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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
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.
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.
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.
Item 8. Financial Statements and Supplementary Data
The response to this Item is presented in a separate section of this report.
Item 9.
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.
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.
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.
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.
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.
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.