 (704,253)
Income taxes 43,000 654,000 248,000 (271,000)
Net income $ 621,265 $ 1,230,208 $ 396,367 $ (433,253)
Basic earnings 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 per share $0.19 $0.38 $0.12 $(0.13)
Diluted shares and share
equivalents outstanding 3,225,826 3,266,308 3,257,935 3,261,655
Fiscal 1997
September 30 December 31 March 31 June 30
Operating revenue $27,562,855 $26,356,862 $25,426,960 $26,789,591
Operating expenses and costs 25,866,378 24,948,949 24,498,584 25,599,334
Operating income 1,696,477 1,407,913 928,376 1,190,257
Other income, net 76,369 57,686 53,373 62,629
Interest expense 936,315 937,439 943,973 975,492
Income before income taxes 836,531 528,160 37,776 277,394
Income taxes 322,000 203,000 15,000 (292,000)
Net income $ 514,531 $ 325,160 $ 22,776 $ 569,394
Basic earnings per share $0.16 $0.10 $0.01 $0.18
Average shares and share
equivalents outstanding 3,147,652 3,147,652 3,147,430 3,147,099
Diluted earnings per share $0.16 $0.10 $0.01 $0.18
Diluted shares and share
equivalents outstanding 3,249,993 3,239,597 3,231,692 3,210,968
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 each of the two years in the period
endced 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 audits of the basic financial
statements. The schedule is presented for purposes or 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, 1998:
Deducted from assets accounts:
Reserve for doubtful trade
receivables $183,411 $ 45,000 $69,755(A) $158,656
Year ended June 30, 1997:
Deducted from assets accounts:
Reserve for doubtful trade
receivables $171,175 $ 30,000 $17,764(A) $183,411
Year ended June 30, 1996:
Deducted from assets accounts:
Reserve for doubtful trade
receivables $141,175 $ 30,000 $ (A) $171,175
(A)Uncollectible accounts written off, net of recoveries.
Shareholder Information
Form 10-K Availability
A copy of the 1998 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.