-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+5SKhDcv+V4mWGzS2N1SPiPCXBlLoDxNqIW2XOOPsdn04LfcUhIUJ2E9eH87kiJ upl2AKO6AaI7uLTN85pr/w== 0000793765-98-000002.txt : 19980403 0000793765-98-000002.hdr.sgml : 19980403 ACCESSION NUMBER: 0000793765-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980102 FILED AS OF DATE: 19980402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KLLM TRANSPORT SERVICES INC CENTRAL INDEX KEY: 0000793765 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 640412551 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14759 FILM NUMBER: 98586141 BUSINESS ADDRESS: STREET 1: 3475 LAKELAND DR CITY: JACKSON STATE: MS ZIP: 39288 BUSINESS PHONE: 6019392545 MAIL ADDRESS: STREET 1: P.O.BOX 6098 CITY: JACKSON STATE: MS ZIP: 39288 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year Commission file number 0-14759 ended January 2, 1998 KLLM TRANSPORT SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 64-0412551 - --------------------------- ------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 135 Riverview Drive Richland, Mississippi 39218 ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (601) 939-2545 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 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 for 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. Aggregate market value of voting stock held by nonaffiliates of the registrant as of the close of business on March 10, 1998: $48,924,224. The number of shares outstanding of registrant's common stock as of March 10, 1998: 4,373,115. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: Document Part - -------- ---- Annual Report to Shareholders for year ended January 2, 1998 II Definitive Proxy Statement for Annual Meeting of Shareholders to be held April 21, 1998 filed with the Securities and Exchange Commission pursuant to Regulation 14A III Only the portions of KLLM Transport Services, Inc.'s 1997 Annual Report to Shareholders and Proxy Statement which are expressly incorporated by reference in this Annual Report on Form 10-K are deemed filed as part of this report. KLLM TRANSPORT SERVICES, INC. FORM 10-K TABLE OF CONTENTS PART I PAGE 1. Business................................................4 2. Properties..............................................6 3. Legal Proceedings.......................................7 4. Submission of Matters to a Vote of Security Holders......................................7 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters................8 6. Selected Financial Data.................................8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........8 8. Financial Statements and Supplementary Data.............8 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................8 PART III 10. Directors and Executive Officers of the Registrant......................................9 11. Executive Compensation..................................9 12. Security Ownership of Certain Beneficial Owners and Management..................................9 13. Certain Relationships and Related Transactions..........9 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................................10 PART I Item 1. BUSINESS. -------- KLLM Transport Services, Inc. (through its wholly-owned subsidiary, KLLM, Inc., and KLLM, Inc.'s wholly-owned subsidiaries, KLLM Maintenance, Inc., Gulf Logistics, Inc., KLLM Contract Logistics, Inc., KLLM Trading Company, and Fresh International Transportation Services, Inc., hereinafter referred to as "the Company") is an irregular-route common carrier that specializes in providing high-quality transportation service in North America. The Company primarily serves the continental United States, Canada and Mexico. The Company, a Delaware corporation, is the successor by merger to KLLM Distributing, Inc. ("KLLM Distributing"), a Mississippi corporation, incorporated in 1964. The Company owns all of the outstanding shares of KLLM, Inc., a Texas corporation, which owns (either in fee or as lessee) and operates substantially all of the Company's tractors and trailers and holds all of the operating rights presently used in the Company's business. The Company offers transportation services for both temperature- controlled and dry commodities. It strives to provide dependable and timely service designed to meet the specialized needs of its customers. Protective service is provided on commodities such as food, medical supplies and cosmetics. Service offerings include over-the-road long haul and regional transportation. These services are provided via the traditional over-the-road temperature-controlled freight operations with both Company-operated and owner-operated equipment and the dry-van over-the-road truckload services, which began May 1, 1995 with the acquisition of substantially all of the assets of Vernon Sawyer, Inc., a regional dry-van truckload carrier based in Bastrop, Louisiana. The Company currently owns (or leases) and operates substantially all of its fleet. On January 2, 1998, the Company's fleet consisted of 1,464 Company-operated tractors and 349 owner-operated tractors, 2,047 temperature-controlled trailers and 570 dry-van trailers. Capital expenditures, net of proceeds from trade-ins during 1997, were approximately $25,764,000. Net capital expenditures in 1996 were $20,153,000. Net capital expenditures in 1998 are expected to be approximately $8,000,000. Marketing and Operations - ------------------------ KLLM specializes in providing high-quality transportation services in North America. The Company seeks customers who value its services; who need a number of trucks per week and who require dependable service in meeting schedule requirements. The Company's full-time staff of ten (10) salespersons, along with certain executives, is responsible for developing new accounts. Once a customer relationship is established, the primary Company contact is an operations manager who is either dedicated to the customer or who is responsible to a geographic territory. Working from the Company's corporate headquarters in Mississippi and Louisiana, these managers contact existing customers to solicit additional business. The Company has driver terminal operations in Georgia, Louisiana, California, Indiana, Pennsylvania and Mississippi. Maintenance facilities are located in Mississippi, Louisiana, Texas and Georgia. The Company's largest 25, 10 and 5 customers accounted for approximately 63%, 49%, and 34%, respectively, of its revenue for the year ended January 2, 1998. During 1997, one customer accounted for more than 10% of the Company's revenues. Maintenance - ----------- The Company has a comprehensive preventive maintenance program for its tractors and trailers, which is carried out at its Jackson, Mississippi, Bastrop, Louisiana and Atlanta, Georgia facilities. The Company's policy is to purchase standardized tractors and trailers manufactured to Company specifications. Standardization enables the Company to control the cost of its spare parts inventory and streamline its preventive maintenance program. Manufacturers of tractors are required to certify that new tractors meet federal emissions standards, and the Company receives this certification on each new tractor it acquires. Environmental protection measures require the Company to adhere to a fuel and oil spill prevention plan and to comply with regulations concerning the discharge of waste oil. The Company believes it is in compliance with all applicable provisions relating to the protection of the environment. Management does not anticipate that compliance with these provisions will have a material effect on the Company's capital expenditures, earnings or competitive position. Personnel - --------- Drivers are recruited at all driver terminal locations. On January 2, 1998, the Company employed 1,742 drivers and had a total of 2,099 employees. None of the Company's employees is represented by a collective bargaining unit. Competition - ----------- The Company competes primarily with other long-haul truckload carriers and with internal shipping conducted by existing and potential customers. The Company also competes with other irregular-route long-haul truckload carriers, and to a lesser extent, the railroads, for freight loads. Although the increased competition resulting from a combination of deregulation, weak market demand, and a shortage of qualified drivers has created some pressure to reduce rates, the Company competes primarily on the basis of its quality of service and efficiency. Trademark - --------- The Company's service mark, the KLLM logo, is registered with the United States Patent and Trademark Office. Seasonality - ----------- In the freight transportation industry generally, results of operations show a seasonal pattern because customers reduce shipments during and after the winter holiday season with its attendant weather variations. The Company's operating expenses have historically been higher in the winter months primarily due to decreased fuel efficiency and increased maintenance costs in colder weather. ITEM 2. PROPERTIES. ---------- Until early in 1998, the Company's corporate office was situated on approximately seven acres of land and contained approximately 20,600 square feet of office space. As of March 13, 1998, that property was sold. Most of the Company's executive and administrative functions, except those that were driver-related, were housed in the corporate office. The corporate office was located in Flowood, Mississippi, a suburb of Jackson. In early 1998, all corporate office functions were moved to a facility located in Richland, Mississippi, a suburb of Jackson, which previously housed all driver-related executive and administrative functions, including safety, driver training, maintenance and driver recruiting. The Company owns a portion of the land on which this facility is located. The remainder is owned by Benjamin C. Lee, Jr. and the Estate of William J. Liles, Jr. The Company owns all of the improvements, consisting of approximately 31,200 square feet of office space and approximately 40,000 square feet of equipment repair and maintenance space. The Company has an option to purchase the Lee and Liles part of the land for $390,257. Mr. Lee and Mr. Liles' estate are principal shareholders of the Company and Mr. Lee is Chairman of the Company's Board of Directors. The Company owns a maintenance and driver terminal facility near Dallas, Texas which was leased out in 1997 after maintenance and terminal operations were ceased at that facility. This facility, which consists of approximately 8,000 square feet of office space and 13,700 square feet of equipment repair and maintenance space, is located on approximately nine acres of land. That property is currently available for sale. The Company also owns a maintenance and driver terminal operation in Atlanta, Georgia. This facility, which includes two buildings containing approximately 5,000 square feet of office space and 20,000 square feet of maintenance space, is located on approximately eighteen acres of land. Additionally, the Company's dry-van operation in Bastrop, Louisiana is situated on 20 acres of land. The facilities located thereon include approximately 8,000 square feet of office space and 36,500 square feet of maintenance space. The remaining driver terminal facilities are leased by the Company pursuant to various short-term leases. ITEM 3. LEGAL PROCEEDINGS. ----------------- The Company is involved in various claims and routine litigation incidental to its business. Although the amount of ultimate liability, if any, with respect to these matters cannot be determined, management believes that these matters will not have a materially adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- Not applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. --------------------------------------------------------------------- "Market and Dividend Information" on page 7 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference in response to this item. Item 6. SELECTED FINANCIAL DATA. ----------------------- "Selected Financial and Operating Data" on page 6 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference in response to this item. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION. ------------------- "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 8-12 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference in response to this item. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The Report of Independent Auditors and the consolidated financial statements included on pages 13-24 of the Company's 1997 Annual Report to Shareholders are incorporated herein by reference in response to this item. "Selected Quarterly Data (Unaudited)" on page 7 of the Company's 1997 Annual Report to Shareholders is incorporated herein by reference in response to this item. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. -------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. -------------------------------------------------- The information under the caption, "Election of Directors--Nominees for Director," of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. The information under the caption, "Election of Directors-- Management," of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. The information under the caption, "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. Item 11. EXECUTIVE COMPENSATION. ---------------------- The information under the captions, "Executive Compensation; Director Compensation; Compensation Committee Report on Executive Compensation; Compensation Committee Interlocks and Insider Participation; Stock Option Plan; Employee Stock Purchase Plan ("ESPP") and Performance Graph" of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- The information under the caption "Election of Directors--Stock Ownership," of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- The information contained in the section titled "Certain Transactions" on page 5 of the Company's definitive proxy statement for its scheduled April 21, 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. --------------------------------------------------------------- a. The following documents are filed, as part of this report or incorporated by reference herein: 1. Financial Statements The following consolidated financial statements of the Company and its subsidiaries, included in the Company's Annual Report, are incorporated by reference in Item 8: Consolidated Balance Sheets-January 3, 1997 and January 2, 1998. Consolidated Statements of Operations--Years ended December 29, 1995, January 3, 1997 and January 2, 1998. Consolidated Statements of Stockholders' Equity-- Years ended December 29, 1995, January 3, 1997 and January 2, 1998. Consolidated Statements of Cash Flows--Years ended December 29, 1995, January 3, 1997 and January 2, 1998. Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following consolidated financial statement schedule is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Listing of Exhibits (i) Exhibits filed pursuant to Item 601 of Regulation S-K Exhibit Number Description 3.1 Bylaws of Registrant 1 3.2 Certificate of Incorporation (as amended) 2 10.1 Amended & Restated Stock Option Plan 3 10.2 KLLM, Inc. Retirement Plan and Trust (as amended) 4 10.3 1986 Lease with Mr. Lee and Mr. Liles Covering Corporate Headquarters 1 10.4 Employee Stock Purchase Plan (as amended) 5 10.5 Options granted to Mr. Young and Dr. Neely 6 - ----------------------- 1 Incorporated herein by reference to Registrant's Registration Statement on Form S-1 as filed on July 2, 1986 (Registration No. 33-5881, File No. 0-14759). 2 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 1, 1989 (File No. 0-14759). 3 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 0-14759). 4 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-14759). 5 Incorporated herein by reference from Fourth Post-Effective Amendment to Registration Statement on Form S-8 as filed on November 30, 1990 (Registration No. 33-14545). 6 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-14759). Exhibit Number Description 10.6 First Amendment to Options granted to Mr. Young and Dr. Neely 7 10.7 KLLM, Inc. Cafeteria Plan 7 10.8 KLLM Maintenance, Inc. Retirement Plan and Trust Agreement 7 10.9 Option to purchase real property on which terminal facility is located from Messrs. Liles and Lee 4 10.10 Stock Purchase Agreement by and between KLLM, Inc. and Fresh International Corp. 8 10.11 Revolving Credit Agreement by and among KLLM, Inc., NationsBank of Georgia, National Association, The First National Bank of Chicago, Deposit Guaranty National Bank, and ABN Amro Bank, N.V. 8 10.12 Employment Agreement between KLLM Transport Services, Inc. and Steven K. Bevilaqua 9 10.13 Options granted to Steven K. Bevilaqua 9 10.14 Asset Purchase Agreement by and among Vernon Sawyer, Inc. and Vernon and Nancy Sawyer as Sellers and KLLM, Inc. as Purchaser (schedules furnished upon request) 9 - ------------------- 7 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0-14759). 8 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 30, 1994 (File No. 0-14759). 9 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 29, 1995 (File No. 0-14759). Exhibit Number Description 10.15 1996 Stock Option Plan 10 10.16 Amended and Restated 1996 Stock Purchase Plan 10 10.17 1998 Non-Employee Director Stock Compensation Plan 10.18 Stockholder Protection Rights Agree- ment dated February 13, 1997 between KLLM Transport Services, Inc. and KeyCorp Shareholder Services, Inc., as Rights Agent 11 13 1997 Annual Report (only portions incorporated by reference are deemed filed) 21 List of Subsidiaries of the Registrant 8 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (b) Reports on Form 8-K filed in the fourth quarter of 1997: None (c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statements Schedules--The response to this portion of Item 14 is submitted as a separate section of this report. - -------------------- 10 Incorportated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 3, 1997 (File No. 0-14759). 11 Incorporated herein by reference to Registrant's Form 8-A12G\A as filed on February 24, 1997 (File No. 001-12751). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. KLLM TRANSPORT SERVICES, INC. Date: March 31, 1998 By: /s/ Steven K. Bevilaqua ---------------------------- Steven K. Bevilaqua President, Chief Executive Officer and Director
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. Date: March 31, 1998 /s/ Benjamin C. Lee, Jr. ------------------------------ Benjamin C. Lee, Jr. Chairman of the Board of Directors Date: March 31, 1998 /s/ Steven K. Bevilaqua ------------------------------ Steven K. Bevilaqua President, Chief Executive Officer and Director Date: March 31, 1998 /s/ James Leon Young ------------------------------- James Leon Young Secretary and Director Date: March 31, 1998 /s/ Walter P. Neely ------------------------------- Walter P. Neely Director Date: March 31, 1998 /s/ Leland R. Speed ------------------------------- Leland R. Speed Director Date: -------------------------------- C. Tom Clowe, Jr. Director Date: March 31, 1998 /s/ Steven L. Dutro --------------------------------- Steven L. Dutro Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the Board of Directors, administrators of the KLLM Transport Services, Inc. Employee Stock Purchase Plan and the KLLM Transport Services, Inc. 1996 Stock Purchase Plan, have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. KLLM TRANSPORT SERVICES, INC. EMPLOYEE STOCK PURCHASE PLAN and KLLM TRANSPORT SERVICES, INC. 1996 STOCK PURCHASE PLAN Date: March 31, 1998 By: /s/ Steven K. Bevilaqua ------------------------------ Steven K. Bevilaqua President, Chief Executive Officer and Director
ITEM 14(a)(2) and (c) FINANCIAL STATEMENT SCHEDULES KLLM TRANSPORT SERVICES, INC. and SUBSIDIARIES SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS Years Ended December 29, 1995, January 3, 1997, and January 2, 1998 BALANCE AT CHARGED TO WRITE-OFF BALANCE AT BEGINNING COST AND OF END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OF PERIOD (In Thousands) - --------------- ---------- ---------- --------- ---------- Accounts Receivable Allowance: Year ended December 29, 1995 $147 $1,239 $907 $479 Year ended January 3, 1997 $479 $ 520 $317 $682 Year ended January 2, 1998 $682 $ 335 $128 $889
EXHIBIT INDEX Exhibit Number Description Page - --------------- ----------- ---- 3.1 Bylaws of Registrant 1 3.2 Certificate of Incorporation (as amended) 2 10.1 Amended and Restated Stock Option Plan 3 10.2 KLLM, Inc. Retirement Plan and Trust (as amended) 4 10.3 1986 Lease with Mr. Lee and Mr. Liles Covering Corporate Headquarters 1 10.4 Employee Stock Purchase Plan (as amended) 5 10.5 Options granted to Mr. Young and Dr. Neely 6 - ----------------------------- 1 Incorporated herein by reference to Registrant's Registration Statement on Form S-1 as filed on July 2, 1986 (Registration No. 33-5881, File No. 0-14759). 2 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 1, 1989 (File No. 0-14759). 3 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 0-14759). 4 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-14759). 5 Incorporated herein by reference from Fourth Post-Effective Amendment to Registration Statement on Form S-8 as filed on November 30, 1990 (Registration No. 33-14545). 6 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-14759). EXHIBIT INDEX Exhibit Number Description Page - -------------- ----------- ---- 10.6 First Amendment to Options granted to Mr. Young and Dr. Neely 7 10.7 KLLM, Inc. Cafeteria Plan 7 10.8 KLLM Maintenance, Inc. Retirement Plan and Trust Agreement 7 10.9 Option to purchase real property on which terminal facility is located from Messrs. Liles and Lee 4 10.10 Stock Purchase Agreement by and between KLLM, Inc. and Fresh International Corp. 8 10.11 Revolving Credit Agreement by and among KLLM, Inc., NationsBank of Georgia, National Association, The First National Bank of Chicago, Deposit Guaranty National Bank, and ABN Amro Bank, N. V. 8 10.12 Employment Agreement between KLLM Transport Services, Inc. and Steven K. Bevilaqua 9 10.13 Options granted to Steven K. Bevilaqua 9 10.14 Asset Purchase Agreement by and among Vernon Sawyer, Inc. and Vernon and Nancy Sawyer as Sellers and KLLM, - ------------------------------- 7 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 0-14759). 8 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 30, 1994 (File No. 0-14759). 9 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 29, 1995 (File No. 0-14759). EXHIBIT INDEX Exhibit Number Description Page - -------------- ----------- ---- Inc. as Purchaser (schedules furnished upon request) 9 10.15 1996 Stock Option Plan10 10.16 Amended and Restated 1996 Stock Purchase Plan10 10.17 1998 Non-Employee Director Stock Compensation Plan 10.18 Stockholder Protection Rights Agreement dated February 13, 1997 between KLLM Transport Services, Inc. and KeyCorp Shareholder Services, Inc., as Rights Agent11 13 1997 Annual Report (Only portions incorporated by reference are deemed filed) 21 List of Subsidiaries of the Registrant 8 23 Consent of Ernst & Young LLP 27 Financial Data Schedule - ------------------ 10 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 3, 1997 (File No. 0-14759). 11 Incorporated herein by reference to Registrant's Form 8-A12G\A as filed on February 24, 1997 (File No. 001-12751). EX-10 2 EXHIBIT 10.17 KLLM TRANSPORT SERVICES, INC. 1998 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN ARTICLE 1 Purpose of the Plan Section 1.1. Purpose. The purpose of the KLLM Transport Services, Inc. 1998 Non-Employee Director Stock Compensation Plan is to promote the long-term growth of KLLM Transport Services, Inc. by providing a vehicle for Non-Employee Directors to increase their proprietary interest in KLLM Transport Services, Inc. and to attract and retain highly qualified and capable Non-Employee Directors. ARTICLE 2 Definitions Unless the context clearly indicates otherwise, the following terms shall have the following meanings: Section 2.1. "Annual Retainer" means the annual cash retainer fee payable by the Corporation to a Non-Employee Director for services as a director of the Corporation, as such amount may be changed from time to time. Section 2.2. "Board" means the Board of Directors of the Corporation. Section 2.3. "Business Day" shall mean a day on which the NASDAQ National Market or any national securities exchange or over-the-counter market on which the Shares are traded is open for business. Section 2.4. "Committee Fees" means fees payable by the Corporation to a Non-Employee Director for serving as a member or chairman of a committee of the Board, as such amount may be changed from time to time. Section 2.5. "Compensation Committee" means the Compensation Committee of the Board. Section 2.6. "Corporation" means KLLM Transport Services, Inc. Section 2.7. "Fair Market Value per Share" as of a particular date means the closing sales price of one Share on such date as reported on the NASDAQ National Market or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported. Section 2.8. "Non-Employee Director" means a director of the Corporation who is not an employee of the Corporation or any subsidiary of the Corporation. Section 2.9. "Plan" means the KLLM Transport Services, Inc. 1998 Non-Employee Director Stock Compensation Plan. Section 2.10. "Shares" means shares of the common stock, par value $1.00 per share, of the Corporation. ARTICLE 3 Administration of the Plan Section 3.1. Administrator of the Plan. The Plan shall be administered by the Compensation Committee. Section 3.2. Authority of Compensation Committee. The Compensation Committee shall have full power and authority to: (i) interpret and construe the Plan and adopt such rules and regulations as it shall deem necessary and advisable to implement and administer the Plan, and (ii) designate persons other than members of the Compensation Committee or the Board to carry out its responsibilities, subject to such limitations, restrictions and conditions as it may prescribe, such determinations to be made in accordance with the Compensation Committee's best business judgment as to the best interests of the Corporation and its stockholders and in accordance with the purposes of the Plan. The Compensation Committee may delegate administrative duties under the Plan to one or more agents as it shall deem necessary or advisable. Section 3.3. Effect of Compensation Committee Determinations. No member of the Compensation Committee or the Board shall be personally liable for any action or determination made in good faith with respect to the Plan or as to any settlement of any dispute between a Non-Employee Director and the Corporation. Any decision or action taken by the Compensation Committee or the Board with respect to the administration or interpretation of the Plan shall be conclusive and binding upon all persons. ARTICLE 4 Eligibility Section 4.1. Eligibility. Non-Employee Directors of the Corporation shall be eligible to participate in the Plan in accordance with Article 6. ARTICLE 5 Shares Subject to the Plan Section 5.1. Shares Subject to the Plan. The maximum number of shares which may be granted under the Plan is 25,000 Shares. The Shares distributable under the Plan may be either unissued Shares or reacquired Shares held in treasury. ARTICLE 6 Receipt of Shares Each Non-Employee Director shall be granted Shares subject to the following terms and conditions: Section 6.1. Receipt of Shares. On the last Business Day of each fiscal quarter of each year, Shares shall be granted to each Non-Employee Director in lieu of such Non-Employee Director's Annual Retainer and Committee Fees. Section 6.2. Number of Shares. The number of Shares to be granted to a Non-Employee Director pursuant to this Article 6 on each quarterly grant date shall be the number of whole Shares equal to (i) one quarter (1/4) of such Non-Employee Director's Annual Retainer plus (ii) such Non-Employee Director's Committee Fees for that fiscal quarter, divided by (iii) the Fair Market Value per Share on the date the Shares are awarded. In determining the number of Shares to be granted, any fraction of a Share will be disregarded and the remaining amount of such quarterly installment shall be paid in cash. ARTICLE 7 Amendment and Termination Section 7.1. Amendment, Suspension or Early Termination. The Board may suspend or terminate the Plan at any time; provided, however, that the Board may condition any amendment or modification on the approval of stockholders of the Corporation if such approval is necessary or deemed advisable with respect to tax, securities or other applicable laws, policies or regulations. ARTICLE 8 Miscellaneous Section 8.1. Right to Service. Except as provided in the Plan, no Non- Employee Director shall have any claim or right to be granted Shares under the Plan. Neither the Plan nor any action pursuant thereto shall be construed as giving any Non-Employee Director a right to be retained in the service of the Corporation. The adoption of this Plan shall not affect any other compensation, retirement or other benefit plan or program in effect for the Corporation. Section 8.2. Validity. In the event that any provision of the Plan is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan. Section 8.3. Inurement of Rights and Obligations. The rights and obligations under the Plan and any related agreements shall inure to the benefit of, and shall be binding upon the Corporation, its successors and assigns, and the Non-Employee Directors and their beneficiaries. Section 8.4. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. EX-13 3 KLLM 1997 Annual Report Company Profile KLLM Transport Services, Inc., through its wholly-owned subsidiary, KLLM, Inc., specializes in providing high-quality transportation services in North America. KLLM, Inc.'s operating divisions haul both temperature-controlled and dry commodities. Protective service is provided on commodities such as food, medical supplies and cosmetics. Service offerings include over-the-road long haul and regional transportation. The shares of KLLM Transport Services, Inc. trade on the Nasdaq National Market under the symbol KLLM. Financial and Operating Highlights (In thousands, except per share and operating data) 1997 1996 STATEMENT OF OPERATIONS DATA: Operating revenue from truckload operations $240,766 $246,222 Operating income (loss) from continuing truckload operations (15,610) 6,702 Net earnings (loss) from continuing operations (14,720) 905 Basic and diluted earnings (loss) per share from continuing operations $ (3.38) $0.21 Weighted average diluted shares outstanding 4,358 4,373 BALANCE SHEET DATA: Total assets $144,535 $159,894 Long-term debt, less current maturities 44,826 49,747 Stockholders' equity 52,111 66,500 OPERATING DATA: Total miles travelled (000s) 205,828 205,006 Average miles per tractor per week 2,212 2,162 Average revenue per total mile $1.12 $1.12 Equipment at year-end: Company-operated tractors 1,464 1,390 Owner-operated tractors 349 366 -------------------- Total tractors 1,813 1,756 Refrigerated trailers 2,047 2,114 Dry-van trailers 570 493 -------------------- Total trailers 2,617 2,607 Refrigerated rail containers _ 200
LETTER TO SHAREHOLDERS A year ago in our annual report to stockholders, we talked about the many significant changes we have made at KLLM: changes in our management team, organizational configuration and cost structure. In 1997, as we continued to rebuild our Company and focus on our core trucking business, we began to realize the benefits of the decisive actions of the past two years. Some of these benefits include improvements in operational efficiency, a better customer mix, penetration of targeted accounts and lower operating costs throughout the Company. Although the sins of the past resulted in one-time writeoffs which offset these real achievements in 1997, the improvements made in operating fundamentals and cost structure are here to stay. DECISIVE ACTIONS Since we adopted the concept of economic value added, or EVA_, as a tool to guide our business decisions and measure our performance, EVA_ has been a major catalyst for change at KLLM. Implementation of EVA_ has resulted in exiting nonperforming businesses, substantial reductions in staff and facilities in our core operation, and a focus on the fundamentals of trucking. Among the significant actions we took in 1997 were the closing of our rail container operations, an acceleration of our conversion to 53-foot trailers and a reassessment of our reserves for self-insured claims and other contingencies. While these steps resulted in special charges in 1997, they enabled us to clean the slate and will serve us well in the future. In particular, the conversion of our trailer fleet will help us maintain our position as a leader in the temperature-controlled sector. The table on page 3 shows the effect of each of these actions on 1997 results and the profit KLLM generated exclusive of the one-time charges. OPERATIONAL EFFICIENCY IMPROVEMENTS Our focus on the fundamentals of our core trucking operations have led to improvements in operational efficiency which can be measured in a number of ways. Higher Utilization In 1997, miles per tractor per week increased 2.3% and empty mile percentage fell to 11.5% from 12.1% for 1996. Safety Improvement The accident rate per million miles traveled fell 8% in 1997 compared with 1996. Facility Consolidation In early 1998, we relocated our corporate offices to the Jackson terminal site to improve efficiency and enhance communications between the corporate staff and drivers. PROSPr This exciting new initiative places greater emphasis on customer service and frees additional manpower to focus on driver needs. SALES AND MARKETING SUCCESS Successes in sales and marketing are important factors in driving future profitability. As a result of improvements in our own marketing efforts, as well as a more favorable economic environment, we made important strides toward our strategy of improving customer mix and winning new business in 1997. Business with our existing top tier customers grew by 13% during the year. In addition, we added two major customers which rapidly grew to be among our top accounts in 1997 and are expected to move into the top 10 in 1998. COST REDUCTIONS On the cost side, we continue to streamline our operations with a goal to be a low-cost producer driven by service quality and excellent execution of the fundamentals of trucking. The actions outlined below have dramatically lowered our cost structure and reduced our capital investment. However, we are not finished and believe there are still opportunities to reduce our costs even further. Business Closure. We exited the intermodal container business in 1997, following the discontinuance of international maritime service and freight brokerage operations in 1996. Facility Closures. We closed three terminal and maintenance facilities in 1997 and the corporate office facility in early 1998. Since mid-1995, total terminals have been reduced from 13 to 6. Head Count Reductions Non-driving staff totaled 357 at year-end 1997, down 20% from year-end 1996 and 40% from the peak in mid-1995. POSITIONED FOR THE FUTURE In 1998, we look forward to the culmination of over two years of hard work. We believe we have put the last obstacles behind us. Our accomplish- ments of the past two years have enabled us to begin the new year with a significantly lower cost structure, operations keenly focused on our core trucking business and a firmer foundation for carrying out our long-term strategy. As we outlined to you a year ago, that strategy is clearly defined and based on three primary goals we call routes to success. Routes to Success Create economic value for our stockholders by providing superior "total service" to select customers who will provide adequate returns on capital. Serve our select customers effectively and cost efficiently at a level unmatched by our competitors. Match our services offered and available fleet capacity to our customers' expectations and industry constraints. Position our services and costs to take advantage of opportunities in the growing freight market while mitigating the impact of periodic downturns. Action Plan _ Use EVA_ as a guide to invest capital based on real, measurable returns. - - Target customers which are interested in building "partnerships" and willing to pay adequately for superior service. _ Maintain focus on operational excellence, reducing costs without sacrificing service quality. _ Bring mix of business and levels of service in line with customer demand, growing capacity in areas where returns on investment are favorable. _ Develop fleet capacity with a balance of company drivers, owner operators and subcontractors. _ Seize the initiative and be proactive to changes in market conditions and competition. _ Deliver the best in customer service to foster stable, "total service" customer relationships. _ Keep capacity flexible. _ Take advantage of opportunities to build key customer relationships, acquire bargain priced assets, hire drivers and make operations more efficient. We enter 1998 with strong sales momentum, an outlook for improved freight demand and rates, substantial reductions in our cost structure and the promising new PROSPr program. In addition, EVA_ continues to mature in our Company and is becoming an ever more valuable barometer that guides our course. All of these factors augur well for an improved performance in 1998. The greatest challenge to our performance in both the short and long term stems from a shortage of new drivers entering the industry, a challenge the PROSPr program is designed to address. Our management team is committed to building shareholder value and excellence in operations. We are making real progress toward these goals. Thank you for your support of our efforts. s/Steven K. Bevilaqua Steven K. Bevilaqua President and Chief Executive Officer
Selected Financial and Operating Data (In thousands, except per share and operating data) 1997 1996 1995 1994 1993 STATEMENTS OF OPERATIONS DATA: Operating revenue from truckload operations $240,766 $246,222 $229,519 $202,101 $165,259 Operating revenue from rail container operations 3,319 10,466 10,166 8,175 - Operating expenses from truckload operations 256,376 239,520 222,789 187,452 152,503 Operating expenses from rail container operations 6,134 10,818 10,383 8,523 - -------------------------------------------- Operating income (18,425) 6,350 6,513 14,301 12,756 Interest and other income 68 59 32 17 11 Interest expense (4,363) (4,783) (5,554) (5,014) (4,384) -------------------------------------------- Earnings (loss) from continuing operations before income taxes (22,720) 1,626 991 9,304 8,383 Income tax expense (benefit) (8,000) 721 473 3,530 3,436 -------------------------------------------- Net earnings (loss) from continuing operations (14,720) 905 518 5,774 4,947 Loss from operations of discontinued division, net of tax benefits _ _ (624) (580) (195) Loss on disposal of discontinued division, net of tax benefit _ (139) (441) _ _ -------------------------------------------- Net earnings (loss) $(14,720) $766 $(547) $5,194 $4,752 =========================================== Basic and diluted earnings (loss) per share: From continuing operations $ (3.38) $0.21 $0.12 $1.28 $1.14 From operations of discontinued division _ _ (0.14) (0.13) (0.05) From disposal of discontinued division _ (0.03) (0.10) _ _ ------------------------------------------- Net earnings (loss) per common share $ (3.38) $0.18 $(0.12) $1.15 $1.09 ------------------------------------------- Weighted average diluted shares outstanding 4,358 4,373 4,504 4,536 4,357 BALANCE SHEET DATA (AT YEAR-END): Net property and equipment $107,940 $121,875 $122,264 $126,756 $117,322 Total assets 144,535 159,894 164,248 166,077 150,094 Total liabilities 92,424 93,394 98,280 98,234 86,403 Long-term debt, less current maturities 44,826 49,747 59,594 66,531 58,514 Stockholders' equity 52,111 66,500 65,968 67,843 63,691 OPERATING DATA: Average number of truckloads per week 3,966 3,907 3,444 2,871 2,420 Average miles per trip 998 1,009 1,065 1,082 1,087 Total miles travelled (000s) 205,828 205,006 186,443 161,584 136,777 Average revenue per total mile $ 1.12 $1.12 $ 1.13 $1.16 $1.13 Empty mile percentage 11.5% 12.1% 11.8% 9.8% 10.3% Equipment at year-end: Company-operated tractors 1,464 1,390 1,485 1,290 1,240 Owner-operated tractors 349 366 291 242 85 -------------------------------------------- Total tractors 1,813 1,756 1,776 1,532 1,325 Refrigerated trailers 2,047 2,114 2,150 2,115 1,955 Dry-van trailers 570 493 384 _ _ -------------------------------------------- Total trailers 2,617 2,607 2,534 2,115 1,955 Refrigerated rail containers _ 200 202 150 _ Ratio of tractors to non-driver employees at year-end 5.1 4.0 3.7 2.9 2.9
Selected Quarterly Data - Market and Dividend Information Selected Quarterly Data First Second Third Fourth (In thousands, except per share Quarter Quarter Quarter Quarter amounts) - -------------------------------------------------------------------------------- 1997 Operating revenue from truckload operations $60,618 $62,593 $60,127 $57,428 Operating revenue from rail container operations 2,149 1,170 _ _ Operating income (loss) from continuing operations1 300 83 2,571 (21,279) Net earnings (loss) (455) (609) 887 (14,543) Basic and diluted earnings (loss) per share $(0.10) $(0.14) $0.20 $(3.34) 1996 Operating revenue from truckload operations $61,010 $64,267 $59,810 $61,135 Operating revenue from rail container operations 2,726 2,843 2,656 2,241 Operating income from continuing operations 607 2,735 1,463 1,545 Net earnings (loss) from continuing operations (406) 959 130 222 Net earnings (loss) (386) 945 91 116 Basic and diluted earnings (loss) per share $(0.09) $0.22 $0.02 $0.03
1 The fourth quarter 1997 operating loss from continuing operations reflects charges of $15.7 million for the impairment of long-lived assets and $3.9 million for increased reserves for self-insured claims and other. Market And Dividend Information The Company's common stock is traded on the Nasdaq National Market under the symbol KLLM. The number of stockholders, including beneficial owners holding shares in nominee or "street" name, as of March 2, 1998, was approximately 1,600. The Company has never declared or paid a cash dividend on its common stock. The current policy of the Board of Directors is to continue to retain earnings to finance the continued growth of the Company's business. The following table shows quarterly high and low prices for the common stock for each quarter of 1997 and 1996: FISCAL YEAR 1997 High Low - --------------------------------------------------------------------- First Quarter $ 13 $ 9 Second Quarter $ 13 $ 10 5/8 Third Quarter $ 12 3/4 $ 11 1/4 Fourth Quarter $ 14 3/8 $ 12 1/8 FISCAL YEAR 1996 High Low - ---------------------------------------------------------------------- First Quarter $ 11 3/4 $ 10 Second Quarter $ 13 3/4 $ 10 3/4 Third Quarter $ 13 1/4 $ 11 3/4 Fourth Quarter $ 11 7/8 $ 9 3/4
Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations The following table sets forth the percentage of revenue and expense items to operating revenue for the periods indicated. Percentage of Operating Revenue For the Year 1997 1996 1995 Operating revenue from truck load operations 100.0% 100.0% 100.0% Operating expenses: Salaries, wages and fringe benefits 31.5 29.0 30.2 Operating supplies and expenses 26.1 28.3 28.4 Insurance, claims, taxes and licenses 7.3 5.8 5.0 Depreciation and amortization 8.9 8.9 10.0 Purchased transportation and equipment rent 21.5 22.0 19.8 Impairment loss 6.5 _ _ Other 4.6 3.9 4.4 (Gain) loss on sale of revenue equipment .1 (.6) (.7) ---------------------------- Total operating expenses from truck load operations 106.5 97.3 97.1 ---------------------------- Operating income (loss) from truck load operations (6.5) 2.7 2.9 Operating income (loss) from rail container operations (1.1) ( .1) (.1) ---------------------------- Operating income (loss) (7.6) 2.6 2.8 Interest expense 1.8 1.9 2.4 ---------------------------- Earnings (loss) from continuing operations before income taxes (9.4) 0.7 0.4 Income tax expense (benefit) (3.3) 0.3 0.2 ---------------------------- Earnings (loss) from continuing operations (6.1)% 0.4% 0.2% ============================
Year Ended January 2, 1998 Compared to Year Ended January 3, 1997 Operating revenue from truckload operations for the year ended January 2, 1998 decreased by $5,456,000, or 2%, when compared to the year ended January 3, 1997. The decrease in operating revenue consisted of a 3% increase from the Company's dry-van over-the-road truckload services, net of decreases resulting from rail non-container operations (2%) and other divisions (3%). The average revenue per mile including fuel surcharges remained constant at $1.12 for the year ended January 2, 1998 when compared to the year ended January 3, 1997. Surcharges for high fuel costs added $1,209,000 and $1,760,000 to operating revenue from truckload operations in 1997 and 1996, respectively. Salaries increased $4,430,000 primarily due to increases in driver compensation in order to offset the cancellation of reimbursement of certain expenses to drivers. Management anticipates continued upward pressure on driver wages. Wages for administrative and maintenance staff were reduced by $1,718,000 in 1997 from 1996. At year-end, the ratio of trucks to non-driving employees had risen to 5.1 from 4.0 at year-end 1996 and 3.7 at year-end 1995. Operating supplies decreased $7,031,000 due to lower fuel prices (approximately $1,076,000), the reduction in driver reimbursed expenses of $4,268,000 as mentioned above, and aggressive cost management. Purchased transportation and equipment rent declined $2,580,000 primarily due to the closure in mid-year 1996 of the freight brokerage operation offset by a 5% increase in owner-operated trucks in the fleet. Insurance, taxes, and licenses increased by $3,524,000 primarily as a result of a reevaluation of the Company's self insured claims management and reserve practices. The Company's ratio of accidents per million miles was lower in 1997 than in 1996. The level of depreciation and amortization expense reflects the stable level of our Company-owned tractor and trailer fleets. Other expenses grew by $1,357,000, the majority of which was related to advertising for and recruiting of drivers. In 1997, the Company realized a net loss of $185,000 on disposition of tractors and trailers compared to a net gain of $1,657,000 in 1996. In 1997, the market value of used 48-foot temperature-controlled trailers decreased resulting in losses on dispositions during the year which were partially offset by gains on disposition of tractors. KLLM Transport Services specializes in providing high-quality transportation services in North America. The majority of revenues are from transporting commodities such as food, medical supplies, and cosmetics requiring temperature-controlled equipment. The temperature-controlled segment of the trucking industry has, until 1997, been reluctant to convert to 53-foot trailers due to operational concerns and a lack of customer demand for the greater cube capacity. New equipment sales to for-hire carriers in fleet conversion in order to maintain its position as a leader in the temperature-controlled sector. As a result management has recognized an impairment in the value of its 48-foot temperature-controlled trailers as of year-end 1997. The book values of the 48-foot temperature-controlled trailers, under the guidance of FASB 121, have been reduced to market value requiring a special pretax charge of $15,246,000. To accomplish the fleet conversion, a three-year contract has been negotiated with a major trailer to purchase KLLM's trailers at predetermined prices and to provide a similar number of new 53-foot temperature-controlled trailers under operating leases. The Company also recorded a pretax impairment charge of $506,000 related to real estate held for sale. The decision in the second quarter to exit the rail container business resulted in a decline in revenues from rail container operations of $7,147,000 and an increase in operating losses of $557,000 compared to 1996. A restructuring charge of $1,906,000 was also incurred pertaining to the write-off of intangible assets and expenses on subleasing the containers and exiting this market. Substantially all costs to exit the rail container business had been incurred and paid as of January 2, 1998. The operating ratio (which represents operating expenses as a percent of operating revenues on continuing operations) increased from 97.3% to 106.5% for the year ended January 2, 1998 when compared to the year ended January 3, 1997. Interest expense for the year ended January 2, 1998 was $4,363,000. The decrease in interest expense in 1997 was primarily due to a decrease in the average debt outstanding in 1997 as compared to 1996. Interest rates under the revolving line of credit remained level in 1997 compared to 1996. The provision for income tax benefit for 1997 was $8,000,000, based on a combined effective federal and state income tax rate of 35%. This rate reflects a decrease in the effective tax rate from 44% in 1996 as a result of a decrease in nondeductible expenses as a percentage of pretax income (loss). Year Ended January 3, 1997 Compared to Year Ended December 29, 1995 Operating revenue from truckload operations for the year ended January 3, 1997 increased by $16,703,000, or 7%, when compared to the year ended December 29, 1995. The net revenue increase consisted of a 4% increase in the Company's traditional over-the-road temperature-controlled freight services, 1% decrease from rail non-container operations, 2% decrease from transportation brokerage services, and 6% increase from the operation of the dry-van over-the-road truckload services. The average revenue per mile in 1996 and 1995, respectively. Through a variety of measures implemented during 1996 the Company focused on improving utilization and profitability in the core trucking business. Significant actions taken included the closure of the freight brokerage business, reintegration of rail intermodal operations into truck operations, a net reduction in the number of Company-owned trucks offset by an increase in owner-operated trucks and the dry-van fleet. Cost control efforts yielded results in facility and staff levels, maintenance and operating expenses. These efforts included centralization of certian terminal functions resulting in the consolidation of certain driver terminals, reducing the number from ten at the end of 1995 to seven at the end of 1996, and reduction in the non-driver work force of approximately 70 employees which, on an annualized basis, will reduce total annual payroll costs by approximately $2.6 million. At January 3, 1997, the Company had 4.0 tractors per non-driver employee which was an improvement over the prior year ratio of 3.7. The operating ratio (which represents operating expenses as a percent of operating revenues on continuing operations) increased from 97.3% to 97.5% for the year ended January 3, 1997 when compared to the year ended December 29, 1995. Operating revenues and results for 1996 were affected by an overall weak freight market which had plagued the industry since early 1995. In addition, during 1996, the Company experienced a steady and significant increase in fuel costs and an unusually large number of severe winter storms. The change in the components of operating expenses during 1996, when compared to 1995, relected increases from the following: a) driver pay and related costs of approximately $1.7 million, b) the previously mentioned increased fuel costs of approximately $5.5 million, (within this amount, approximately $2.8 million was associated with rising fuel prices), and c) liability and workers' compensation insurance costs of approximately $3.0 million and cost reductions in the following: a) administrative wages and expenses of approximately $3.1 million, b) maintenance costs of approximately $0.5 million, and c) various over-the-road operating costs of approximately $1.3 million Comparability of components of operating expenses was affected by the increase in purchasing transportation services instead of incurring wage, depreciation and other expenses related to owned asset operations and by the use of operating leases for revenue equipment put in service throughout 1995. Interest expense for the year ended January 3, 1997 was $4,783,000. The decrease in interest expense in 1996 was primarily due to a decrease in the average debt outstanding in 1996.1.3 million. The provision for income taxes for the year ended January 3, 1997 was $721,000 on continuing operations, based on a combined effective federal and state income tax rate of 44%. This rate reflected a decrease in the effective tax rate from 48% for the year ended December 29, 1995 as a result of a decrease in nondeductible expenses as a percentage of pretax income when compared to 1995. As a result of the foregoing, net earnings from continuing operations increased $387,000, or 75%, for the year ended January 3, 1997 when compared to the year ended December 29, 1995. Impact of Year 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total year 2000 project cost is estimated at approximately $700,000, which includes $400,000 for the purchase of new software that will be capitalized and $300,000 that will be expensed as incurred. To date, the Company has incurred and expensed approximately $100,000, primarily for assessment of the year 2000 issue and the development of a modification plan and purchase of new software. The project is estimated to be complete no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. However, if such modification and conversions are not made, or are not completed timely, the year 2000 issue could have a material impact on the operations of the Company. The cost of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Liquidity and Capital Resources KLLM Transport Services, Inc.'s primary sources of liquidity are its cash flow from operations and existing credit agreements of KLLM, Inc., a wholly- owned subsidiary. The significant charges against earnings in 1997 were primarily for the impairment of value of certain assets and other charges which did not affect cash flow during the year. During the years ended January 2, 1998 and January 3, 1997, the Company generated $31.8 million and $33.5 million, respectively, in net cash provided from operating activities. This cash flow in 1997 combined with limited capital expenditures allowed the Company to reduce long-term cebt and capital leases by approximately $4,871,000. In 1997, the Company-owned fleet increased by 74 tractors and 10 trailers, net of replacements. Capital expenditures, net of proceeds from disposals, during 1997 were approximately $25.8 million compared to $20.2 million in 1996. The Company also entered into an operating lease for 77 tractors in the fourth quarter of 1997. Net capital expenditures in 1998 are expected to be approximately $8.0 million. The Company also expects to enter into operating leases for approximately 600 trailers during 1998. The Company has a $50,000,000 unsecured revolving line of credit with a syndication of banks. Borrowings of $30,000,000 were outstanding at year- end. At January 2, 1998, the weighted average interest rate on the revolving line of credit was 6.7%. Under the terms of the agreement, borrowings bear interest at (i) the higher of prime rate or a rate based upon the federal funds effective rate, (ii) a rate based upon the Eurodollar rates, or (iii) an absolute interest rate as determined by each lender in the syndication under a competitive bid process at the Company s option. Facilities fees from 1/5% to 3/8% per annum are charged on the unused portion of this line. Working capital needs have generally been met from net cash provided from operating activities. The Company has a $4,000,000 unsecured working capital line of credit with a bank, all of which was available at January 2, 1998. Interest is at a rate based upon the Eurodollar rates with facility fees at 1/4% per annum on the unused portion of the line. This working capital line of credit is used to minimize idle cash in the bank and is tied to cash equivalent investments for any excess cash. At year-end 1997 and 1996, cash and cash equivalents totaled $670,000 and $2,874,000, respectively. At January 2, 1998, the aggregate principal amount of the Company's outstanding long-term indebtedness and capital lease obligations including current maturities was approximately $49.7 million. Of this total, $1.2 million was in the form of 10.2% notes due July 15, 1998, $14.3 million in the form of 9.11% notes due June 15, 2002, $30.0 million consisted of borrowings under the revolving line of credit due April 7, 1999, and $4.2 million was related to capital lease obligations with varying maturities through June 1999. The required principal payments on all long-term debt and capital leases are anticipated to be $4.9 million in 1998, $36.2 million in 1999, $2.9 million in 2000, $2.9 million in 2001, and $2.8 million in 2002. The Company periodically enters into heating oil (diesel fuel) swap agreements to hedge its exposure to price fluctuations on various levels of its anticipated fuel requirements. Gains and losses on hedging contracts are recognized in operating expenses as part of the fuel cost over the hedge period. The Company anticipates that its existing credit facilities along with cash flow from operations will be sufficient to fund operating expenses, capital expenditures and debt service. Factors Affecting Future Performance The Company's future operating results may be affected by various trends and factors which are beyond the Company's control. These include adverse changes in demand for trucking services, availability of drivers and fuel prices. Accordingly, past performance should not be presumed to be an accurate indication of future performance. Seasonality In the transportation industry, results of operations generally show a seasonal pattern because customers reduce shipments during and after the winter holiday season with its attendant weather variations. The Company's operating expenses have historically been higher in the winter months primarily due to decreased fuel efficiency and increased maintenance costs in colder weather. The foregoing statements contain forward-looking statements which involve risks and uncertainties and the Company's actual experience may differ materially from that discussed above. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors Affecting Future Performance" as well as future events that have the effect of reducing the Company's available cash balances, such as unanticipated operating losses or capital expenditures related to possible future acquisitions. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. Consolidated Balance sheets At Year-End 1997 1996 - ------------------------------------------------------------------------------- ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents $ 670 $ 2,874 Accounts receivable: Customers (net of allowances of $889,000 in 1997 and $682,000 in 1996) 20,195 21,818 Other 629 866 ------------------------- 20,824 22,684 Inventories _ at cost 635 891 Prepaid expenses: Tires 2,885 4,282 Taxes, licenses and permits 2,027 1,120 Other 467 245 ------------------------- 5,379 5,647 Assets held for sale _ Note B 3,383 0 Deferred income taxes _ Note D 5,413 3,325 ------------------------- Total current assets 36,304 35,421 Property and Equipment _ note B Revenue equipment and capital leases 121,337 158,421 Land, structures and improvements 7,103 12,742 Other equipment 8,776 8,450 Accumulated depreciation (29,276) (57,738) ------------------------- 107,940 121,875 Intangible assets, Net of accumulated amortization of $682,000 in 1997 and $775,000 in 1996 _ Notes E and J 90 2,259 Other Assets 201 339 ------------------------- Total Assets $144,535 $159,894 Liabilities and Stockholders' Equity Current Liabilities Notes payable to banks _ Note C $0 $ 3,598 Accounts payable 4,350 1,002 Accrued expenses 11,562 7,213 Accrued claims expense _ Note K 13,913 8,199 Current maturities of long-term debt and capital leases 4,898 4,848 ------------------------ Total current liabilities 34,723 24,860 Long-term Debt and Capital Leases, Less current maturities _ Note C 44,826 49,747 Deferred Income Taxes _ Note D 12,875 18,787 Stockholders' Equity _ Notes G and H Preferred stock, $0.01 par value; authorized shares _ 5,000,000; none issued Common stock, $1 par value; authorized shares _ 10,000,000; issued shares _ 4,558,754 in 1997 and 1996; outstanding shares _ 4,373,115 in 1997 and 4,344,955 in 1996 4,559 4,559 Additional paid-in capital 32,854 32,811 Retained earnings 16,733 31,453 ------------------------- 54,146 68,823 Less common stock in treasury, 185,639 shares in 1997 and 213,799 shares in 1996, at cost (2,035) (2,323) ------------------------- Total stockholders' equity 52,111 66,500 ------------------------- Total liabilities and stockholders' equity $144,535 159,894 ========================== See accompanying notes.
Consolidated Statements of Operations For The Year (In thousands, except share and per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------- Operating revenue from truckload operations $240,766 $246,222 $229,519 Operating expenses: Salaries, wages and fringe benefits 75,748 71,318 69,375 Operating supplies and expenses 62,828 69,859 65,185 Insurance, claims, taxes and licenses 17,751 14,227 11,575 Depreciation and amortization 21,432 21,872 22,865 Purchased transportation and equipment rent 51,692 54,272 45,221 Other 10,986 9,629 10,157 Impairment of long-lived assets _ Note B 15,754 0 0 (Gain) loss on sale of revenue equipment 185 (1,657) (1,589) ------------------------- Total operating expenses from truckload operations 256,376 239,520 222,789 ------------------------- Operating income (loss) from truckload operations (15,610) 6,702 6,730 Operating revenue from rail container operations 3,319 10,466 10,166 Operating expenses 4,228 10,818 10,383 Restructuring charge _ note j 1,906 0 0 ------------------------- Operating loss from rail container Operations (2,815) (352) (217) ------------------------- Operating Income (loss) (18,425) 6,350 6,513 Other income and expenses: Interest and other income 68 59 32 Interest expense (4,363) (4,783) (5,554) ------------------------- (4,295) (4,724) (5,522) ------------------------- Earnings (loss) from continuing operations before income taxes (22,720) 1,626 991 Income tax expense (benefit) _ Note D (8,000) 721 473 ------------------------- Net Earnings (loss) from continuing operations (14,720) 905 518 Loss from operations of discontinued division (Net of tax benefits of $0, $0 and $351,respectively) _ Note I 0 0 (624) Loss on disposal of discontinued division (Net of tax benefit of $0, $109 and $247, respectively) _ Note I 0 (139) (441) ------------------------- Net earnings (loss) $(14,720) $ 766 $ (547) ========================= Basic and diluted earnings (loss) per share: From continuing operations $(3.38) $0.21 $0.12 From operations of discontinued division 0.00 0.00 (0.14) From disposal of discontinued division 0.00 (0.03) (0.10) -------------------------- Basic and diluted net earnings (loss) per share $(3.38) $0.18 $(0.12) ========================= Weighted average number of shares outstanding: Basic 4,357,970 4,365,199 4,478,827 Diluted 4,357,970 4,371,945 4,504,007
See accompanying notes. Consolidated Statements of Stockholders' Equity Common Stock ---------------------------- Additional Total Treasury Stock Paid-in Retained Stock --------------- (In thousands) Shares Amount Shares Amount Capital Earnings holders' Equity - -------------------------------------------------------------------------------- BALANCE AT DECEMBER 30, 1994 4,552 $4,552 (71) $(1,064) $33,121 $31,234 $67,843 Purchase of treasury shares, at cost (172) (1,763) (1,763) Sale of common stock _ Note G 5 74 (22) 52 Common stock issued upon exercise of stock options 44 667 (284) 383 Net loss (547) (547) -------------------------------------------------------------- BALANCE AT DECEMBER 29, 1995 4,552 4,552 (194) (2,086) 32,815 30,687 65,968 Purchase of treasury shares, at cost (70) (854) (854) Sale of common stock _ Note G 7 7 61 68 Common stock issued upon exercise of stock options _ Note H 50 617 (190) 427 Income tax benefit from options exercised _ Note H 125 125 Net earnings 766 766 ------------------------------------------------------------- BALANCE AT JANUARY 3, 1997 4,559 4,559 (214) (2,323) 32,811 31,453 66,500 Sale of common stock _ Note G 4 36 5 41 Common stock issued upon exercise of stock options _ Note H 24 252 (29) 223 Common stock options granted for services 67 67 Net loss (14,720)(14,720) ------------------------------------------------------------ BALANCE AT JANUARY 2, 1998 4,559 $ 4,559 (186) $(2,035) $32,854 $ 16,733 $52,111 =============================================================
See accompanying notes. Consolidated statements of cash flows For The Year (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Cash flows from operating activities Cash received from customers $245,865 $263,897 $248,165 Interest and other income (expense) received (paid) 68 (94) 59 Cash paid to suppliers and employees (210,613) (227,362) (217,523) Interest paid (4,432) (4,776) (5,999) Income taxes refunded 877 1,785 87 Income taxes paid 0 0 (856) Net cash provided from operating activities 31,765 33,450 23,933 Cash flows from investing activities Purchase of Vernon Sawyer assets _ Note E 0 0 (6,758) Purchases of property and equipment (37,108) (31,040) (19,890) Proceeds from disposition of equipment 11,344 10,887 11,166 Net cash flows used in investing activities (25,764) (20,153) (15,482) Cash flows from financing activities Proceeds from sale of common stock 41 68 52 Proceeds from exercise of stock 223 427 383 Purchase of common stock for treasury 0 (854) (1,763) Net decrease in borrowing under revolving line of credit 0 (5,000) (1,000) Repayment of long-term debt and capital leases (4,871) (7,812) (4,171) Net change in borrowing under working capital line of credit (3,598) 2,748 (3,349) -------------------------------------- Net cash flows used in financing activities (8,205) (10,423) (9,848) Net increase (decrease) in cash and cash equivalents (2,204) 2,874 (1,397) -------------------------------------- Cash and cash equivalents at beginning of year 2,874 0 1,397 -------------------------------------- Cash and cash equivalents at end of year $ 670 $2,874 $ 0 ====================================== Reconciliation of net earnings (loss) to net cash provided from operations Net income (loss) $(14,720) $766 $(547) Noncash expenses and gain included in income: Depreciation and amortization 21,507 22,055 23,141 Deferred income taxes, net of option exercise benefit (8,000) 487 (125) Impairment of long-lived assets 15,754 0 0 Restructuring charge on rail container operations 1,906 0 0 Book value of equipment written off in accidents 522 510 375 (Increase) decrease in accounts receivable 1,780 5,102 (2,287) (Increase) decrease in inventories and prepaid expenses (785) 2,682 1,069 (Increase) decrease in other assets 138 198 (411) Increase in accounts payable and accrued expenses 13,478 3,307 4,382 (Gain) loss on sale of equipment 185 (1,657) (1,664) -------------------------------------- Net cash provided from operations $ 31,765 $ 33,450 $23,933 ======================================
See accompanying notes. Notes to consolidated financial statements NOTE A _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business. The Company, through its wholly-owned subsidiary, KLLM, Inc., provides transportation services in North America for both temperature- controlled and dry commodities. Services provided include over-the-road long haul, regional, and intermodal transportation. The demand for transportation services is affected by general economic conditions and is subject to seasonal demand for certain commodities and severe weather conditions. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform with current year presentation. Cash Equivalents. The Company classifies short-term, highly liquid investments with original maturities of three months or less as cash equivalents. Cash equivalents are stated at cost which approximates market. Tires in Service. The cost of original equipment and replacement tires placed in service is capitalized and amortized over the estimated useful life of twenty-four to thirty months. The cost of recapping tires is expensed as incurred. Property and Equipment. Property and equipment is stated at cost. Depreciation of property and equipment is provided by the straight-line method over the estimated useful lives. The ranges of estimated useful lives of the major classes of depreciable assets are as follows: revenue equipment - 3 to 7 years, buildings and improvements - 20 to 30 years, and other equipment - 3 to 5 years. Gains and losses on sales or exchanges of property and equipment are included in operations in the year of disposition. Income Taxes. Income taxes are accounted for by the Company using the liabilities method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred income taxes relate to temporary differences between assets and liabilities recognized differently for financial reporting and income tax purposes. Impairment of Long-Lived Assets. The Company continually reevaluates the carrying value of its long-lived assets for events or changes in circumstances which indicate that the carrying value may not be recoverable. As part of this reevaluation, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized through a charge to operations. Use of Estimates. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition. The Company uses the relative transit time incurred method to recognize revenue and record costs of shipments in transit. Prior to 1997, the Company recognized revenue on the date freight was received for shipment and accrued estimated cost of delivery of shipments in transit. The effect of the Company's change to the relative transit time incurred method of revenue recognition on 1997 was insignificant. Earnings per Share. In 1997, the Financial Accounting Standards Board issued Statement No. 128. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings (loss) per share amounts for all periods have beenn presented, and where appropriate, restated to conform to the Statement 128 requirements. Fiscal Year. The Company's fiscal year-end is the Friday nearest December 31, which was the 52-week period ended January 2, 1998, the 53-week period ended January 3, 1997 and the 52-week period ended December 29, 1995 for the past three fiscal year-ends. NOTE B _ IMPAIRMENT OF LONG-LIVED ASSETS Included in the Company's fleet of temperature-controlled trailers, as of January 2, 1998, were 1,860 trailers that are 48 feet in length. In December 1997, management developed a plan to dispose of all of the Company's 48-foot temperature-controlled trailers over the next three years, which is significantly earlier than the typical disposal cycle for these units, due to the temperature-controlled segment of the trucking industry's rapid acceptance of 53-foot trailers as the industry standard. Accordingly management evaluated the market value for used 48-foot temperature-controlled trailers based upon the Company's accelerated disposal dates and determined that the carrying value of the 48-foot temperature-controlled trailers of $46.4 million was impaired. A charge of $15.2 million resulted which is included in impairment on long-lived assets in the accompanying consolidated statement of operations for the year ended January 2, 1998. During 1997, the Company closed its terminal facility in Dallas, Texas and plans to sell the facility in 1998. The Dallas terminal had a carrying amount of $2.0 million as of January 2, 1998 which is greater than the estimated sales value, net of related costs to sell. Accordingly, the Company marked the facility to market and included the write-down of approximately $0.5 million in impairment on long-lived assets in the accompanying consolidated statement of operations for the year ended January 2, 1998. The Company also plans to sell in 1998 its former corporate office building with a carrying amount of $1.8 million at year-end 1997, whcih is less than management's estimate of the sales value, net of related costs to sell. NOTE C _ CREDIT FACILITIES, DEBT AND CAPITAL LEASES Long-term debt and capital leases consisted of the following: 1997 1996 - -------------------------------------------------------------------------------- (In thousands) 9.11% unsecured notes payable to insurance companies with semi-annual interest payments and annual principal payments of $2,857,000 through 2002 $14,286 $17,143 10.2% unsecured notes payable to insurance company with semi-annual interest payments and annual principal payments of $1,250,000 through July 1998 1,250 2,500 Revolving line of credit with banks, with floating interest rates (6.7% weighted average rate at January 2, 1998) 30,000 30,000 Capital lease obligations with interest rates from 6.5% to 6.68% and monthly payments of $144,000 through June 1999 4,188 4,952 --------------------------- 49,724 54,595 Less current maturities (4,898) (4,848) -------------------------- $44,826 $49,747 ==========================
Capital lease obligations represent leased revenue equipment with a carrying value of $2,770,000 at January 2, 1998 and $7,817,000 at January 3, 1997. Amortization of revenue equipment leased under capital leases is included in depreciation and amortization in the accompanying consolidated statements of operations. The Company has a $50,000,000 unsecured revolving line of credit maturing in 1999. In accordance with the agreement, the Company has agreed to limit assets pledged on any other borrowing. At January 2, 1998, $20,000,000 was available to the Company under the revolving line of credit. Under the terms of the agreement, borrowings bear interest at (i) the higher of prime rate or a rate based upon the Federal Funds Effective Rate, (ii) a rate based upon the Eurodollar rates, or (iii) an absolute interest rate as determined by each lender under a competitive bid process at the Company's option. Facilities fees from 1/5% to 3/8% per annum are charged on the unused portion of this line. The aggregate annual maturities of long-term debt and capital leases at January 2, 1998 are as follows: Long-term Capital (In thousands) Debt Leases Total - ------------------------------------------------------------------------------ 1998 $ 4,107 $ 867 $4,974 1999 32,857 3,397 36,254 2000 2,857 _ 2,857 2001 2,857 _ 2,857 2002 2,858 _ 2,858 ------------------------------------------ 45,536 4,264 49,800 Less amount representing interest _ (76) (76) ------------------------------------------ $45,536 $4,188 $49,724
The Company also has $4,000,000 in an unsecured working capital line of credit, all of which was available at January 2, 1998. Interest is at a rate based upon the London Interbank Offered Rate (LIBOR) on borrowings on the working capital line with facility fees at 1/4% per annum on the unused portion of the line. Under the terms of the lines of credit and notes payable agreements, the Company agreed to maintain minimum levels of consolidated tangible net worth and cash flows, to limit additional borrowing based on a debt-to-consolidated tangible net worth ratio, and to restrict assets that can be pledged on any other borrowings. The agreements also establish limits on dividends, stock repurchases and new investments. The 9.11% and 10.2% notes payable to insurance companies require the Company to meet a fixed charge ration, as defined, at each quarter-end based upon the preceding twelve months' operating results. The Company was in compliance with these requirements at year-end 1997 and 1996 as amended subsequent to January 2, 1998. NOTE D _ INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities are as follows: (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Deferred tax liability _ property and equipment $21,972 $23,149 Deferred tax assets: Allowance for doubtful accounts 338 263 Accrued expenses 5,075 3,062 Net operating loss carryforward 7,989 3,347 Intangibles 192 99 Alternative minimum tax carryforward 916 916 ----------------------------- 14,510 7,687 ----------------------------- Net deferred tax liabilities $7,462 $15,462 =============================
Income tax expense (benefit) consists of the following: (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Deferred: Federal $(7,300) $538 $(115) State (700) 74 (10) ------------------------------- Total income tax expense (benefit) (8,000) 612 (125) Income tax benefit allocated to discontinued operations _ _ 351 Income tax benefit allocated to loss on disposal of discontinued operations _ 109 247 ------------------------------- Income tax expense attributable to continuing operations $(8,000) $721 $473 ===============================
The reconciliation of income tax computed at the federal statutory tax rate to income tax expense is as follows: (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Statutory federal income tax rate $(7,725) $468 $(228) State income taxes, net (462) 49 (7) Other 187 95 110 $(8,000) $612 (125) The Company has a net operating loss carryforward for income tax purposes of approximately $22,200,000, which expires at various dates through the year 2012. NOTE E _ ACQUISITIONS Effective May 1, 1995, the Company acquired substantially all of the assets of Vernon Sawyer, Inc., a regional dry-van truckload carrier based in Bastrop, Louisiana. Results from operations of the Company include operations of the net assets acquired since May 1, 1995. The acquisition was accounted for using the purchase method of accounting. Acquisition cost included $772,000 of intangibles, a three-year non-compete agreement. The non-compete agreement is being amortized by the straight-line method over the life of the agreement. NOTE F _ CONCENTRATIONS OF CREDIT RISK The Company had one customer which accounted for operating revenues of $23,311,000 in 1995 and a customer which accounted for operating revenues of $27,759,000 in 1997. No customer accounted for more than 10% of the Company's operating revenues in 1996. Trade accounts receivable are the principal financial instruments that potentially subject the Company to significant concentrations of credit risk. The Company performs periodic credit evaluations of its customers and credit losses have been insignificant and within management's expectations. NOTE G _ EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution plan covering substantially all of its employees. The Company makes discretionary contributions to the plan of 100% of the employee contribution up to 4% of each covered employee's salary. Contributions by the Company under the plan approximated $716,000, $1,071,000, and $653,000 in 1997, 1996, and 1995, respectively. In April 1987, the stockholders approved an employee stock purchase plan reserving 133,333 shares of common stock for the plan. Substantially all employees are eligible to participate and may subscribe for 10 to 300 shares each. During 1997, 3,276 shares were purchased and in 1996, 6,535 shares were issued pursuant to the plan. Subsequent to January 2, 1998, an additional 5,227 shares have been subscribed for by employees. NOTE H _ STOCK OPTION PLANS The Company grants stock options for a fixed number of shares to employees with an exercise price equal to or above the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock options granted. Under the Company's Incentive Stock Option Plan, 533,333 shares of Common Stock have been reserved for grant to key employees and directors. Options granted under the plan have a ten-year term with vesting periods of one to five years from the date of the grant. Pro forma information regarding net income (loss) and earnings (loss) per share is required by FASB Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted-average assumptions: volatility factors of .281 and .297 for 1997 and 1996, respectively; weighted-average expected life of options of three and two years for 1997 and 1996, respectively; risk-free interest rate of 6% and 5% for 1997 and 1996, respectively; and no dividend yield. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options and the securities purchase agreements granted in 1997 and 1996 is amortized to expense over the vesting period. The Company's pro forma information follows:
(In thousands, except per share information) 1997 1996 - ------------------------------------------------------------------------------- Pro forma net income $(14,786) 386 Pro forma basic and diluted earnings (loss) per common share $ (3.39) $ .09
A summary of the Company's stock option activity and related information is as follows: 1997 1996 ------------------------- --------------------------- Options Weighted-Average Options Weighted-Average (000) Exercise Price (000) Exercise Price - ------------------------------------------------------------------------------ Outstanding-beginning of year 269 $ 14 332 $ 14 Granted 21 12 34 11 Exercised (25) 9 (50) 8 Forfeited (31) 15 (47) 16 ------ ----- Outstanding-end of year 234 $ 14 269 $14 ======= ======== ======= ======== Weighted-average fair value of options granted during the year $ 3.15 $ 1.86 ========= ========= Weighted-average fair value of securities purchase agreements granted during the year $ _ $ 1.28 ========= =========
Following is a summary of the status of options outstanding at January 2, 1998: Outstanding Options Exercisable Options ------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Range (000's) Life Price (000's) Price - --------------------------------------------------------------------------- $ 9.00 - $11.75 34 8 years $11 5 $9 $12.00 - $15.00 186 7 years $15 127 $15 $21.00 14 4 years $21 14 $21
NOTE I _ DISCONTINUED OPERATIONS Abandonment of the Company's international division, which primarily provided maritime transportation services, began on November 30, 1995 and was completed by August 31, 1996. The loss on disposal of discontinued operations, in 1995, included approximately $62,000 (net of $35,000 tax benefit) of operational losses from November 30, 1995 through December 29, 1995. Actual costs incurred to complete the disposal exceeded the Company's 1995 estimate by $139,000 (net of $109,000 tax benefit), and accordingly, are included in the accompanying consolidated statement of operations for 1996. NOTE J _ RAIL CONTAINER RESTRUCTURING CHARGE During 1997, the Company completed its plan to exit the rail container market. A one-time restructuring charge of $1,906,000 was recorded for the write-off of intangible assets pertaining to the rail container operation and the accrual of certain expenses related to the subleasing of rail containers and exiting this market. NOTE K _ COMMITMENTS AND CONTINGENCIES The Company self-insures for losses related to liability and workers' compensation claims with excess coverage by underwriters on a per incident basis. Claims payable totaled $13,913,000 at January 2, 1998 and $8,199,000 at January 3, 1997, a portion of which is for insurance claims that have been incurred but not reported and estimated future development of claims. The ultimate cost for outstanding claims may vary significantly from current estimates. The Company leases certain revenue equipment and data processing equipment under operating leases that expire over the next six years. The leases require the Company to pay the maintenance, insurance, taxes and other expenses in addition to the minimum monthly rentals. Future minimum payments under the leases at January 2, 1998 are $10,627,000 in 1998, $10,331,000 in 1999, $2,000,000 in 2000, $502,000 in 2001 and $36,000 in 2002. The Company guarantees approximately $1,360,000 of the residual value of certain revenue equipment leased under and operating lease. Rental expense applicable to noncancelable operating leases totaled $6,806,000 in 1997, $8,440,000 in 1996, and $7,042,000 in 1995. The Company has entered into heating oil (diesel fuel) swap agreements to hedge its exposure to price fluctuations at year-end 1997 on 3% of its 1998 anticipated fuel requirements. Gains and losses on hedging contracts are recognized in operating expenses as part of the fuel cost over the hedge period. During 1996, the Internal Revenue Service assessed the Company for certain employment taxes for the years 1992 through 1994. The Company disputes the assessment and believes that the matter will be resolved in the Company's favor. Accordingly, the Company has not accrued for such amounts in the accompanying financial statements. The Company is also involved in various claims and routine litigation incidental to its business. Management is of the opinion that the outcome of these other matters will not have a material adverse effect on the consolidated financial position or operations of the Company. NOTE L _ FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount reported in the consolidated balance sheet for cash and cash equivalents and short-term notes payable to banks approximate their fair values. The fair values of the Company's long-term debt and capital lease obligations are estimated using discounted cash flow analysis, based upon the Company's current incremental borrowing rates for similar types of borrowing arrangements, which approximate the carrying amounts at January 2, 1998. Report of Independent Auditors The Board of Directors and Stockholders KLLM Transport Services, Inc. We have audited the accompanying consolidated balance sheets of KLLM Transport Services, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 2, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KLLM Transport Services, Inc. and subsidiaries at January 2, 1998 and January 3, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 2, 1998, in conformity with generally accepted accounting principles. s/Ernst & Young LLP Jackson, Mississippi January 30, 1998, except for Note C as to which the date is February 24, 1998 Directors and officers BOARD OF DIRECTORS BENJAMIN C. LEE, JR. Chairman of the Board KLLM Transport Services, Inc. STEVEN K. BEVILAQUA President and Chief Executive Officer KLLM Transport Services, Inc. WALTER P. NEELY, PH. D. J. Army Brown Chair of Business Administration Professor of Finance Else School of Management, Millsaps College JAMES L. YOUNG Attorney Young, Williams, Henderson and Fuselier, P.A. LELAND R. SPEED Chairman of the Board and Chief Executive Officer The Parkway Company C. TOM CLOWE, JR. President and Chief Operating Officer Missouri Gas Energy OFFICERS BENJAMIN C. LEE, JR. Chairman of the Board STEVEN K. BEVILAQUA President and Chief Executive Officer STEVEN L. DUTRO Chief Financial Officer JOHN J. RITCHIE Senior Vice President _ Sales and Marketing NANCY M. SAWYER President _ Vernon Sawyer Division IRENE C. HOWARD Vice President _ Human Resources and Risk Management WILLIAM J. LILES III Vice President _ Sales and Marketing JAMES M. RICHARDS, JR. Vice President of Operations _ Customer Service OFFICERS _ continued VINCENT A. SCHOTT Vice President _ Information Systems LARRY C. SIMPSON Vice President _ Maintenance JAMES P. SORRELS Vice President of Operations _ Driver Retention Shareholder Information CORPORATE OFFICES KLLM Transport Services, Inc. 135 Riverview Drive Richland, Mississippi 39218 (601) 939-2545 TRANSFER AGENT Harris Trust & Savings Bank Corporate Trust Division 600 Superior Avenue E, Suite 600 Cleveland, Ohio 44115 (216) 263-3639 INDEPENDENT AUDITORS Ernst & Young LLP 188 East Capitol Street, Suite 400 Jackson, Mississippi 39201 FORM 10-K Information about KLLM Transport Services, Inc., including the Form 10-K, may be obtained without charge by writing to Mr. Steven L. Dutro, Chief Financial Officer, at the Company's corporate offices. ANNUAL MEETING 10:00 a.m. April 21, 1998 KLLM Corporate Offices 135 Riverview Drive Richland, Mississippi 39218 EX-23 4 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of KLLM Transport Services, Inc. of our report dated January 30, 1998, except for Note C as to which the date is February 24, 1998, included in the 1997 Annual Report to Shareholders of KLLM Transport Services, Inc. Our audits also included the financial statement schedule of KLLM Transport Services, Inc. listed in Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. 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 set forth therein. We also consent to the incorporation by reference in the Registration Statement (Post-effective Amendment No. 6, Form S-8, No. 33-14545) pertaining to the KLLM Transport Services, Inc. Employee Stock Purchase Plan and in the Registration Statement (Form S-8, No. 333-09605) pertaining to the KLLM Transport Services, Inc. 1996 Stock Purchase Plan of our report dated January 30, 1998, except for Note C as to which the date is February 24, 1998, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedule of KLLM Transport Services, Inc. included in the Annual Report (Form 10-K) of KLLM Transport Services, Inc. /s/ Ernst & Young LLP Jackson, Mississippi March 30, 1998 EX-27 5
5 1,000 12-MOS JAN-02-1998 JAN-02-1998 670 0 20,824 889 635 36,304 137,216 29,276 144,535 34,723 0 0 0 4,559 47,552 144,535 0 244,085 0 262,510 0 0 4,363 (22,720) (8,000) (14,720) 0 0 0 (14,720) (3.38) (3.38)
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