Cannon Express, Inc.

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Cannon Express, Inc.

1457 East Robinson
Springdale, Arkansas 72764
U.S.A.
Telephone: (501) 751-9209
Toll Free: (800) 846-8400
Fax: (501) 756-1857
Web site: http://www.cannonexpress.com

Public Company
Incorporated: 1981
Employees: 797
Sales: $85.8 million (2001)
Stock Exchanges: American
Ticker Symbol: AB
NAIC: 484121 General Freight Trucking, Long-Distance, Truckload

Cannon Express, Inc. is an irregular route trucking company operating in 48 states and in Canada. The firm maintains a fleet of approximately 775 trucks and 1,450 trailers. The company’s freight primarily includes retail and wholesale goods destined for discount merchandisers, paper goods, automotive supplies and parts, and non-perishable food products. Cannon Express is managed by CFOex, Inc., a Knoxville, Tennessee, financial services company hired by Cannon Express’s founder, Dean Cannon.

Origins

Cannon Express originated from the assets of a Springdale, Arkansas, trucking company named C.R. Kidd Produce. In 1981, C.R. Kidd was acquired by Dean Cannon, who had been operating as a lease operator of trucks since 1974. By the time Cannon purchased C.R. Kidd, his modestly sized fleet comprised three trucks. The acquisition of C.R. Kidd substantially increased Cannon’s stature in the Arkansas trucking industry. C.R. Kidd operated as a refrigerated carrier hauling produce to retail stores, relying on a fleet of 5 trucks, 20 trailers, and 15 lease operators. Once the acquisition was complete, the newly named Cannon Express began to expand, its growth orchestrated by Cannon, who presided as chief executive officer and president, and his wife, Rose Marie, who served as Cannon Express’s secretary and treasurer.

Within five years of founding Cannon Express, the husband-and-wife team had made significant progress in expanding the trucking company. By 1986, Cannon Express had 100 trailers at its disposal and continued to operate its business under the lease-operator arrangement, contracting with truck owners for deliveries. The Cannons soon changed the way their business operated, forsaking the lease-operator arrangement for control over their own fleet. The Cannons purchased 100 trucks, replacing the owner-operated trucks they had been using. They also fashioned the company into an irregular route, truckload carrier, its mission to transport a wide range of commodities throughout the country, pursuant to nationwide operating authorities granted by the Department of Transportation. The company’s sales efforts consisted of a three-pronged approach spearheaded by satellite salespeople, a telemarketing staff, and customer coordinators. Cannon Express’s salespeople were situated in strategic locations, dotting the company’s operating territory. The telemarketing staff drummed up new business by soliciting new customers. Cannon Express’s customer coordinators arranged shipments for the company’s existing customers.

A new customer’s initial contact with the company was made through one of Cannon Express’s salespeople. The sales-person collected pertinent information from the customer, ascertaining the its financial condition, payment history, and information related to its loads, including the volume of freight to be delivered, the origins and destinations of the shipments, the pick-up and delivery time frames, and any special needs. Once the information was recorded on a database, Cannon Express and the shipper discussed shipment rates, agreeing on a figure that was subsequently passed to one of the company’s customer coordinators, who where assigned to a specific region of the country. A customer coordinator served as a matchmaker, finding a truck available for the shipper’s load. Once a match was found, the customer coordinator assigned the shipment to a dispatcher, the final link in the process. Dispatchers relayed the shipment information to the selected driver, who, once on the road, communicated with the dispatcher either via telephone at routine stops on route or through a computer and satellite link located in the truck. The satellite link allowed the dispatcher to keep track of the shipment’s progress. When the shipment reached its destination, the dispatcher assigned another shipment to the driver.

Cannon Express published its own freight rates, rather than using those published by freight rate publishing bureaus. By doing so, according to the company’s belief, Cannon Express could adjust its prices more nimbly, enabling it to be more responsive to changing market conditions and to the particular needs of its customers. The cargo carried by the company’s trucks consisted of a wide range of commodities, including retail and wholesale goods destined for discount merchandisers, paper goods, automotive supplies and parts, and non-perishable food products.

Growth in the Early and Mid-1990s

By the time Cannon Express celebrated its 10th anniversary, the company had developed into a genuine regional carrier. Freight traffic local to Springdale accounted for virtually none of the company’s business. Instead, Cannon Express spread its presence throughout a wide territory bounded by Texas and Oklahoma to the west. To the east, Cannon Express’s operating territory extended to the Atlantic Ocean. To service this territory, the company maintained a fleet of 288 trucks (referred to as tractors in the trucking industry), and 359 trailers, the extent of the Cannons’ expansion efforts by mid-1991. Increasing customer demand, despite the anemic financial conditions prevalent during the early 1990s, demanded a larger, newer fleet. Consequently, the company was negotiating for a substantial upgrade and expansion of its fleet midway through 1991, planning to purchase 85 new tractors, to replace 95 of its tractors with new tractors, and to acquire an additional 100 trailers, expecting to put the acquired assets into service by the end of the year.

At this point in the company’s development, it stood as a $27 million company. The total, recorded in 1991, represented a 43 percent increase over the previous year’s total. The gain was indicative of the robust growth the company was enjoying at the completion of its first decade of business. The growth, which continued for much of the 1990s, transformed Cannon Express into a national freight hauler, with operations in the 48 contiguous states and in Canada. The expansion made Cannon Express the eighth-largest trucking company in Arkansas, but by the time the company’s second decade of business was nearing completion, the years of growth had given way to a period of considerable frustration. A number of factors contributed to the pain suffered by Cannon Express—the publication Arkansas Business referred to “an almost cataclysmic union of negative business factors” in a June 4, 2001 article. This situation was further exacerbated by the actions of one of Cannon Express’s customers.

Much of Cannon Express’s strength as it entered the late 1990s was drawn from a another Arkansas concern, Wal-Mart Stores Inc., the largest retailer in the world. Wal-Mart operated 31 of what it referred to as “Centerpoints,” distribution centers that served as hubs for the company’s myriad stores. Cannon Express, to its great financial benefit, enjoyed a share of Wal-Mart’s Centerpoint business, deriving roughly 50 percent of its $109 million in sales in 1998 from Wal-Mart. The company’s reliance on Wal-Mart was massive, helping to account for the four-fold increase in annual sales Cannon Express recorded between 1991 and 1998. Dependence on Wal-Mart worked to Cannon Express’s advantage, but the gains were equal to the losses when Wal-Mart rethought the distribution of its $1.5 billion worth of annual outside trucking business. For Cannon Express, the hammer began to fall in 1997.

In 1997, Wal-Mart converted to a “price-only” bidding system for its trucking contracts, part of the retailer’s plan to consolidate its distribution processes. Cannon Express lost its share in the Centerpoint business as a result of Wal-Mart’s decision, one of the effects of which was to cause Cannon Express’s stock value to plunge by 70 percent. In early 2000, Cannon Express’s loss was compounded when Wal-Mart handed another Arkansas-based trucking company, J.B. Hunt Transport Services Inc., a $100 million distribution contract. J.B. Hunt, the state’s largest trucking concern, generated more than $2 billion in annual revenue from its fleet of 9,400 trucks and 38,000 trailers. Ted Wade, Wal-Mart’s vice-president of corporate traffic, explained the decision in an April 24, 2000 interview with Arkansas Business. “J.B. Hunt was selected for their ability to provide the entire scope of transportation and logistics solutions to meet our needs. The simplicity of dealing with a single source that will help us lower transportation costs to benefit our customers was a key factor.” Cannon, two years after Wade’s remarks, provided his perception in an April 1, 2002 interview with Arkansas Business, saying, “We heard they were wanting to single-source a lot of that business, so they took it away from us and gave to other companies—gave it to Hunt. It’s extremely difficult to recoup from that big of a hit.”

Key Dates:

1981:: Dean Cannon purchases C.R. Kidd Produce.
1997:: Wal-Mart begins to sever its business relationship with Cannon Express.
2000:: Cannon Express reduces the size of its fleet.
2002:: CFOex, Inc. is hired to manage Cannon Express.

Diminishing Financial Health: Late 1990s

The blow was devastating, triggering the downward spiral of the company’s fortunes. Cannon rallied to reverse the negative affects, which were aggravated by the financial troubles of the company’s second-largest customer, International Paper, whose contribution to Cannon Express’s annual revenue volume declined from 14.4 percent to 9.4 percent between 1998 and 2000. At roughly the same time that Wal-Mart handed $100 million in new business to rival J.B. Hunt, Cannon Express launched a Web site that, for a fee of $10, allowed trucking companies to post their loads and to coordinate hauling, providing capabilities that removed the need to pay brokerage fees. Within the first two weeks of the Web site’s debut, it attracted 22,000 trucks. Hoping to compensate for the loss of Wal-Mart traffic, Cannon was endeavoring to attract business from two million trucks for his company’s Web site. “The intent at this point,” Cannon said in an April 24, 2000 interview with Arkansas Business, “is to reduce the carriers’ expenses, to cut out the parasites, and keep the money in the trucking community where it belongs.”

However, Cannon’s efforts to recover from the loss of Wal-Mart’s business were hampered by a host of other, almost conspiratorial, obstacles. As the company entered the 21st century, it was beset by rising diesel costs and hobbled by a shortage of qualified drivers. A weakening national economy offered no salve. In response, Cannon reduced the size of his fleet, a consequence of steadily declining revenues. In June 2000, he sold 120 of his trucks and 180 of his trailers. At the same time, he began replacing many of his 48-foot trailers with 53-foot trailers in an effort to become more competitive. Cannon also implemented a new lease program for truck owner-operators, a strategy which was expected to improve Cannon Express’s driver retention rate and operating results by transferring responsibility of certain costs, such as fuel costs, from the company to the owner-operators.

By the end of the company’s 2001 fiscal year in June 2001, the financial figures for the previous 12 months pointed to serious problems. For the year, the company generated $85.8 million in sales, down markedly from the $109 million collected in 1998, and posted a crippling $7.3 million loss. To make matters worse, the company found itself embroiled in legal controversy as fiscal 2001 drew to an end. In May 2001, three individuals—Ed Bennett, Farish Kincaid, and Felix Pruss— filed an involuntary bankruptcy petition against Cannon Express, claiming that the company owed them more than $1.3 million for services rendered. (According to the petition for Chapter 7 liquidation, the trio claimed to have signed contracts with Cannon Express to recruit foreign drivers, primarily from Australia and New Zealand). Cannon responded to the accusation with disbelief. In a May 28, 2001 interview with Arkansas Business, he remarked, “We don’t know totally what the complaint says. But we know who some of the individuals are who are involved. One we’ve never heard of and has never had any affiliation with us, and the other two we don’t owe any money to. It does not make a lot of sense.”

At the end of July 2001, Cannon’s prospects brightened somewhat when the request for involuntary bankruptcy was withdrawn. According to the plaintiffs’ attorneys, the lawsuit was dropped because of Felix Pruss’ failing health. Cannon’s respite from legal problems was all too brief, however. In February 2002, the company announced a net loss for the seventh consecutive quarter, contributing to the more than $4.5 million deficit racked up during the first six months of the company’s fiscal 2002. At the same time, the Internal Revenue Service (IRS) notified Cannon Express that it owed $6 million in back taxes. Cannon brushed aside the accusation. “We believe [the 1RS position is] totally unfounded,” he explained in a February 25, 2002 interview with Arkansas Business. “It involves a leasing transaction. It’s more of a question of who pays the tax.”

One month after the 1RS notified Cannon Express of its tax obligations, the company began to unravel. The first major job cut in the company’s 21-year history occurred in March 2002, when 50 workers were laid off, which represented one-quarter Cannon Express’s non-driving work force. Concurrently, Cannon and his wife announced they would stop drawing a salary from the company in an effort to reduce expenses. The company’s precarious financial condition did not improve, however, as the summer months of 2002 resulted in further losses. By August 2002, Cannon had run out of options, save one.

In an August 26, 2002 article published in Arkansas Business, Cannon made what must have been a difficult announcement. “Due to the company’s lack of operating success, it is imperative that Cannon Express take immediate steps to improve its operating performance and liquidity.” The immediate steps Cannon referred to, in effect, represented his own dismissal. Cannon hired CFOex Inc. to assume day-to-day management responsibilities over Cannon Express’s operation. CFOex Inc. was a financial services company comprising former chief financial officers and senior executives from public and private trucking companies. Concurrent with the announcement, Cannon resigned as president and chief executive officer and Rose Marie Cannon resigned as secretary and treasurer.

Into the void created by Cannon’s departure stepped Bruce Jones, the founder and president of CFOex. Jones, the former chief executive officer of two trucking companies, including J.B. Hunt, took on the title of interim chief executive officer. The impact of Jones’s managerial reign was not determined by the end of 2002, but the first few months of his tenure pointed to continued problems for the beleaguered company. During the first fiscal quarter of 2003, revenues were down 13 percent and the company reported a net loss of $3.1 million. Ahead lay many months of arduous work to repair the damages incurred during the previous five years, a crucible for the 21-year-old company.