-----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, DlO00n2o1CeDkOQBRyDjDHWMyNE5DSGqUpdpNc/RlQwVFIB9uAmjGVuOrMjCF26M JKB2MyoaI53dpV8EOnwm7w== 0000950144-00-004286.txt : 20000331 0000950144-00-004286.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004286 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588311 BUSINESS ADDRESS: STREET 1: 135 RIVERVIEW DR CITY: RICHLAND STATE: MS ZIP: 39218 BUSINESS PHONE: 6019392545 MAIL ADDRESS: STREET 1: P.O.BOX 6098 CITY: JACKSON STATE: MS ZIP: 39288 10-K 1 KLLM TRANSPORT SERVICES, INC. 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 December 31, 1999 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 24, 2000: $27,620,824. The number of shares outstanding of registrant's common stock as of March 24, 2000: 4,101,468. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: Document Part -------- ---- Annual Report to Shareholders for year ended December 31, 1999 II Definitive Proxy Statement for Annual Meeting of Shareholders to be held May 26, 2000 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A III Only the portions of KLLM Transport Services, Inc.'s 1999 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. 3 KLLM TRANSPORT SERVICES, INC. FORM 10-K TABLE OF CONTENTS
Page ---- PART I 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 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 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
4 PART I ITEM 1. BUSINESS. KLLM Transport Services, Inc. (through its wholly-owned subsidiary, KLLM, 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. A Delaware corporation, the Company 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, regional, and dedicated fleet transportation. These services are provided with both Company-operated and owner-operated equipment. The Company currently owns (or leases) and operates substantially all of its fleet. On December 31, 1999, the Company's fleet consisted of 1,422 Company-operated tractors and 260 owner-operated tractors, 1,948 temperature-controlled trailers and 793 dry-van trailers. Capital expenditures, net of proceeds from trade-ins during 1999, were approximately $17,535,000. Net capital expenditures in 1998 were $4,823,000. Net capital expenditures in 2000 are expected to be approximately $28,400,000. MARKETING AND OPERATIONS The Company specializes in providing high-quality transportation services in North America. The Company seeks customers who value its premium services, who need a certain number of trucks each week and who require dependable service in meeting schedule requirements. The Company's full-time staff of six (6) 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 65%, 49%, and 39%, respectively, of its revenue for the year ended December 31, 1999. During 1999, 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. 4 5 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 the Mississippi and California driver terminal locations. On December 31, 1999, the Company employed 1,418 drivers and had a total of 1,851 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. The Company's corporate office is located in Richland, Mississippi, a suburb of Jackson. All driver-related executive and administrative functions, including safety, driver training, maintenance and driver recruiting are housed in this location. The Company owns a portion of the land on which this facility is located. The remainder is owned by the Liles and Lee families (or entities or trusts controlled by those families), major shareholders of the Company. 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 Liles and Lee part of the land for $390,257. The Company owns a maintenance and driver terminal facility near Dallas, Texas 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. 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 sixteen acres of land. 5 6 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. 6 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. "Market and Dividend Information" on page 6 of the Company's 1999 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 4 of the Company's 1999 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 7 - 10 of the Company's 1999 Annual Report to Shareholders is incorporated herein by reference in response to this item, except that the estimated net capital expenditures is expected to be approximately $28,400,000 rather than the $40,700,000 on page 10 of the Company's 1999 Annual Report. You should read the following discussion and analysis and the discussion and analysis incorporated by reference from the Company's 1999 Annual Report in conjunction with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data" incorporated herein by reference from the Company's 1999 Annual Report, which may contain forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. The Company's actual results could differ materially from the results anticipated by such forward-looking statements as a result of many known and unknown factors, including but not limited to those discussed below, those discussed in "-Factors Affecting Future Performance" in the Company's 1999 Annual Report and those discussed elsewhere in this report and the Company's 1999 Annual Report. IN ADDITION TO THE "-FACTORS AFFECTING FUTURE PERFORMANCE" INCORPORATED HEREIN BY REFERENCE FROM THE COMPANY'S 1999 ANNUAL REPORT, ANOTHER FACTOR AFFECTING FUTURE PERFORMANCE IS THAT THE COMPANY HAS ADOPTED MEASURES THAT HAVE ANTI-TAKEOVER EFFECTS, WHICH MAY DISCOURAGE TRANSACTIONS THAT MAY BE BENEFICIAL TO STOCKHOLDERS. Under the Company's Certificate of Incorporation, the Board of Directors may issue Preferred Stock, with any rights the Company wishes to assign them, without stockholder action. The Company has also adopted a Stockholder Rights Plan under which the Company has distributed rights to purchase shares of its Participating Preferred Stock to its stockholders. If certain triggering events occur, the holders of the rights will be able to purchase shares of Common Stock at a price substantially discounted from the then applicable market price of the Common Stock. The Company has also entered into or anticipates entering into Change of Control Agreements with certain employees of the Company which, upon certain triggering events, will cause the Company to pay such employees, in the aggregate, approximately $1,876,600. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. "Market Risk" on page 9 of the Company's 1999 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 11 - 22 of the Company's 1999 Annual Report to Shareholders are incorporated herein by reference in response to this item. "Selected Quarterly Data (Unaudited)" on page 5 of the Company's 1999 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. 7 8 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 May 26, 2000 Annual Meeting of Shareholders to be 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 May 26, 2000 Annual Meeting of Shareholders to be 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 May 26, 2000 Annual Meeting of Shareholders to be 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 May 26, 2000 Annual Meeting of Shareholders to be filed with the Securities and 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 May 26, 2000 Annual Meeting of Shareholders to be 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 under the caption "Certain Transactions" of the Company's definitive proxy statement for its scheduled May 26, 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated herein by reference in response to this item. 8 9 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 1, 1999 and December 31, 1999. Consolidated Statements of Operations--Years ended January 2, 1998, January 1, 1999 and December 31, 1999. Consolidated Statements of Stockholders' Equity--Years ended January 2, 1998, January 1, 1999 and December 31, 1999. Consolidated Statements of Cash Flows--Years ended January 2, 1998, January 1, 1999 and December 31, 1999. 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 9 10 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 10.7 KLLM, Inc. Cafeteria Plan 6 10.9 Option to purchase real property on which terminal facility is located from Messrs. Liles and Lee 4 10.11 Revolving Credit Agreement by andamong KLLM, Inc., NationsBank of Georgia, National Association, The First National Bank of Chicago, Deposit Guaranty National Bank, and ABN Amro Bank, N.V. 7 10.15 1996 Stock Option Plan 8 10.16 Amended and Restated 1996 Stock Purchase Plan 8 10.17 1998 Non-Employee Director Stock Compensation Plan 9 10.18 Stockholder Protection Rights Agreement dated February 13, 1997 between KLLM Transport Services, Inc. and KeyCorp Shareholder Services, Inc.,as Rights Agent 10 10.19 Change in Control Agreement 13 1999 Annual Report (only portions incorporated by reference are deemed filed) 21 List of Subsidiaries of the Registrant - -------- 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, 1990 (File No. 0-14759). 7 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 30, 1994 (File No. 0-14759). 8 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 3, 1997 (File No. 0-14759). 9 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 2, 1998 (File No. 0-14759). 10 Incorporated herein by reference to Registrant's Form 8-A12G\A as filed on February 24, 1997 (File No. 001-12751). 10 11 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (b) Reports on Form 8-K filed in the fourth quarter of 1999: 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. 11 12 INFORMATION REGARDING THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN and THE COMPANY'S AMENDED AND RESTATED 1996 STOCK PURCHASE PLAN INCLUDED PURSUANT TO RULE 15d-21. 1. Full title of the Plans: KLLM Transport Services, Inc. Employee Stock Purchase Plan KLLM Transport Services, Inc. Amended and Restated 1996 Stock Purchase Plan 2. Name of issuer of the securities held pursuant to the Plans and the address of its principal executive office: KLLM Transport Services, Inc. 135 Riverview Drive Richland, Mississippi 39218 3. Financial Statements and Exhibits Not applicable. 12 13 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 30, 2000 By: /s/ Jack Liles ------------------------- ------------------------------------- Jack Liles Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 30, 2000 /s/ Jack Liles ------------------------- ------------------------------------- Jack Liles Chairman of the Board, President, and Chief Executive Officer Date: March 30, 2000 /s/ James L. Young ------------------------- ------------------------------------- James L. Young Secretary and Director Date: ------------------------- ------------------------------------- David L. Metzler Director Date: March 30, 2000 /s/ Walter P. Neely ------------------------- ------------------------------------- Walter P. Neely Director Date: ------------------------- ------------------------------------- Leland R. Speed Director Date: March 30, 2000 /s/ Steven L. Dutro ------------------------- ------------------------------------- Steven L. Dutro Senior Vice President and Chief Financial Officer Date: March 30, 2000 /s/ A. K. Northrop ------------------------- ------------------------------------- A. K. Northrop Corporate Controller 13 14 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. Amended and Restated 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. AMENDED AND RESTATED 1996 STOCK PURCHASE PLAN Date: March 30, 2000 By: /s/ Jack Liles ------------------------- ------------------------------------- Jack Liles Chairman of the Board, President, and Chief Executive Officer 14 15 ITEM 14(a)(2) and (c) FINANCIAL STATEMENT SCHEDULES KLLM TRANSPORT SERVICES, INC. and SUBSIDIARIES SCHEDULE II - VALUATION and QUALIFYING ACCOUNTS Years Ended January 2, 1998, January 1, 1999, and December 31, 1999 This schedule contains summary financial information extracted from the consolidated financial statements for the three years ended December 31, 1999 and is qualified in its entirely by reference to such financial statements.
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 January 2, 1998 $682 $335 $128 $889 Year ended January 1, 1999 $889 $213 $552 $550 Year ended December 31, 1999 $550 $378 $512 $416
15 16 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------------- ----------- 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 10.7 KLLM, Inc. Cafeteria Plan 6 10.9 Option to purchase real property on which terminal facility is located from Messrs. Liles and Lee 4 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. 7 10.15 1996 Stock Option Plan 8 10.16 Amended and Restated 1996 Stock Purchase Plan 8 10.17 1998 Non-Employee Director Stock Compensation Plan 9 10.18 Stockholder Protection Rights Agreement dated February 13, 1997 between KLLM Transport Services, Inc. and KeyCorp Shareholder Services, Inc., as Rights Agent 10 10.19 Change in Control Agreement 13 1999 Annual Report (Only portions incorporated by reference are deemed filed) - ---------- 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, 1990 (File No. 0-14759). 7 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 30, 1994 (File No. 0-14759). 8 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 3, 1997 (File No. 0-14759). 9 Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended January 2, 1998 (File No. 0-14759). 10 Incorporated herein by reference to Registrant's Form 8-A12G\A as filed on February 24, 1997 (File No. 001-12751). 17 21 List of Subsidiaries of the Registrant 23 Consent of Ernst & Young LLP 27 Financial Data Schedule EX-10.19 2 CHANGE IN CONTROL AGREEMENT 1 EXHIBIT 10.19 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT (this "Agreement") is made as of this 30th day of December, 1999, between KLLM, Inc. ("KLLM"), and [NAME OF PERSON] ("Employee"). RECITALS Employee is employed by KLLM. The Board of Directors of KLLM (the "Board"), has determined that it is in the best interests of KLLM and its sole shareholder, KLLM Transport Services, Inc. (the "Company") to assure that KLLM will have the continued dedication of Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of Employee by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage Employee's full attention and dedication to KLLM currently and in the event of any threatened or pending Change in Control. Therefore, in order to accomplish these objectives, the Board has caused KLLM to enter into this Agreement. NOW, THEREFORE, in consideration of the mutual promises set forth below, in order to induce Employee to remain in the employ of KLLM, and to provide continued services to KLLM now and in the event a Change of Control occurs within the 12 month term hereof, this Agreement sets forth a Bonus, which KLLM offers to pay to Employee in the event of a termination of employment pursuant to those circumstances described in Section 3 below at the time and in the manner prescribed herein. AGREEMENT 1. EFFECTIVE DATE. This Agreement shall be effective as of the date first noted above (the "Effective Date"). 2. PERFORMANCE OF SERVICE. Employee agrees to devote his or her full business time, attention, skill and best efforts while at work exclusively to the faithful performance of his or her duties assigned from time to time by KLLM. The term of this Agreement shall commence immediately upon the date hereof and continue for a period of twelve (12) months thereafter. 3. BONUS PAYMENT. If Employee's employment with KLLM shall have terminated within twelve (12) months after a Change in Control due to (i) Employee's termination by KLLM without Cause (as defined below), or (ii) Employee's resignation for Good Reason (as defined below), then KLLM will pay to Employee a bonus (the "Bonus") equal to but not less than [PERCENTAGE OF GROSS ANNUAL SALARY] of his gross annual salary, as of the Effective Date of this Agreement, in cash, less applicable withholding of taxes. The Bonus shall be due and payable on the date Employee's employment is terminated pursuant to clauses (i) or (ii) above. 2 4. DEFINED TERMS. (i) CHANGE IN CONTROL. For the purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (a) Individuals who, at the Effective Date, constitute the Board of Directors of the Company (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Company's Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no Individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the 1934 Act ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the 1934 Act and as used in Section 13(d)(3) and 14(d)(2) of the 1934 Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; (b) any person is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing 15% or more of either (i) the then outstanding shares of common stock or (ii) the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (b) shall not be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (A) any acquisition by a person who is on the Effective Date the beneficial owner of 25% or more of the outstanding Company Voting Securities, (B) an acquisition by the Company which reduces the number of Company Voting Securities outstanding and thereby results in any person acquiring beneficial ownership of more than 25% of the outstanding Company Voting Securities; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person by 5%, a Change in Control of the Company shall then occur, (C) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Parent or Subsidiary, (D) an acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities, (E) an acquisition pursuant to a Non-Qualifying Transaction (as defined in paragraph (c) below), or (F) a transaction (other than the one described in paragraph (c) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control of the Company under this paragraph (b); (c) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or the sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (A) more than 50% of the total voting power of (x) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (B) no person (other than (x) the Company, (y) any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation, or (z) a person who immediately prior to the Reorganization or Sale was the beneficial owner of 25% or -2- 3 more of the outstanding Company Voting Securities) is the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"). (ii) TERMINATION FOR CAUSE. For the purposes of this Agreement, "Cause" includes but shall not be limited to: (a) conduct amounting to fraud or dishonesty against the Company or any affiliate of the Company, including the knowing failure to disclose or stop such dishonest conduct of others; (b) inattention to or substandard performance by Employee of his/her duties; (c) repeated absences from work without a reasonable excuse; (d) intoxication with alcohol or drugs while on Company business during regular business hours; (e) any conduct by Employee involving moral turpitude; (f) commission of a felony; (g) a breach or violation by Employee of any material terms of this Agreement or any other agreement to which Employee and the Company or any affiliate of the Company are a party; or (h) any act or omission by Employee that is likely to injure the reputation or Business of the Company or any affiliate of the Company. (iii) RESIGNATION FOR GOOD REASON. For the purposes of this Agreement, "Good Reason" shall mean: (a) without the written consent of Employee, any action by KLLM that results in a material diminution in Employee's position, authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied by KLLM promptly after receipt of notice thereof given by Employee; (b) a material reduction by KLLM in Employee's Base Salary as in effect on the Effective Date or as the same may be increased from time to time; or (c) without the written consent of Employee, KLLM's requiring Employee, to be based at any office or location more than [60] miles from the Jackson, Mississippi metropolitan area. 5. INDIVIDUAL. For the purposes of this Agreement, any reference to an individual includes a natural person, entity or group, and use of any masculine pronoun in this Agreement is used for convenience only. 6. NOTICE. Any notice required or permitted to be given by this Agreement shall be effective only if in writing, delivered personally against receipt therefor or mailed by certified or registered mail, return receipt requested, to the parties at the addresses hereinafter set forth, or at such other places that either party may designate by notice to the other. Notice to the Company shall be addressed to: KLLM, Inc. P. O. Box 6098 Jackson, MS 39288 Facsimile No. (601) 936-5441 Attention: Chairman Notice to Employee shall be addressed to him or her at the business address of the Company where Employee is employed. All such notices shall be deemed effectively given five (5) days after the same has been deposited in a post box -3- 4 under the exclusive control of the United States Postal Service. 7. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 8. ARBITRATION. Any dispute or controversy between the parties relating to this Agreement shall be settled by binding arbitration in the City of Jackson, State of Mississippi pursuant to the governing rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. 9. COSTS OF ENFORCEMENT. Each party shall pay its own legal fees and expenses incurred in connection with any arbitration (or other proceeding whether or not instituted by KLLM or Employee), relating to the interpretation or enforcement of any provision of this Agreement (including any action seeking to obtain or enforce any right or benefit provided by this Agreement). 10. NO RESTRICTION ON EMPLOYMENT RIGHTS. This contract is in relation to certain benefits and compensation only and is not to be construed as an employment contract for a definite term. Nothing in this Agreement shall confer on Employee any right to continue in the employ of KLLM or shall interfere with or restrict the rights of KLLM, which are expressly reserved, to discharge Employee at any time for any reason whatsoever, with or without Cause. Nothing in this Agreement shall restrict the right of Employee to terminate his or her employment with the Company at any time for any reason whatsoever. 11. OTHER BENEFITS PAYABLE. The Bonus shall be payable in addition to, and not in lieu of, all other accrued or vested earned but deferred compensation, rights, options or other benefits which may be owed to Employee following his discharge or resignation (whether or not contingent on any Change of Control preceding termination), including but not limited to accrued vacation or sick pay, amounts or benefits payable, if any, under any bonus or other compensation plan, stock option plan, stock purchase plan, life insurance plan, health plan, disability plan or similar plan. 12. ASSIGNABILITY. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by KLLM (except to any subsidiary or affiliate) or by Employee. 13. SUCCESSOR. KLLM shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of KLLM or the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, Company shall mean the company as hereinabove defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 14. AMENDMENT; WAIVER. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party at any time to require the performance by the other party of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect, nor shall the invalidity or unenforceability of a portion of any provision of this Agreement affect the validity or enforceability of the balance of such provision. If any provision of this Agreement, or portion thereof is so broad, in scope or duration, as to -4- 5 be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the Company and Employee with respect to the subject matter hereof. 17. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the substantive internal law and not the conflicts provision of the State of Mississippi. IN WITNESS WHEREOF, the parties have executed these presents as of the day and year first above written. KLLM, INC. By: ---------------------------------- Title: -------------------------------- EMPLOYEE -------------------------------------- -5- 6 SCHEDULE TO EXHIBIT 10.19 The named executive officers listed below have each entered into the above form Change in Control Agreement with KLLM, Inc., except that the name of each such named executive officer appears as set forth below in the place of the phrase "[NAME OF PERSON]" on page 1 of the form Change of Control Agreement and the percentage of such named executive officer's gross annual salary agreed to in such agreement appears as set forth in the place of the phrase "[PERCENTAGE OF GROSS ANNUAL SALARY]" on page 1 of the form Change of Control Agreement.
Percentage of Gross Name Annual Salary - -------------- ------------- Jack Liles 200 Steven L. Dutro 200 Nancy M. Sawyer 200
EX-13 3 1999 ANNUAL REPORT (PORTIONS OF) 1 SELECTED FINANCIAL AND OPERATING DATA KLLM Transport Services, Inc. - 1999 Annual Report EXHIBIT 13
(In thousands, except per share and operating data) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS DATA: Operating revenue from truckload operations $ 234,595 $ 228,988 $ 240,766 $ 246,222 $ 229,519 Operating revenue from rail container operations -- -- 3,319 10,466 10,166 Operating expenses from truckload operations 232,125 223,346 256,376 239,520 222,789 Operating expenses from rail container operations -- -- 6,134 10,818 10,383 ------------------------------------------------------------------------- Operating income (loss) 2,470 5,642 (18,425) 6,350 6,513 Interest and other income 58 945 68 59 32 Interest expense (3,403) (3,551) (4,363) (4,783) (5,554) ------------------------------------------------------------------------- Earnings (loss) from continuing operations before income taxes (875) 3,036 (22,720) 1,626 991 Income tax expense (benefit) (330) 1,200 (8,000) 721 473 ------------------------------------------------------------------------- Net earnings (loss) from continuing operations before extraordinary item (545) 1,836 (14,720) 905 518 Extraordinary item, net of income tax benefit (247) -- -- -- -- Loss from operations of discontinued division, net of income tax benefit -- -- -- -- (624) Loss on disposal of discontinued division, net of income tax benefit -- -- -- (139) (441) ------------------------------------------------------------------------- Net earnings (loss) $ (792) $ 1,836 $ (14,720) $ 766 $ (547) ========================================================================= Basic and diluted earnings (loss) per share: From continuing operations $ (0.13) $ 0.42 $ (3.38) $ 0.21 $ 0.12 From extraordinary item (0.06) -- -- -- -- From operations of discontinued division -- -- -- -- (0.14) From disposal of discontinued division -- -- -- (0.03) (0.10) ------------------------------------------------------------------------- Net earnings (loss) per common share $ (0.19) $ 0.42 $ (3.38) $ 0.18 $ (0.12) ========================================================================= Weighted average diluted common shares outstanding 4,117 4,341 4,358 4,372 4,504 =========================================================================== BALANCE SHEET DATA (AT YEAR-END): Net property and equipment $ 99,046 $ 98,212 $ 107,940 $ 121,875 $ 122,264 Total assets 139,147 133,362 144,535 159,894 164,248 Total liabilities 88,180 80,694 92,424 93,394 98,280 Long-term debt, less current maturities 48,000 36,571 44,826 49,747 59,594 Stockholders' equity 50,967 52,668 52,111 66,500 65,968 OPERATING DATA: Average number of truckloads per week 3,999 3,708 3,966 3,907 3,444 Average miles per trip 936 990 998 1,009 1,065 Total miles travelled (000s) 194,680 190,975 205,828 205,006 186,443 Average revenue per total mile $ 1.13 $ 1.13 $ 1.12 $ 1.12 $ 1.13 Empty mile percentage 13.6% 12.8% 11.5% 12.1% 11.8% Equipment at year-end: Company-operated tractors 1,422 1,467 1,464 1,390 1,485 Owner-operated tractors 260 279 349 366 291 ------------------------------------------------------------------------- Total tractors 1,682 1,746 1,813 1,756 1,776 Refrigerated trailers 1,948 1,998 2,047 2,114 2,150 Dry-van trailers 793 695 570 493 384 ------------------------------------------------------------------------- Total trailers 2,741 2,693 2,617 2,607 2,534 Refrigerated rail containers -- -- -- 200 202
4 2 SELECTED QUARTERLY DATA (UNAUDITED) KLLM Transport Services, Inc. - 1999 Annual Report
First Second Third Fourth (In thousands, except per share amounts) Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------- 1999 Operating revenue $ 55,331 $61,229 $ 58,893 $ 59,142 Operating income (loss) 420 1,542 (419) 927 Extraordinary item, net of tax benefits 0 247 0 0 Net earnings (loss) (225) 150 (747) 30 Basic and diluted earnings (loss) per share before extraordinary item (0.05) 0.10 (0.18) 0.01 Basic and diluted earnings (loss) per share $ (0.05) $ 0.04 $ (0.18) $ 0.01 1998 Operating revenue $ 59,190 $60,113 $ 55,102 $ 54,583 Operating income (loss) (1) 1,730 2,855 1,262 (205) Net earnings (loss) 1,006 1,204 231 (605) Basic and diluted earnings (loss) per share $ 0.23 $ 0.28 $ 0.05 $ (0.14)
(1) The fourth quarter 1998 operating loss reflects a $.8 million reduction in reserves for self-insured claims as a result of favorable claims experience in the quarter. 5 3 MARKET AND DIVIDEND INFORMATION KLLM Transport Services, Inc. - 1999 Annual Report The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol KLLM. The number of stockholders, including beneficial owners holding shares in nominee or "street" name, as of March 10, 2000, was approximately 1,180. 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 1999 and 1998:
FISCAL YEAR 1999 High Low - ----------------------------------------------------------- First Quarter $ 7.63 $ 5.75 Second Quarter $ 7.00 $ 5.38 Third Quarter $ 6.00 $ 4.00 Fourth Quarter $ 7.50 $ 4.25 FISCAL YEAR 1998 High Low - ----------------------------------------------------------- First Quarter $ 13.75 $ 11.00 Second Quarter $ 14.13 $ 11.50 Third Quarter $ 13.00 $ 8.00 Fourth Quarter $ 9.00 $ 7.00
6 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION KLLM Transport Services, Inc. - 1999 Annual Report 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 1999 1998 1997 - ------------ ------- ------- ------- Operating revenue from truckload operations 100.0% 100.0% 100.0% Operating expenses: Salaries, wages and fringe benefits 35.7 31.9 31.5 Operating supplies and expenses 24.9 24.9 26.1 Insurance, claims, taxes and licenses 4.5 6.0 7.3 Depreciation and amortization 7.8 8.0 8.9 Purchased transportation and equipment rent 21.9 22.2 21.5 Impairment loss -- -- 6.5 Other 4.6 5.0 4.6 (Gain) loss on sale of revenue equipment (0.4) (0.5) 0.1 ------- ------- ------- Total operating expenses from truckload operations 99.0 97.5 106.5 ------- ------- ------- Operating income (loss) from truckload operations 1.0 2.5 (6.5) Operating loss from rail container operations -- -- (1.1) ------- ------- ------- Operating income (loss) 1.0 2.5 (7.6) Other income -- 0.4 -- Interest expense 1.3 1.6 1.8 ------- ------- ------- Earnings (loss) before income taxes and extraordinary item (0.3) 1.3 (9.4) Income tax expense (benefit) (0.1) 0.5 (3.3) ------- ------- ------- Net earnings (loss) before extraordinary item (0.2) 0.8 (6.1) Extraordinary item, net of tax benefits (0.1) -- -- ------- ------- ------- Net earnings (loss) (0.3)% 0.8% (6.1)% ======= ======= =======
Year Ended December 31, 1999 Compared to Year Ended January 1, 1999 Operating revenue for the year ended December 31, 1999 increased by $5,607,000 or 2% when compared to the year ended January 1, 1999. The increase in operating revenue consisted of a 4% increase from dry-van services, net of a 2% decrease from temperature-controlled services. The decrease in temperature-controlled services resulted primarily from a 14% decrease in the average number of owner operated tractors. Average revenue per mile excluding fuel surcharges remained flat. At the end of the third quarter of 1999, fuel prices rose to a level that generated fuel surcharges to the Company's customers. These surcharges added an additional $538,000 and $15,000 to operating revenues in 1999 and 1998, respectively. During the third quarter of 1998, the Company implemented an enhanced pay package that increased compensation for certain drivers. As a result, salaries, wages, and benefits increased in 1999 when compared to 1998. The primary elements leading to the change in driver wages were an increase in the average experience level of the driver workforce combined with growth in the number of drivers in regional and dedicated fleets. In 1999, the Company was able to recruit and retain drivers better than in prior years. During 1999, many driver performance related expenses improved. - - Miles per truck increased in 1999 compared to 1998, indicating an improvement in the utilization of equipment. - - Repair costs decreased for the year, reflecting more careful treatment of equipment by drivers. - - An improvement in safety led to reduced accident repair cost, a component of operating supplies and expenses, and to a significant decrease in the cost of claims. - - Advertising and recruiting expenses, within other expenses, also decreased in 1999 compared to 1998, further reflecting the results of the 1998 pay increase. 7 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report Operating supplies and expenses increased, when compared to the prior year, primarily due to an increase in the price of fuel offsetting the decrease in expenses from driver related improvements. During 1999, the Company paid $4,500,000 more for fuel than in 1998. Diesel fuel prices began rising in March 1999 and at year end retail on-highway diesel prices were $.34 per gallon above year end 1998 prices. At year end prices, the Company is able to recover a portion of its diesel fuel cost through fuel surcharges to its customers. Purchased transportation and equipment rent remained level from 1998 through 1999 as the decrease in purchased transportation paid to owner operated trucks was offset by an increase in equipment rent resulting from the new equipment operating leases. Depreciation and amortization did not change significantly compared to the prior year. An increase in depreciation expense, reflecting a conversion of the fleet to a shorter trade cycle, was offset by the decrease in depreciation resulting from the replacement of owned equipment by equipment leased under operating leases. Other income decreased $887,000 from the prior year primarily as a result of a gain on sale of the corporate office building of $858,000 in the first quarter of 1998. The operating ratio (which represents operating expenses as a percent of operating revenues) increased from 97.5% to 99.0% for the year ended December 31, 1999 when compared to the year ended January 1, 1999. Interest expense decreased $148,000 from the prior year as a result of lower debt outstanding. The average interest rate under the revolving line of credit was approximately the same in both years. During 1999, the Company fully prepaid the 9.11% senior notes which were due June 2002. Under the terms of the prepayment, fees and other expenses totaling $247,000, net of a $150,000 tax benefit, were incurred which are included in the consolidated statements of operations as an extraordinary item. The effective income tax rate was 37.7% in 1999 compared to 39.5% in 1998. The decreased rate reflects the effect of nondeductible expenses as a percentage of pretax income (loss). Year Ended January 1, 1999 Compared to Year Ended January 2, 1998 Operating revenue for the year ended January 1, 1999 decreased by $11,778,000 or 5% when compared to the year ended January 2, 1998. The decrease in operating revenue consisted of a 2% increase from dry-van services, net of a 7% decrease in temperature-controlled services. The decrease in temperature-controlled services resulted primarily from a 4% decrease in the number of owner operated tractors and a 6% decrease in miles per tractor. The decrease in miles per tractor was due to a shortage of qualified drivers. Average revenue per mile excluding fuel surcharges increased to $1.13 for the year ended January 1, 1999 compared to $1.12 for the year ended January 2, 1998. Surcharges for high fuel costs added an additional $15,000 and $1,209,000 to revenues in 1998 and 1997, respectively. The challenge of attracting and retaining qualified drivers led to the implementation of an enhanced pay package for certain drivers on September 1, 1998 which increased driver wages approximately 7%. Fewer miles driven and reductions in nondriver compensation have resulted in a net reduction in salaries, wages, and benefits expense compared to 1997. Operating supplies and expenses decreased $5,890,000 compared to the prior year primarily due to lower fuel prices ($3,862,000), and cost control efforts offset by an increase in repair costs. Insurance, claims, taxes, and licenses decreased $4,022,000 compared to 1997. Insurance expense in 1997 had been increased as a result of a reevaluation of the Company's self insured claims management and reserve practices. Management believes that improvements in driver recruiting and retention, in part a result of the new driver pay plan, also contributed to lower costs through improvements in safety. Depreciation and amortization decreased from 1997 as a result of; 1) the write-off in 1997 of intangible assets related to exiting the rail container business; 2) the special charge in 1997 to recognize an impairment in value of the Company's 48-foot temperature-controlled trailers; and 3) the replacement of certain owned equipment with equipment leased under operating leases. 8 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report Purchased transportation and equipment rent remained level from 1997 to 1998 because the increase in equipment rent was offset by a decrease in transportation purchased from owner operators. During 1998, the Company had a modest gain on the sale of revenue equipment through the regular trade cycle. The operating ratio (which represents operating expenses as a percent of operating revenues on continuing operations) decreased from 106.5% to 97.5% for the year ended January 1, 1999 when compared to the year ended January 2, 1998. Interest expense for the year ended January 1, 1999 decreased from the prior year primarily due to a decrease in the average debt outstanding. Interest rates under the revolving line of credit declined slightly during 1998 compared to 1997. The provision for income tax expense for 1998 was $1,200,000, based on a combined effective federal and state income tax rate of 40%. This rate reflects an increase in the effective rate in 1997 as a result of an increase in nondeductible expenses as a percentage of pretax income (loss) and a small increase in the effective state income tax rate. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The total project cost was approximately $700,000 for the purchase of new software and the modification of existing software with $400,000 of the total capitalized and the remaining $300,000 expensed. The Company expensed approximately $120,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. MARKET RISK Market risk relating to the Company's operations result primarily from changes in interest rates and the price of heating oil (diesel fuel), as well as credit risk concentration. The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. The Company's interest expense is sensitive to changes in the general level of U. S. interest rates. At December 31, 1999, the Company had long-term debt of $48,000,000 at a weighted average interest rate of 8.2% maturing in 2001. The 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. To hedge its exposure to price fluctuations, the Company periodically enters into heating oil (diesel fuel) swap agreements. Such agreements are accounted for as hedges with gains and losses recognized in operating expense as part of the fuel cost over the hedge period. At December 31, 1999, the Company has entered into swap agreements on approximately 4% of its 2000 anticipated fuel requirements which is immaterial to the Company's financial position and operations. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash flow from operations and existing credit agreements of KLLM, Inc., a wholly-owned subsidiary. During the years ended December 31, 1999 and January 1, 1999, the Company generated $9.6 million and $16.5 million, respectively, in net cash provided by operating activities. This cash flow in 1999 was used primarily for capital expenditures. In 1999, the Company-owned tractor fleet decreased by 45 units while the trailer fleet increased by 48 units, net of replacements, compared to 1998. Capital expenditures, net of proceeds from trade-ins during 1999, were approximately $17.5 million compared to $4.8 million in 1998. The Company also entered into operating leases for 65 tractors and 600 9 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report trailers throughout the year. Net capital expenditures in 2000 are expected to be approximately $40.7 million, although management may finance a portion of the capital expenditures with operating leases. The Company has a $60,000,000 unsecured revolving line of credit with a syndication of banks due April 7, 2001. Borrowings of $48,000,000 were outstanding under the line at year-end. Under the most restrictive payment terms on long-term debt, the entire amount, $48,000,000, would be payable in 2001. Working capital needs have generally been met from net cash provided from operating activities. The Company has a $5,000,000 unsecured working capital line of credit with a bank which was fully available at December 31, 1999. Interest is at a rate based upon the Eurodollar rates with facility fees at 3/8% 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 1999 and 1998, cash and cash equivalents totaled $511,000 and $756,000, respectively. In 1998, the Company announced plans to purchase up to 150,000 shares of the Company's outstanding stock. During 1999, 134,000 shares were purchased for $960,000 of which 50,000 shares for $356,000 were purchased from the Estate of B.C. Lee, Jr., former Chairman of the Board. 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 of the date hereof. The Company assumes no obligation to update forward-looking statements. 10 8 CONSOLIDATED BALANCE SHEETS KLLM Transport Services, Inc. - 1999 Annual Report
At Year-End (In thousands) 1999 1998 - -------------------------- ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 511 $ 756 Accounts receivable: Customers (net of allowances of $416,000 in 1999 and $550,000 in 1998) 24,763 20,607 Other 1,941 525 ---------- ---------- 26,704 21,132 Inventories - at cost 686 597 Prepaid expenses: Tires 3,625 2,758 Taxes, licenses and permits 3,161 1,796 Other 313 763 ---------- ---------- 7,099 5,317 Assets held for sale - Note B 0 1,530 Deferred income taxes - Note D 5,101 5,818 ---------- ---------- TOTAL CURRENT ASSETS 40,101 35,150 PROPERTY AND EQUIPMENT - Note B Revenue equipment and capital leases 129,926 118,567 Land, structures and improvements 7,873 8,174 Other equipment 7,790 5,212 ---------- ---------- 145,589 131,953 Accumulated depreciation and amortization (46,543) (33,741) ---------- ---------- 99,046 98,212 ---------- ---------- TOTAL ASSETS $ 139,147 $ 133,362 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,877 $ 4,295 Accrued expenses 12,155 7,450 Accrued claims expense - Note J 12,865 15,041 Current maturities of long-term debt 0 2,857 ---------- ---------- TOTAL CURRENT LIABILITIES 26,897 29,643 LONG-TERM DEBT, less current maturities - Note C 48,000 36,571 DEFERRED INCOME TAXES - Note D 13,283 14,480 STOCKHOLDERS' EQUITY - Notes F and G 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 1999 and 1998 4,559 4,559 Additional paid-in capital 32,822 32,858 Retained earnings 17,777 18,569 ---------- ---------- 55,158 55,986 Less common stock in treasury, 459,787 shares in 1999 and 334,266 shares in 1998, at cost (4,191) (3,318) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 50,967 52,668 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,147 $ 133,362 ========== ==========
See accompanying notes. 11 9 CONSOLIDATED STATEMENT OF OPERATIONS KLLM Transport Services, Inc. - 1999 Annual Report
For The Year (In thousands, except share and per share amounts) 1999 1998 1997 - --------------------------------------------------------------- --------- --------- --------- OPERATING REVENUE FROM TRUCKLOAD OPERATIONS $ 234,595 $228,988 $ 240,766 OPERATING EXPENSES: Salaries, wages and fringe benefits 83,655 73,143 75,748 Operating supplies and expenses 58,392 56,938 62,828 Insurance, claims, taxes and licenses 10,585 13,729 17,751 Depreciation and amortization 18,303 18,270 21,432 Purchased transportation and equipment rent 51,424 50,840 51,692 Other 10,797 11,657 10,986 Impairment of long-lived assets - Note B 0 0 15,754 (Gain) loss on sale of revenue equipment (1,031) (1,231) 185 --------- --------- --------- TOTAL OPERATING EXPENSES FROM TRUCKLOAD OPERATIONS 232,125 223,346 256,376 --------- --------- --------- OPERATING INCOME (LOSS) FROM TRUCKLOAD OPERATIONS 2,470 5,642 (15,610) OPERATING REVENUE FROM RAIL CONTAINER OPERATIONS 0 0 3,319 OPERATING EXPENSES 0 0 4,228 RESTRUCTURING CHARGE - Note I 0 0 1,906 --------- --------- --------- OPERATING LOSS FROM RAIL CONTAINER OPERATIONS 0 0 (2,815) --------- --------- --------- OPERATING INCOME (LOSS) 2,470 5,642 (18,425) OTHER INCOME AND EXPENSES: Gain on sale of property 0 858 0 Interest and other income 58 87 68 Interest expense (3,403) (3,551) (4,363) --------- --------- --------- (3,345) (2,606) (4,295) --------- --------- --------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS (875) 3,036 (22,720) Income tax expense (benefit) - Note D (330) 1,200 (8,000) --------- --------- --------- NET EARNINGS (LOSS) before extraordinary item (545) 1,836 (14,720) EXTRAORDINARY LOSS on early extinguishment of debt - Note H (Net of income tax benefit of $150) (247) 0 0 --------- --------- --------- NET EARNINGS (LOSS) $ (792) $1,836 $ (14,720) ========== ========= ========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Net earnings (loss) before extraordinary item $ (0.13) $ 0.42 ($3.38) Extraordinary item (0.06) 0.00 0.00 --------- --------- --------- BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE $ (0.19) $ 0.42 ($3.38) ========== ========= ====== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 4,116,718 4,340,033 4,357,970 ========= ========= ========= Diluted 4,116,718 4,340,666 4,357,970 ========= ========= =========
See accompanying notes. 12 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY KLLM Transport Services, Inc. - 1999 Annual Report
Common Stock ------------------------------------------ Treasury Stock Additional Total -------------------- Paid-in Retained Stockholders' (In thousands) Shares Amount Shares Amount Capital Earnings Equity - -------------- ------ ------ ------ ------- --------- --------- ------------- BALANCE AT JANUARY 4, 1997 4,559 $4,559 (214) $(2,323) $32,811 $31,453 $66,500 Sale of common stock - Note F 4 36 5 41 Common stock issued upon exercise of stock options - Note G 24 252 (29) 223 Stock options issued 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 Purchase of treasury shares, at cost (153) (1330) (1,330) Sale of common stock - Note F 1 2 2 Common stock issued for services 4 45 4 49 Net earnings 1,836 1,836 ----- ------ ---- ------- ------- ------- ------- BALANCE AT JANUARY 1, 1999 4,559 4,559 (334) (3,318) 32,858 18,569 52,668 Purchase of treasury shares, at cost (134) (960) (960) Common stock issued for services 8 87 (36) 51 Net loss (792) (792) ----- ------ ---- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1999 4,559 $4,559 (460) $(4,191) $32,822 $17,777 $50,967 ===== ====== ==== ======= ======= ======= =======
See accompanying notes. 13 11 CONSOLIDATED STATEMENTS OF CASH FLOWS KLLM Transport Services, Inc. - 1999 Annual Report
For The Year (In thousands) 1999 1998 1997 - --------------------------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (792) $ 1,836 $ (14,720) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 18,303 18,270 21,507 Deferred income taxes (480) 1,200 (8,000) Impairment costs 0 0 15,754 Restructuring charge on rail container operations 0 0 1,906 Book value of equipment written off in accidents 607 464 522 Change in operating assets and liabilities: (Increase) decrease in accounts receivable (5,572) (308) 1,780 (Increase) decrease in inventory and prepaid expenses (1,148) 301 (647) Increase (decrease) in accounts payable and accrued expenses (260) (3,190) 13,478 (Gain) loss on sale of property and equipment (1,031) (2,089) 185 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,627 16,484 31,765 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (31,975) (21,865) (37,108) Proceeds from disposition of property and equipment 14,440 17,042 11,344 ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (17,535) (4,823) (25,764) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 0 2 41 Proceeds from exercise of stock options 0 0 223 Common stock issued for services 51 49 0 Purchase of common stock for treasury (960) (1,330) 0 Net increase (decrease) in borrowing under revolving line of credit 20,000 (2,000) 0 Repayment of long-term debt and capital leases (11,428) (8,296) (4,871) Net change in borrowing under working capital line of credit 0 0 (3,598) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,663 (11,575) (8,205) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (245) 86 (2,204) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 756 670 2,874 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 511 $ 756 $ 670 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest $ 3,420 $ 3,721 $ 4,432 ========== ========== ========== Income taxes refunded $ 726 $ 816 $ 877 ========== ========== ==========
See accompanying notes. 14 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KLLM Transport Services, Inc. - 1999 Annual Report 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 dedicated fleet transportation. The Company operates as one segment under the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." 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 eighteen to twenty-four 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 using the liability 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. Such charge is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. 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. Earnings per Share. Basic earnings per share are based on the weighted average common shares outstanding. Diluted earnings per share includes any dilutive effects of options, warrants and convertible securities. 15 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report Use of Derivative Commodity Instruments. To hedge its exposure to price fluctuations, the Company periodically enters into heating oil (diesel fuel) swap agreements. The Company does not engage in speculative transactions nor does the Company hold or issue derivative instruments for trading purposes. Such agreements are accounted for as hedges with gains and losses recognized in operating expenses using the accrual method as part of the fuel cost over the hedge period. Fiscal Year. The Company's fiscal year-end is the Friday nearest December 31, which was the 52-week periods ended December 31, 1999, January 1, 1999 and January 2, 1998 for the past three fiscal year ends. Impact of Recently Issued Accounting Pronouncements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). The provisions of SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value. SFAS No. 133 establishes "special accounting" for fair value hedges, cash flow hedges, and hedges of foreign currency exposures of net investments in foreign operations. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The effect of this statement will be insignificant to the results of the consolidated operations and financial position of the Company when it becomes effective for 2001. 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 following three years, which was 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 statement of operations for the year ended January 2, 1998. During 1997, the Company closed its terminal facility in Dallas, Texas. The Dallas terminal had a carrying amount of $2.0 million as of January 2, 1998 which was 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 $.5 million in impairment on long-lived assets in the accompanying statement of operations for the year ended January 2, 1998. The terminal was classified as assets available for sale in the accompanying balance sheets as of January 1, 1999. As of December 31, 1999, the terminal was reclassified to land, structures and improvements because the Company intends to use the facility in its operations. 16 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report NOTE C - CREDIT FACILITIES AND DEBT Long-term debt consisted of the following:
(In thousands) 1999 1998 - -------------- ------- ------- Revolving line of credit with banks, with floating interest rates (weighted average rate of 8.2% at December 31, 1999 and 6.1% at January 1, 1999) $48,000 $28,000 9.11% unsecured notes payable to insurance companies 0 11,428 ------- ------- 48,000 39,428 Less current maturities 0 (2,857) ------- ------- $48,000 $36,571 ======= =======
The Company has a $60,000,000 unsecured revolving line of credit maturing in 2001. In accordance with the agreement, the Company has agreed to limit assets pledged on any other borrowing. At December 31, 1999, $12,000,000 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 1/4% to 1/2% per annum are charged on the unused portion of this line. Under the most restrictive payment terms, borrowings under the revolving line of credit are payable in 2001. The Company also has $5,000,000 in an unsecured working capital line of credit, all of which was available at December 31, 1999. Interest is at a rate based upon London Interbank Offered Rate (LIBOR) on borrowings on the working capital line with facility fees at 3/8% per annum on the unused portion of the line. Under the terms of the lines of credit, 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. 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) 1999 1998 - -------------- ------- ------- Deferred tax liability--property and equipment $22,769 $25,668 Deferred tax assets: Allowance for doubtful accounts 161 193 Accrued expenses 4,940 5,625 Net operating loss carryforward 8,376 10,064 Intangibles 194 208 Alternative minimum tax carryforward 916 916 ------- ------- 14,587 17,006 ------- ------- Net deferred tax liabilities $ 8,182 $ 8,662 ======= =======
17 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report Income tax expense (benefit) consists of the following:
(In thousands) 1999 1998 1997 - -------------- ------- ------- -------- Deferred: Federal $ (410) $ 833 $ (7,300) State (70) 367 (700) ------ ------- -------- Total income tax expense (benefit) (480) 1,200 (8,000) Income tax benefit allocated to extraordinary item 150 0 0 ------ ------- -------- Income tax expense (benefit) attributable to income before extraordinary item $ (330) $ 1,200 $ (8,000) ====== ======= ========
The reconciliation of income tax computed at the federal statutory tax rate to income tax expense is as follows:
(In thousands) 1999 1998 1997 - -------------- ------ ------- -------- Statutory federal income tax rate $ (433) $ 1,032 $ (7,725) State income taxes, net (46) 242 (462) Other (1) (74) 187 ------ ------- -------- $ (480) $ 1,200 $ (8,000) ====== ======= ========
The Company has a net operating loss carry forward for income tax purposes of approximately $22,000,000, which expires at various dates beginning in 2010 through the year 2018. NOTE E - CONCENTRATIONS OF CREDIT RISK The Company had one customer, which accounted for operating revenues of $43,600,000 in 1999, $39,700,000 in 1998 and $27,760,000 in 1997. 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 collateral is generally not required. Credit losses have been insignificant and within management's expectations. NOTE F - 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 $830,000, $559,000, and $540,000 in 1999, 1998, and 1997, 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 1999, 210 shares were purchased and in 1998, 211 shares were issued pursuant to the plan. Subsequent to December 31, 1999, an additional 9,334 shares have been subscribed for by employees. 18 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report NOTE G - 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 and earnings 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 .285 for 1998; weighted-average expected life of options of five years for 1998; risk-free interest rate of 6% for 1998; and no dividend yield. There were no options granted in 1999. 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 is amortized to expense over the vesting period. The Company's pro forma information follows (in thousands, except per share information):
1999 1998 ------ ------- Pro forma net income (loss) $ (834) $ 1,809 Pro forma basic and diluted earnings (loss) per common share $ (.20) $ .42
19 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report A summary of the Company's stock option activity and related information is as follows:
1999 1998 1997 ------------------------- ------------------------- ------------------------- Options Weighted-Average Options Weighted-Average Options Weighted-Average (000) Exercise Price (000) Exercise Price (000) Exercise Price ------------------------- ------------------------- ------------------------- Outstanding-beginning of year 117 $14 234 $14 269 $14 Granted -- -- 95 12 21 12 Exercised -- -- -- -- (25) 9 Forfeited (23) 14 (212) 14 (31) 15 ---- ----- ----- ----- ----- ------ Outstanding-end of year 94 $14 117 $14 234 $14 ---- ----- ----- ----- ----- ------ Exercisable-end of year 51 48 146 ---- ----- ----- Weighted-average fair value of options granted during the year -- $4.26 $3.15 ----- ------ -------
Following is a summary of the status of options outstanding at December 31, 1999:
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 ----------- ------------------------------- ----------------------- $11 - $12 38 7 years $11 10 $11 $13 - $14 45 3 years $14 30 $14 $21 11 2 years $21 11 $21
NOTE H - EXTRAORDINARY ITEM During the second quarter of 1999, the Company fully prepaid the 9.11% senior notes (1992 debt) which were due June 2002. Under the terms of the prepayment, fees and other expenses totaling $247,000, net of a $150,000 tax benefit, were incurred. With the prepayment of the 1992 debt, the Company's average effective interest rate for debt outstanding was reduced and certain restrictive financial covenants were eliminated. Expenses relating to the prepayment of the 1992 debt are included in the consolidated statements of earnings as an extraordinary item. NOTE I - 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. 20 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KLLM Transport Services, Inc. - 1999 Annual Report NOTE J - 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 $12,865,000 at December 31, 1999 and $15,041,000 at January 1, 1999, 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 five 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 December 31, 1999 are $10,327,000 in 2000, $8,817,000 in 2001, $7,787,000 in 2002, $6,334,000 in 2003 and $1,349,000 in 2004. The Company guarantees approximately $3,270,000 of the residual value of certain revenue equipment leased under operating leases. Rental expense applicable to noncancelable operating leases totaled $11,433,000 in 1999, $8,097,000 in 1998, and $6,806,000 in 1997. The Company has entered into heating oil (diesel fuel) swap agreements to hedge its exposure to price fluctuations at year end 1999 on 4% of its 2000 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 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 K - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount reported in the consolidated balance sheet for cash and cash equivalents and long-term debt approximate their fair values at December 31, 1999. 21 19 REPORT OF INDEPENDENT AUDITORS KLLM Transport Services, Inc. - 1999 Annual Report 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 December 31, 1999 and January 1, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KLLM Transport Services, Inc. and subsidiaries at December 31, 1999 and January 1, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Jackson, Mississippi February 4, 2000 22 EX-21 4 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 List of Subsidiaries of the Registrant -------------------------------------- The only subsidiary of the registrant is KLLM, Inc., a Texas corporation. EX-23 5 CONSENT OF ERNST & YOUNG LLP 1 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 February 4, 2000, included in the 1999 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 as 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, the Registration Statement (Form S-8, No. 333-35365) pertaining to the KLLM Transport Services, Inc. 1996 Stock Purchase Plan and the Registration Statement (Form S-8, No.333-50359) pertaining to the KLLM Transport Services, Inc. 1998 Non-Employee Director Stock Compensation Plan of our report dated February 4, 2000, 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) for the year ended December 31, 1999. Ernst & Young LLP Jackson, Mississippi March 28, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF KLLM TRANSPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-02-1999 DEC-31-1999 511 0 27,120 416 686 40,101 145,589 46,543 139,147 26,897 0 0 0 4,559 46,408 139,147 0 234,595 0 232,125 (58) 0 3,403 (875) (330) (545) 0 (247) 0 (792) (0.19) (0.19)
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