KLLM
1997 Annual Report
Company Profile
KLLM Transport Services, Inc., through its wholly-owned subsidiary,
KLLM, Inc., specializes in providing high-quality transportation services
in North America.
KLLM, Inc.'s operating divisions haul both temperature-controlled and dry
commodities. Protective service is provided on commodities such as food,
medical supplies and cosmetics. Service offerings include over-the-road
long haul and regional transportation.
The shares of KLLM Transport Services, Inc. trade on the Nasdaq National
Market under the symbol KLLM.
Financial and Operating Highlights
(In thousands, except per share and operating data) 1997 1996
STATEMENT OF OPERATIONS DATA:
Operating revenue from truckload operations $240,766 $246,222
Operating income (loss) from continuing truckload
operations (15,610) 6,702
Net earnings (loss) from continuing operations (14,720) 905
Basic and diluted earnings (loss) per share from
continuing operations $ (3.38) $0.21
Weighted average diluted shares outstanding 4,358 4,373
BALANCE SHEET DATA:
Total assets $144,535 $159,894
Long-term debt, less current maturities 44,826 49,747
Stockholders' equity 52,111 66,500
OPERATING DATA:
Total miles travelled (000s) 205,828 205,006
Average miles per tractor per week 2,212 2,162
Average revenue per total mile $1.12 $1.12
Equipment at year-end:
Company-operated tractors 1,464 1,390
Owner-operated tractors 349 366
--------------------
Total tractors 1,813 1,756
Refrigerated trailers 2,047 2,114
Dry-van trailers 570 493
--------------------
Total trailers 2,617 2,607
Refrigerated rail containers _ 200
LETTER TO SHAREHOLDERS
A year ago in our annual report to stockholders, we talked about the many
significant changes we have made at KLLM: changes in our management team,
organizational configuration and cost structure. In 1997, as we continued
to rebuild our Company and focus on our core trucking business, we began
to realize the benefits of the decisive actions of the past two years. Some
of these benefits include improvements in operational efficiency, a better
customer mix, penetration of targeted accounts and lower operating costs
throughout the Company. Although the sins of the past resulted in one-time
writeoffs which offset these real achievements in 1997, the improvements
made in operating fundamentals and cost structure are here to stay.
DECISIVE ACTIONS
Since we adopted the concept of economic value added, or EVA_, as a tool
to guide our business decisions and measure our performance, EVA_ has been
a major catalyst for change at KLLM. Implementation of EVA_ has resulted
in exiting nonperforming businesses, substantial reductions in staff and
facilities in our core operation, and a focus on the fundamentals of trucking.
Among the significant actions we took in 1997 were the closing of our rail
container operations, an acceleration of our conversion to 53-foot trailers
and a reassessment of our reserves for self-insured claims and other
contingencies. While these steps resulted in special charges in 1997,
they enabled us to clean the slate and will serve us well in the future.
In particular, the conversion of our trailer fleet will help us maintain
our position as a leader in the temperature-controlled sector. The table on
page 3 shows the effect of each of these actions on 1997 results and the
profit KLLM generated exclusive of the one-time charges.
OPERATIONAL EFFICIENCY IMPROVEMENTS
Our focus on the fundamentals of our core trucking operations have
led to improvements in operational efficiency which can be measured in a
number of ways.
Higher Utilization In 1997, miles per tractor per week increased 2.3%
and empty mile percentage fell to 11.5% from 12.1% for 1996.
Safety Improvement The accident rate per million miles traveled fell
8% in 1997 compared with 1996.
Facility Consolidation In early 1998, we relocated our corporate
offices to the Jackson terminal site to improve efficiency and enhance
communications between the corporate staff and drivers.
PROSPr This exciting new initiative places greater emphasis on customer
service and frees additional manpower to focus on driver needs.
SALES AND MARKETING SUCCESS
Successes in sales and marketing are important factors in driving
future profitability. As a result of improvements in our own marketing
efforts, as well as a more favorable economic environment, we made
important strides toward our strategy of improving customer mix and
winning new business in 1997. Business with our existing top tier customers
grew by 13% during the year. In addition, we added two major customers
which rapidly grew to be among our top accounts in 1997 and are expected
to move into the top 10 in 1998.
COST REDUCTIONS
On the cost side, we continue to streamline our operations with a goal
to be a low-cost producer driven by service quality and excellent execution
of the fundamentals of trucking. The actions outlined below have dramatically
lowered our cost structure and reduced our capital investment. However, we
are not finished and believe there are still opportunities to reduce our
costs even further.
Business Closure. We exited the intermodal container business in 1997,
following the discontinuance of international maritime service and freight
brokerage operations in 1996.
Facility Closures. We closed three terminal and maintenance facilities
in 1997 and the corporate office facility in early 1998. Since mid-1995,
total terminals have been reduced from 13 to 6.
Head Count Reductions Non-driving staff totaled 357 at year-end 1997,
down 20% from year-end 1996 and 40% from the peak in mid-1995.
POSITIONED FOR THE FUTURE
In 1998, we look forward to the culmination of over two years of hard
work. We believe we have put the last obstacles behind us. Our accomplish-
ments of the past two years have enabled us to begin the new year with a
significantly lower cost structure, operations keenly focused on our core
trucking business and a firmer foundation for carrying out our long-term
strategy. As we outlined to you a year ago, that strategy is clearly defined
and based on three primary goals we call routes to success.
Routes to Success
Create economic value for our stockholders by providing superior
"total service" to select customers who will provide adequate returns
on capital. Serve our select customers effectively and cost efficiently
at a level unmatched by our competitors.
Match our services offered and available fleet capacity to our customers'
expectations and industry constraints.
Position our services and costs to take advantage of opportunities in
the growing freight market while mitigating the impact of periodic downturns.
Action Plan
_ Use EVA_ as a guide to invest capital based on real, measurable returns.
- - Target customers which are interested in building "partnerships" and
willing to pay adequately for superior service.
_ Maintain focus on operational excellence, reducing costs without
sacrificing service quality.
_ Bring mix of business and levels of service in line with customer demand,
growing capacity in areas where returns on investment are favorable.
_ Develop fleet capacity with a balance of company drivers, owner operators
and subcontractors.
_ Seize the initiative and be proactive to changes in market conditions and
competition.
_ Deliver the best in customer service to foster stable, "total service"
customer relationships.
_ Keep capacity flexible.
_ Take advantage of opportunities to build key customer relationships,
acquire bargain priced assets, hire drivers and make operations more
efficient.
We enter 1998 with strong sales momentum, an outlook for improved freight
demand and rates, substantial reductions in our cost structure and the
promising new PROSPr program. In addition, EVA_ continues to mature in
our Company and is becoming an ever more valuable barometer that guides
our course. All of these factors augur well for an improved performance
in 1998. The greatest challenge to our performance in both the short and
long term stems from a shortage of new drivers entering the industry, a
challenge the PROSPr program is designed to address.
Our management team is committed to building shareholder value and
excellence in operations. We are making real progress toward these goals.
Thank you for your support of our efforts.
s/Steven K. Bevilaqua
Steven K. Bevilaqua
President and Chief Executive Officer
Selected Financial and Operating Data
(In thousands, except per share
and operating data) 1997 1996 1995 1994 1993
STATEMENTS OF OPERATIONS DATA:
Operating revenue from truckload
operations $240,766 $246,222 $229,519 $202,101 $165,259
Operating revenue from rail
container operations 3,319 10,466 10,166 8,175 -
Operating expenses from truckload
operations 256,376 239,520 222,789 187,452 152,503
Operating expenses from rail
container operations 6,134 10,818 10,383 8,523 -
--------------------------------------------
Operating income (18,425) 6,350 6,513 14,301 12,756
Interest and other income 68 59 32 17 11
Interest expense (4,363) (4,783) (5,554) (5,014) (4,384)
--------------------------------------------
Earnings (loss) from
continuing operations before
income taxes (22,720) 1,626 991 9,304 8,383
Income tax expense (benefit) (8,000) 721 473 3,530 3,436
--------------------------------------------
Net earnings (loss) from
continuing operations (14,720) 905 518 5,774 4,947
Loss from operations of
discontinued division,
net of tax benefits _ _ (624) (580) (195)
Loss on disposal of discontinued
division, net of tax benefit _ (139) (441) _ _
--------------------------------------------
Net earnings (loss) $(14,720) $766 $(547) $5,194 $4,752
===========================================
Basic and diluted earnings
(loss) per share:
From continuing operations $ (3.38) $0.21 $0.12 $1.28 $1.14
From operations of
discontinued division _ _ (0.14) (0.13) (0.05)
From disposal of
discontinued division _ (0.03) (0.10) _ _
-------------------------------------------
Net earnings (loss) per common
share $ (3.38) $0.18 $(0.12) $1.15 $1.09
-------------------------------------------
Weighted average diluted shares
outstanding 4,358 4,373 4,504 4,536 4,357
BALANCE SHEET DATA (AT YEAR-END):
Net property and equipment $107,940 $121,875 $122,264 $126,756 $117,322
Total assets 144,535 159,894 164,248 166,077 150,094
Total liabilities 92,424 93,394 98,280 98,234 86,403
Long-term debt, less current
maturities 44,826 49,747 59,594 66,531 58,514
Stockholders' equity 52,111 66,500 65,968 67,843 63,691
OPERATING DATA:
Average number of truckloads
per week 3,966 3,907 3,444 2,871 2,420
Average miles per trip 998 1,009 1,065 1,082 1,087
Total miles travelled (000s) 205,828 205,006 186,443 161,584 136,777
Average revenue per total mile $ 1.12 $1.12 $ 1.13 $1.16 $1.13
Empty mile percentage 11.5% 12.1% 11.8% 9.8% 10.3%
Equipment at year-end:
Company-operated tractors 1,464 1,390 1,485 1,290 1,240
Owner-operated tractors 349 366 291 242 85
--------------------------------------------
Total tractors 1,813 1,756 1,776 1,532 1,325
Refrigerated trailers 2,047 2,114 2,150 2,115 1,955
Dry-van trailers 570 493 384 _ _
--------------------------------------------
Total trailers 2,617 2,607 2,534 2,115 1,955
Refrigerated rail containers _ 200 202 150 _
Ratio of tractors to non-driver
employees at year-end 5.1 4.0 3.7 2.9 2.9
Selected Quarterly Data - Market and Dividend Information
Selected Quarterly Data
First Second Third Fourth
(In thousands, except per share Quarter Quarter Quarter Quarter
amounts)
- --------------------------------------------------------------------------------
1997
Operating revenue from truckload
operations $60,618 $62,593 $60,127 $57,428
Operating revenue from rail
container operations 2,149 1,170 _ _
Operating income (loss) from
continuing operations1 300 83 2,571 (21,279)
Net earnings (loss) (455) (609) 887 (14,543)
Basic and diluted earnings (loss)
per share $(0.10) $(0.14) $0.20 $(3.34)
1996
Operating revenue from truckload
operations $61,010 $64,267 $59,810 $61,135
Operating revenue from rail
container operations 2,726 2,843 2,656 2,241
Operating income from continuing
operations 607 2,735 1,463 1,545
Net earnings (loss) from
continuing operations (406) 959 130 222
Net earnings (loss) (386) 945 91 116
Basic and diluted earnings
(loss) per share $(0.09) $0.22 $0.02 $0.03
1 The fourth quarter 1997 operating loss from continuing operations reflects
charges of $15.7 million for the impairment of long-lived assets and $3.9
million for increased reserves for self-insured claims and other.
Market And Dividend Information
The Company's common stock is traded on the Nasdaq National Market under
the symbol KLLM. The number of stockholders, including beneficial owners
holding shares in nominee or "street" name, as of March 2, 1998, was
approximately 1,600. The Company has never declared or paid a cash dividend
on its common stock. The current policy of the Board of Directors is to
continue to retain earnings to finance the continued growth of the Company's
business.
The following table shows quarterly high and low prices for the common
stock for each quarter of 1997 and 1996:
FISCAL YEAR 1997 High Low
- ---------------------------------------------------------------------
First Quarter $ 13 $ 9
Second Quarter $ 13 $ 10 5/8
Third Quarter $ 12 3/4 $ 11 1/4
Fourth Quarter $ 14 3/8 $ 12 1/8
FISCAL YEAR 1996 High Low
- ----------------------------------------------------------------------
First Quarter $ 11 3/4 $ 10
Second Quarter $ 13 3/4 $ 10 3/4
Third Quarter $ 13 1/4 $ 11 3/4
Fourth Quarter $ 11 7/8 $ 9 3/4
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
The following table sets forth the percentage of revenue and expense items
to operating revenue for the periods indicated.
Percentage of
Operating Revenue
For the Year 1997 1996 1995
Operating revenue from truck
load operations 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and fringe
benefits 31.5 29.0 30.2
Operating supplies and expenses 26.1 28.3 28.4
Insurance, claims, taxes and
licenses 7.3 5.8 5.0
Depreciation and amortization 8.9 8.9 10.0
Purchased transportation and
equipment rent 21.5 22.0 19.8
Impairment loss 6.5 _ _
Other 4.6 3.9 4.4
(Gain) loss on sale of revenue
equipment .1 (.6) (.7)
----------------------------
Total operating expenses from
truck load operations 106.5 97.3 97.1
----------------------------
Operating income (loss) from truck
load operations (6.5) 2.7 2.9
Operating income (loss) from rail
container operations (1.1) ( .1) (.1)
----------------------------
Operating income (loss) (7.6) 2.6 2.8
Interest expense 1.8 1.9 2.4
----------------------------
Earnings (loss) from continuing
operations before income taxes (9.4) 0.7 0.4
Income tax expense (benefit) (3.3) 0.3 0.2
----------------------------
Earnings (loss) from continuing
operations (6.1)% 0.4% 0.2%
============================
Year Ended January 2, 1998 Compared to Year Ended January 3, 1997
Operating revenue from truckload operations for the year ended
January 2, 1998 decreased by $5,456,000, or 2%, when compared to the year
ended January 3, 1997. The decrease in operating revenue consisted of a
3% increase from the Company's dry-van over-the-road truckload services,
net of decreases resulting from rail non-container operations (2%) and
other divisions (3%). The average revenue per mile including fuel surcharges
remained constant at $1.12 for the year ended January 2, 1998 when compared
to the year ended January 3, 1997. Surcharges for high fuel costs added
$1,209,000 and $1,760,000 to operating revenue from truckload operations
in 1997 and 1996, respectively.
Salaries increased $4,430,000 primarily due to increases in driver
compensation in order to offset the cancellation of reimbursement of
certain expenses to drivers. Management anticipates continued upward
pressure on driver wages. Wages for administrative and maintenance staff
were reduced by $1,718,000 in 1997 from 1996. At year-end, the ratio of
trucks to non-driving employees had risen to 5.1 from 4.0 at year-end 1996
and 3.7 at year-end 1995.
Operating supplies decreased $7,031,000 due to lower fuel prices
(approximately $1,076,000), the reduction in driver reimbursed expenses
of $4,268,000 as mentioned above, and aggressive cost management.
Purchased transportation and equipment rent declined $2,580,000 primarily
due to the closure in mid-year 1996 of the freight brokerage operation
offset by a 5% increase in owner-operated trucks in the fleet.
Insurance, taxes, and licenses increased by $3,524,000 primarily as a
result of a reevaluation of the Company's self insured claims management
and reserve practices. The Company's ratio of accidents per million miles
was lower in 1997 than in 1996.
The level of depreciation and amortization expense reflects the stable
level of our Company-owned tractor and trailer fleets. Other expenses
grew by $1,357,000, the majority of which was related to advertising for
and recruiting of drivers.
In 1997, the Company realized a net loss of $185,000 on disposition of
tractors and trailers compared to a net gain of $1,657,000 in 1996. In
1997, the market value of used 48-foot temperature-controlled trailers
decreased resulting in losses on dispositions during the year which were
partially offset by gains on disposition of tractors.
KLLM Transport Services specializes in providing high-quality transportation
services in North America. The majority of revenues are from transporting
commodities such as food, medical supplies, and cosmetics requiring
temperature-controlled equipment. The temperature-controlled segment
of the trucking industry has, until 1997, been reluctant to convert to
53-foot trailers due to operational concerns and a lack of customer demand
for the greater cube capacity. New equipment sales to for-hire carriers in
fleet conversion in order to maintain its position as a leader in the
temperature-controlled sector. As a result management has recognized an
impairment in the value of its 48-foot temperature-controlled trailers as
of year-end 1997. The book values of the 48-foot temperature-controlled
trailers, under the guidance of FASB 121, have been reduced to market value
requiring a special pretax charge of $15,246,000. To accomplish the fleet
conversion, a three-year contract has been negotiated with a major trailer
to purchase KLLM's trailers at predetermined prices and to provide a
similar number of new 53-foot temperature-controlled trailers under
operating leases. The Company also recorded a pretax impairment charge
of $506,000 related to real estate held for sale.
The decision in the second quarter to exit the rail container business
resulted in a decline in revenues from rail container operations of
$7,147,000 and an increase in operating losses of $557,000 compared to 1996.
A restructuring charge of $1,906,000 was also incurred pertaining to the
write-off of intangible assets and expenses on subleasing the containers
and exiting this market. Substantially all costs to exit the rail container
business had been incurred and paid as of January 2, 1998.
The operating ratio (which represents operating expenses as a percent of
operating revenues on continuing operations) increased from 97.3% to 106.5%
for the year ended January 2, 1998 when compared to the year ended January 3,
1997.
Interest expense for the year ended January 2, 1998 was $4,363,000. The
decrease in interest expense in 1997 was primarily due to a decrease in the
average debt outstanding in 1997 as compared to 1996. Interest rates under
the revolving line of credit remained level in 1997 compared to 1996.
The provision for income tax benefit for 1997 was $8,000,000, based on a
combined effective federal and state income tax rate of 35%. This rate
reflects a decrease in the effective tax rate from 44% in 1996 as a result
of a decrease in nondeductible expenses as a percentage of pretax income
(loss).
Year Ended January 3, 1997 Compared to Year Ended December 29, 1995
Operating revenue from truckload operations for the year ended January 3,
1997 increased by $16,703,000, or 7%, when compared to the year ended
December 29, 1995. The net revenue increase consisted of a 4% increase in
the Company's traditional over-the-road temperature-controlled freight
services, 1% decrease from rail non-container operations, 2% decrease from
transportation brokerage services, and 6% increase from the operation of
the dry-van over-the-road truckload services. The average revenue per mile
in 1996 and 1995, respectively.
Through a variety of measures implemented during 1996 the Company focused
on improving utilization and profitability in the core trucking business.
Significant actions taken included the closure of the freight brokerage
business, reintegration of rail intermodal operations into truck operations,
a net reduction in the number of Company-owned trucks offset by an increase
in owner-operated trucks and the dry-van fleet. Cost control efforts
yielded results in facility and staff levels, maintenance and operating
expenses. These efforts included centralization of certian terminal
functions resulting in the consolidation of certain driver terminals,
reducing the number from ten at the end of 1995 to seven at the end of
1996, and reduction in the non-driver work force of approximately 70
employees which, on an annualized basis, will reduce total annual payroll
costs by approximately $2.6 million. At January 3, 1997, the Company had
4.0 tractors per non-driver employee which was an improvement over the
prior year ratio of 3.7.
The operating ratio (which represents operating expenses as a percent
of operating revenues on continuing operations) increased from 97.3% to
97.5% for the year ended January 3, 1997 when compared to the year ended
December 29, 1995. Operating revenues and results for 1996 were affected
by an overall weak freight market which had plagued the industry since
early 1995. In addition, during 1996, the Company experienced a steady
and significant increase in fuel costs and an unusually large number of
severe winter storms. The change in the components of operating expenses
during 1996, when compared to 1995, relected increases from the
following: a) driver pay and related costs of approximately
$1.7 million, b) the previously mentioned increased fuel costs of
approximately $5.5 million, (within this amount, approximately $2.8
million was associated with rising fuel prices), and c) liability and
workers' compensation insurance costs of approximately $3.0 million and
cost reductions in the following: a) administrative wages and expenses
of approximately $3.1 million, b) maintenance costs of approximately $0.5
million, and c) various over-the-road operating costs of approximately
$1.3 million
Comparability of components of operating expenses was affected by the
increase in purchasing transportation services instead of incurring wage,
depreciation and other expenses related to owned asset operations and by
the use of operating leases for revenue equipment put in service throughout
1995.
Interest expense for the year ended January 3, 1997 was $4,783,000.
The decrease in interest expense in 1996 was primarily due to a decrease
in the average debt outstanding in 1996.1.3 million.
The provision for income taxes for the year ended January 3, 1997 was
$721,000 on continuing operations, based on a combined effective federal
and state income tax rate of 44%. This rate reflected a decrease in the
effective tax rate from 48% for the year ended December 29, 1995 as a
result of a decrease in nondeductible expenses as a percentage of pretax
income when compared to 1995.
As a result of the foregoing, net earnings from continuing operations
increased $387,000, or 75%, for the year ended January 3, 1997 when
compared to the year ended December 29, 1995.
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could
cause a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total year 2000
project cost is estimated at approximately $700,000, which includes $400,000
for the purchase of new software that will be capitalized and $300,000 that
will be expensed as incurred. To date, the Company has incurred and expensed
approximately $100,000, primarily for assessment of the year 2000 issue
and the development of a modification plan and purchase of new software.
The project is estimated to be complete no later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software and conversions
to new software, the year 2000 issue will not pose significant operational
problems for its computer systems. However, if such modification and
conversions are not made, or are not completed timely, the year 2000 issue
could have a material impact on the operations of the Company.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Liquidity and Capital Resources
KLLM Transport Services, Inc.'s primary sources of liquidity are its cash
flow from operations and existing credit agreements of KLLM, Inc., a wholly-
owned subsidiary. The significant charges against earnings in 1997 were
primarily for the impairment of value of certain assets and other charges
which did not affect cash flow during the year. During the years ended
January 2, 1998 and January 3, 1997, the Company generated $31.8 million
and $33.5 million, respectively, in net cash provided from operating
activities. This cash flow in 1997 combined with limited capital
expenditures allowed the Company to reduce long-term cebt and capital
leases by approximately $4,871,000.
In 1997, the Company-owned fleet increased by 74 tractors and 10 trailers,
net of replacements. Capital expenditures, net of proceeds from disposals,
during 1997 were approximately $25.8 million compared to $20.2 million in
1996. The Company also entered into an operating lease for 77 tractors in
the fourth quarter of 1997. Net capital expenditures in 1998 are expected
to be approximately $8.0 million. The Company also expects to enter into
operating leases for approximately 600 trailers during 1998.
The Company has a $50,000,000 unsecured revolving line of credit with a
syndication of banks. Borrowings of $30,000,000 were outstanding at year-
end. At January 2, 1998, the weighted average interest rate on the
revolving line of credit was 6.7%. Under the terms of the agreement,
borrowings bear interest at (i) the higher of prime rate or a rate based
upon the federal funds effective rate, (ii) a rate based upon the Eurodollar
rates, or (iii) an absolute interest rate as determined by each lender in
the syndication under a competitive bid process at the Company
s option. Facilities fees from 1/5% to 3/8% per annum are charged on the
unused portion of this line.
Working capital needs have generally been met from net cash provided
from operating activities. The Company has a $4,000,000 unsecured working
capital line of credit with a bank, all of which was available at January 2,
1998. Interest is at a rate based upon the Eurodollar rates with facility
fees at 1/4% per annum on the unused portion of the line. This working
capital line of credit is used to minimize idle cash in the bank and is
tied to cash equivalent investments for any excess cash. At year-end 1997
and 1996, cash and cash equivalents totaled $670,000 and $2,874,000,
respectively.
At January 2, 1998, the aggregate principal amount of the Company's
outstanding long-term indebtedness and capital lease obligations including
current maturities was approximately $49.7 million. Of this total, $1.2
million was in the form of 10.2% notes due July 15, 1998, $14.3 million
in the form of 9.11% notes due June 15, 2002, $30.0 million consisted of
borrowings under the revolving line of credit due April 7, 1999, and $4.2
million was related to capital lease obligations with varying maturities
through June 1999.
The required principal payments on all long-term debt and capital leases
are anticipated to be $4.9 million in 1998, $36.2 million in 1999, $2.9
million in 2000, $2.9 million in 2001, and $2.8 million in 2002.
The Company periodically enters into heating oil (diesel fuel) swap
agreements to hedge its exposure to price fluctuations on various levels
of its anticipated fuel requirements. Gains and losses on hedging
contracts are recognized in operating expenses as part of the fuel cost
over the hedge period.
The Company anticipates that its existing credit facilities along with
cash flow from operations will be sufficient to fund operating expenses,
capital expenditures and debt service.
Factors Affecting Future Performance
The Company's future operating results may be affected by various trends
and factors which are beyond the Company's control. These include adverse
changes in demand for trucking services, availability of drivers and fuel
prices. Accordingly, past performance should not be presumed to be an
accurate indication of future performance.
Seasonality
In the transportation industry, results of operations generally show a
seasonal pattern because customers reduce shipments during and after the
winter holiday season with its attendant weather variations. The Company's
operating expenses have historically been higher in the winter months
primarily due to decreased fuel efficiency and increased maintenance
costs in colder weather.
The foregoing statements contain forward-looking statements which involve
risks and uncertainties and the Company's actual experience may differ
materially from that discussed above. Factors that may cause such a
difference include, but are not limited to, those discussed in "Factors
Affecting Future Performance" as well as future events that have the
effect of reducing the Company's available cash balances, such as
unanticipated operating losses or capital expenditures related to possible
future acquisitions. Readers are cautioned not to place undue reliance on
forward-looking statements, which reflect management's analysis only
as the date hereof. The Company assumes no obligation to update
forward-looking statements.
Consolidated Balance sheets
At Year-End 1997 1996
- -------------------------------------------------------------------------------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 670 $ 2,874
Accounts receivable:
Customers (net of allowances of
$889,000 in 1997 and $682,000 in 1996) 20,195 21,818
Other 629 866
-------------------------
20,824 22,684
Inventories _ at cost 635 891
Prepaid expenses:
Tires 2,885 4,282
Taxes, licenses and permits 2,027 1,120
Other 467 245
-------------------------
5,379 5,647
Assets held for sale _ Note B 3,383 0
Deferred income taxes _ Note D 5,413 3,325
-------------------------
Total current assets 36,304 35,421
Property and Equipment _ note B
Revenue equipment and capital leases 121,337 158,421
Land, structures and improvements 7,103 12,742
Other equipment 8,776 8,450
Accumulated depreciation (29,276) (57,738)
-------------------------
107,940 121,875
Intangible assets,
Net of accumulated amortization
of $682,000 in 1997 and $775,000
in 1996 _ Notes E and J 90 2,259
Other Assets 201 339
-------------------------
Total Assets $144,535 $159,894
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks _ Note C $0 $ 3,598
Accounts payable 4,350 1,002
Accrued expenses 11,562 7,213
Accrued claims expense _ Note K 13,913 8,199
Current maturities of long-term debt
and capital leases 4,898 4,848
------------------------
Total current liabilities 34,723 24,860
Long-term Debt and Capital Leases,
Less current maturities _ Note C 44,826 49,747
Deferred Income Taxes _ Note D 12,875 18,787
Stockholders' Equity _ Notes G and H
Preferred stock, $0.01 par value; authorized
shares _ 5,000,000; none issued
Common stock, $1 par value; authorized
shares _ 10,000,000; issued shares _
4,558,754 in 1997 and 1996; outstanding
shares _ 4,373,115 in 1997 and
4,344,955 in 1996 4,559 4,559
Additional paid-in capital 32,854 32,811
Retained earnings 16,733 31,453
-------------------------
54,146 68,823
Less common stock in treasury,
185,639 shares in 1997 and 213,799
shares in 1996, at cost (2,035) (2,323)
-------------------------
Total stockholders' equity 52,111 66,500
-------------------------
Total liabilities and stockholders'
equity $144,535 159,894
==========================
See accompanying notes.
Consolidated Statements of Operations
For The Year (In thousands,
except share and per
share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Operating revenue from truckload
operations $240,766 $246,222 $229,519
Operating expenses:
Salaries, wages and fringe benefits 75,748 71,318 69,375
Operating supplies and expenses 62,828 69,859 65,185
Insurance, claims, taxes and licenses 17,751 14,227 11,575
Depreciation and amortization 21,432 21,872 22,865
Purchased transportation and
equipment rent 51,692 54,272 45,221
Other 10,986 9,629 10,157
Impairment of long-lived assets
_ Note B 15,754 0 0
(Gain) loss on sale of revenue
equipment 185 (1,657) (1,589)
-------------------------
Total operating expenses from
truckload operations 256,376 239,520 222,789
-------------------------
Operating income (loss) from
truckload operations (15,610) 6,702 6,730
Operating revenue from rail
container operations 3,319 10,466 10,166
Operating expenses 4,228 10,818 10,383
Restructuring charge _ note j 1,906 0 0
-------------------------
Operating loss from rail container
Operations (2,815) (352) (217)
-------------------------
Operating Income (loss) (18,425) 6,350 6,513
Other income and expenses:
Interest and other income 68 59 32
Interest expense (4,363) (4,783) (5,554)
-------------------------
(4,295) (4,724) (5,522)
-------------------------
Earnings (loss) from continuing
operations before income taxes (22,720) 1,626 991
Income tax expense (benefit) _ Note D (8,000) 721 473
-------------------------
Net Earnings (loss) from continuing
operations (14,720) 905 518
Loss from operations of discontinued
division (Net of tax benefits of $0,
$0 and $351,respectively) _ Note I 0 0 (624)
Loss on disposal of discontinued
division (Net of tax benefit of $0,
$109 and $247, respectively) _ Note I 0 (139) (441)
-------------------------
Net earnings (loss) $(14,720) $ 766 $ (547)
=========================
Basic and diluted earnings (loss)
per share:
From continuing operations $(3.38) $0.21 $0.12
From operations of discontinued
division 0.00 0.00 (0.14)
From disposal of discontinued
division 0.00 (0.03) (0.10)
--------------------------
Basic and diluted net earnings (loss)
per share $(3.38) $0.18 $(0.12)
=========================
Weighted average number of
shares outstanding:
Basic 4,357,970 4,365,199 4,478,827
Diluted 4,357,970 4,371,945 4,504,007
See accompanying notes.
Consolidated Statements of Stockholders' Equity
Common Stock
---------------------------- Additional Total
Treasury Stock Paid-in Retained Stock
---------------
(In thousands) Shares Amount Shares Amount Capital Earnings holders'
Equity
- --------------------------------------------------------------------------------
BALANCE AT
DECEMBER 30,
1994 4,552 $4,552 (71) $(1,064) $33,121 $31,234 $67,843
Purchase of
treasury
shares, at cost (172) (1,763) (1,763)
Sale of common
stock _ Note G 5 74 (22) 52
Common stock issued
upon exercise of
stock options 44 667 (284) 383
Net loss (547) (547)
--------------------------------------------------------------
BALANCE AT
DECEMBER 29,
1995 4,552 4,552 (194) (2,086) 32,815 30,687 65,968
Purchase of
treasury shares,
at cost (70) (854) (854)
Sale of common
stock
_ Note G 7 7 61 68
Common stock
issued upon
exercise of
stock options
_ Note H 50 617 (190) 427
Income tax benefit
from options
exercised
_ Note H 125 125
Net earnings 766 766
-------------------------------------------------------------
BALANCE AT
JANUARY 3, 1997 4,559 4,559 (214) (2,323) 32,811 31,453 66,500
Sale of common
stock _ Note G 4 36 5 41
Common stock
issued upon
exercise of
stock options
_ Note H 24 252 (29) 223
Common stock options
granted for services 67 67
Net loss (14,720)(14,720)
------------------------------------------------------------
BALANCE AT
JANUARY 2, 1998 4,559 $ 4,559 (186) $(2,035) $32,854 $ 16,733 $52,111
=============================================================
See accompanying notes.
Consolidated statements of cash flows
For The Year (In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Cash flows from operating activities
Cash received from customers $245,865 $263,897 $248,165
Interest and other income
(expense) received (paid) 68 (94) 59
Cash paid to suppliers and
employees (210,613) (227,362) (217,523)
Interest paid (4,432) (4,776) (5,999)
Income taxes refunded 877 1,785 87
Income taxes paid 0 0 (856)
Net cash provided from operating
activities 31,765 33,450 23,933
Cash flows from investing activities
Purchase of Vernon Sawyer assets
_ Note E 0 0 (6,758)
Purchases of property and equipment (37,108) (31,040) (19,890)
Proceeds from disposition of
equipment 11,344 10,887 11,166
Net cash flows used in investing
activities (25,764) (20,153) (15,482)
Cash flows from financing activities
Proceeds from sale of common stock 41 68 52
Proceeds from exercise of stock 223 427 383
Purchase of common stock for
treasury 0 (854) (1,763)
Net decrease in borrowing under
revolving line of credit 0 (5,000) (1,000)
Repayment of long-term debt and
capital leases (4,871) (7,812) (4,171)
Net change in borrowing under
working capital line of credit (3,598) 2,748 (3,349)
--------------------------------------
Net cash flows used in financing
activities (8,205) (10,423) (9,848)
Net increase (decrease) in cash and
cash equivalents (2,204) 2,874 (1,397)
--------------------------------------
Cash and cash equivalents at
beginning of year 2,874 0 1,397
--------------------------------------
Cash and cash equivalents at end
of year $ 670 $2,874 $ 0
======================================
Reconciliation of net earnings (loss)
to net cash
provided from operations
Net income (loss) $(14,720) $766 $(547)
Noncash expenses and gain
included in income:
Depreciation and
amortization 21,507 22,055 23,141
Deferred income taxes,
net of option exercise
benefit (8,000) 487 (125)
Impairment of long-lived
assets 15,754 0 0
Restructuring charge on
rail container operations 1,906 0 0
Book value of equipment
written off in accidents 522 510 375
(Increase) decrease in
accounts receivable 1,780 5,102 (2,287)
(Increase) decrease in
inventories and prepaid
expenses (785) 2,682 1,069
(Increase) decrease in
other assets 138 198 (411)
Increase in accounts payable
and accrued expenses 13,478 3,307 4,382
(Gain) loss on sale of
equipment 185 (1,657) (1,664)
--------------------------------------
Net cash provided from operations $ 31,765 $ 33,450 $23,933
======================================
See accompanying notes.
Notes to consolidated financial statements
NOTE A _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company, through its wholly-owned subsidiary, KLLM, Inc.,
provides transportation services in North America for both temperature-
controlled and dry commodities. Services provided include over-the-road
long haul, regional, and intermodal transportation. The demand for
transportation services is affected by general economic conditions and
is subject to seasonal demand for certain commodities and severe weather
conditions.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation. Certain reclassifications have been made to conform with
current year presentation.
Cash Equivalents. The Company classifies short-term, highly liquid
investments with original maturities of three months or less as cash
equivalents. Cash equivalents are stated at cost which approximates market.
Tires in Service. The cost of original equipment and replacement tires
placed in service is capitalized and amortized over the estimated useful
life of twenty-four to thirty months. The cost of recapping tires is expensed
as incurred.
Property and Equipment. Property and equipment is stated at cost.
Depreciation of property and equipment is provided by the straight-line
method over the estimated useful lives. The ranges of estimated useful
lives of the major classes of depreciable assets are as follows: revenue
equipment - 3 to 7 years, buildings and improvements - 20 to 30 years, and
other equipment - 3 to 5 years. Gains and losses on sales or exchanges of
property and equipment are included in operations in the year of disposition.
Income Taxes. Income taxes are accounted for by the Company using the
liabilities method in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Deferred income taxes
relate to temporary differences between assets and liabilities recognized
differently for financial reporting and income tax purposes.
Impairment of Long-Lived Assets. The Company continually reevaluates the
carrying value of its long-lived assets for events or changes in
circumstances which indicate that the carrying value may not be recoverable.
As part of this reevaluation, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposal.
If the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized through a charge to operations.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition. The Company uses the relative transit time incurred
method to recognize revenue and record costs of shipments in transit.
Prior to 1997, the Company recognized revenue on the date freight was
received for shipment and accrued estimated cost of delivery of shipments
in transit. The effect of the Company's change to the relative transit
time incurred method of revenue recognition on 1997 was insignificant.
Earnings per Share. In 1997, the Financial Accounting Standards Board
issued Statement No. 128. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings (loss) per share
amounts for all periods have beenn presented, and where appropriate,
restated to conform to the Statement 128 requirements.
Fiscal Year. The Company's fiscal year-end is the Friday nearest December
31, which was the 52-week period ended January 2, 1998, the 53-week period
ended January 3, 1997 and the 52-week period ended December 29, 1995 for the
past three fiscal year-ends.
NOTE B _ IMPAIRMENT OF LONG-LIVED ASSETS
Included in the Company's fleet of temperature-controlled trailers, as of
January 2, 1998, were 1,860 trailers that are 48 feet in length. In
December 1997, management developed a plan to dispose of all of the
Company's 48-foot temperature-controlled trailers over the next three
years, which is significantly earlier than the typical disposal cycle
for these units, due to the temperature-controlled segment of the trucking
industry's rapid acceptance of 53-foot trailers as the industry standard.
Accordingly management evaluated the market value for used 48-foot
temperature-controlled trailers based upon the Company's accelerated
disposal dates and determined that the carrying value of the 48-foot
temperature-controlled trailers of $46.4 million was impaired. A charge
of $15.2 million resulted which is included in impairment on long-lived
assets in the accompanying consolidated statement of operations for the
year ended January 2, 1998.
During 1997, the Company closed its terminal facility in Dallas, Texas
and plans to sell the facility in 1998. The Dallas terminal had a carrying
amount of $2.0 million as of January 2, 1998 which is greater than the
estimated sales value, net of related costs to sell. Accordingly, the
Company marked the facility to market and included the write-down of
approximately $0.5 million in impairment on long-lived assets in the
accompanying consolidated statement of operations for the year ended
January 2, 1998. The Company also plans to sell in 1998 its former
corporate office building with a carrying amount of $1.8 million at
year-end 1997, whcih is less than management's estimate of the
sales value, net of related costs to sell.
NOTE C _ CREDIT FACILITIES, DEBT AND CAPITAL LEASES
Long-term debt and capital leases consisted of the following:
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
9.11% unsecured notes payable to insurance
companies with semi-annual interest
payments and annual principal payments
of $2,857,000 through 2002 $14,286 $17,143
10.2% unsecured notes payable to insurance
company with semi-annual interest
payments and annual principal payments
of $1,250,000 through July 1998 1,250 2,500
Revolving line of credit with banks, with
floating interest rates (6.7% weighted
average rate at January 2, 1998) 30,000 30,000
Capital lease obligations with interest rates
from 6.5% to 6.68% and monthly payments
of $144,000 through June 1999 4,188 4,952
---------------------------
49,724 54,595
Less current maturities (4,898) (4,848)
--------------------------
$44,826 $49,747
==========================
Capital lease obligations represent leased revenue equipment with a
carrying value of $2,770,000 at January 2, 1998 and $7,817,000 at
January 3, 1997. Amortization of revenue equipment leased under capital
leases is included in depreciation and amortization in the accompanying
consolidated statements of operations.
The Company has a $50,000,000 unsecured revolving line of credit maturing
in 1999. In accordance with the agreement, the Company has agreed to limit
assets pledged on any other borrowing. At January 2, 1998, $20,000,000 was
available to the Company under the revolving line of credit. Under the terms
of the agreement, borrowings bear interest at (i) the higher of prime rate or
a rate based upon the Federal Funds Effective Rate, (ii) a rate based upon
the Eurodollar rates, or (iii) an absolute interest rate as determined by
each lender under a competitive bid process at the Company's option.
Facilities fees from 1/5% to 3/8% per annum are charged on the unused
portion of this line.
The aggregate annual maturities of long-term debt and capital leases at
January 2, 1998 are as follows:
Long-term Capital
(In thousands) Debt Leases Total
- ------------------------------------------------------------------------------
1998 $ 4,107 $ 867 $4,974
1999 32,857 3,397 36,254
2000 2,857 _ 2,857
2001 2,857 _ 2,857
2002 2,858 _ 2,858
------------------------------------------
45,536 4,264 49,800
Less amount representing interest _ (76) (76)
------------------------------------------
$45,536 $4,188 $49,724
The Company also has $4,000,000 in an unsecured working capital line of
credit, all of which was available at January 2, 1998. Interest is at a
rate based upon the London Interbank Offered Rate (LIBOR) on borrowings on
the working capital line with facility fees at 1/4% per annum on the unused
portion of the line.
Under the terms of the lines of credit and notes payable agreements, the
Company agreed to maintain minimum levels of consolidated tangible net worth
and cash flows, to limit additional borrowing based on a debt-to-consolidated
tangible net worth ratio, and to restrict assets that can be pledged on any
other borrowings. The agreements also establish limits on dividends, stock
repurchases and new investments. The 9.11% and 10.2% notes payable to
insurance companies require the Company to meet a fixed charge ration, as
defined, at each quarter-end based upon the preceding twelve months'
operating results. The Company was in compliance with these requirements
at year-end 1997 and 1996 as amended subsequent to January 2, 1998.
NOTE D _ INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
components of deferred tax assets and liabilities are as follows:
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
Deferred tax liability _ property and equipment $21,972 $23,149
Deferred tax assets:
Allowance for doubtful accounts 338 263
Accrued expenses 5,075 3,062
Net operating loss carryforward 7,989 3,347
Intangibles 192 99
Alternative minimum tax carryforward 916 916
-----------------------------
14,510 7,687
-----------------------------
Net deferred tax liabilities $7,462 $15,462
=============================
Income tax expense (benefit) consists of the following:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Deferred:
Federal $(7,300) $538 $(115)
State (700) 74 (10)
-------------------------------
Total income tax expense
(benefit) (8,000) 612 (125)
Income tax benefit allocated
to discontinued
operations _ _ 351
Income tax benefit allocated to
loss on disposal of discontinued
operations _ 109 247
-------------------------------
Income tax expense attributable to
continuing operations $(8,000) $721 $473
===============================
The reconciliation of income tax computed at the federal statutory tax rate
to income tax expense is as follows:
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Statutory federal income tax rate $(7,725) $468 $(228)
State income taxes, net (462) 49 (7)
Other 187 95 110
$(8,000) $612 (125)
The Company has a net operating loss carryforward for income tax purposes
of approximately $22,200,000, which expires at various dates through the
year 2012.
NOTE E _ ACQUISITIONS
Effective May 1, 1995, the Company acquired substantially all of the assets
of Vernon Sawyer, Inc., a regional dry-van truckload carrier based in
Bastrop, Louisiana. Results from operations of the Company include
operations of the net assets acquired since May 1, 1995. The acquisition
was accounted for using the purchase method of accounting. Acquisition cost
included $772,000 of intangibles, a three-year non-compete agreement. The
non-compete agreement is being amortized by the straight-line method over
the life of the agreement.
NOTE F _ CONCENTRATIONS OF CREDIT RISK
The Company had one customer which accounted for operating revenues of
$23,311,000 in 1995 and a customer which accounted for operating revenues
of $27,759,000 in 1997. No customer accounted for more than 10% of the
Company's operating revenues in 1996.
Trade accounts receivable are the principal financial instruments that
potentially subject the Company to significant concentrations of credit
risk. The Company performs periodic credit evaluations of its customers
and credit losses have been insignificant and within management's
expectations.
NOTE G _ EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan covering substantially
all of its employees. The Company makes discretionary contributions to
the plan of 100% of the employee contribution up to 4% of each covered
employee's salary. Contributions by the Company under the plan
approximated $716,000, $1,071,000, and $653,000 in 1997, 1996, and 1995,
respectively.
In April 1987, the stockholders approved an employee stock purchase plan
reserving 133,333 shares of common stock for the plan. Substantially all
employees are eligible to participate and may subscribe for 10 to 300
shares each.
During 1997, 3,276 shares were purchased and in 1996, 6,535 shares were
issued pursuant to the plan. Subsequent to January 2, 1998, an additional
5,227 shares have been subscribed for by employees.
NOTE H _ STOCK OPTION PLANS
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to or above the fair value of the shares at the
date of the grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for stock
options granted.
Under the Company's Incentive Stock Option Plan, 533,333 shares of Common
Stock have been reserved for grant to key employees and directors. Options
granted under the plan have a ten-year term with vesting periods of one to
five years from the date of the grant.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FASB Statement No. 123, and has been determined as if
the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was
estimated at the date of the grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: volatility factors
of .281 and .297 for 1997 and 1996, respectively; weighted-average expected
life of options of three and two years for 1997 and 1996, respectively;
risk-free interest rate of 6% and 5% for 1997 and 1996, respectively; and
no dividend yield.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options and the securities purchase agreements granted in 1997 and 1996
is amortized to expense over the vesting period. The Company's pro forma
information follows:
(In thousands, except per share information) 1997 1996
- -------------------------------------------------------------------------------
Pro forma net income $(14,786) 386
Pro forma basic and diluted earnings (loss)
per common share $ (3.39) $ .09
A summary of the Company's stock option activity and related information
is as follows:
1997 1996
------------------------- ---------------------------
Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price
- ------------------------------------------------------------------------------
Outstanding-beginning
of year 269 $ 14 332 $ 14
Granted 21 12 34 11
Exercised (25) 9 (50) 8
Forfeited (31) 15 (47) 16
------ -----
Outstanding-end of
year 234 $ 14 269 $14
======= ======== ======= ========
Weighted-average fair
value of options
granted during the
year $ 3.15 $ 1.86
========= =========
Weighted-average
fair value of securities
purchase agreements
granted during the year $ _ $ 1.28
========= =========
Following is a summary of the status of options outstanding at January 2, 1998:
Outstanding Options Exercisable Options
------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Range (000's) Life Price (000's) Price
- ---------------------------------------------------------------------------
$ 9.00 - $11.75 34 8 years $11 5 $9
$12.00 - $15.00 186 7 years $15 127 $15
$21.00 14 4 years $21 14 $21
NOTE I _ DISCONTINUED OPERATIONS
Abandonment of the Company's international division, which primarily
provided maritime transportation services, began on November 30, 1995 and
was completed by August 31, 1996. The loss on disposal of discontinued
operations, in 1995, included approximately $62,000 (net of $35,000 tax
benefit) of operational losses from November 30, 1995 through December 29,
1995. Actual costs incurred to complete the disposal exceeded the Company's
1995 estimate by $139,000 (net of $109,000 tax benefit), and accordingly,
are included in the accompanying consolidated statement of operations for
1996.
NOTE J _ RAIL CONTAINER RESTRUCTURING CHARGE
During 1997, the Company completed its plan to exit the rail container
market. A one-time restructuring charge of $1,906,000 was recorded for
the write-off of intangible assets pertaining to the rail container
operation and the accrual of certain expenses related to the subleasing
of rail containers and exiting this market.
NOTE K _ COMMITMENTS AND CONTINGENCIES
The Company self-insures for losses related to liability and workers'
compensation claims with excess coverage by underwriters on a per incident
basis. Claims payable totaled $13,913,000 at January 2, 1998 and $8,199,000
at January 3, 1997, a portion of which is for insurance claims that have
been incurred but not reported and estimated future development of claims.
The ultimate cost for outstanding claims may vary significantly from current
estimates.
The Company leases certain revenue equipment and data processing equipment
under operating leases that expire over the next six years. The leases
require the Company to pay the maintenance, insurance, taxes and other
expenses in addition to the minimum monthly rentals. Future minimum
payments under the leases at January 2, 1998 are $10,627,000 in 1998,
$10,331,000 in 1999, $2,000,000 in 2000, $502,000 in 2001 and $36,000 in
2002. The Company guarantees approximately $1,360,000 of the residual
value of certain revenue equipment leased under and operating lease.
Rental expense applicable to noncancelable operating leases totaled $6,806,000
in 1997, $8,440,000 in 1996, and $7,042,000 in 1995.
The Company has entered into heating oil (diesel fuel) swap agreements to
hedge its exposure to price fluctuations at year-end 1997 on 3% of its 1998
anticipated fuel requirements. Gains and losses on hedging contracts are
recognized in operating expenses as part of the fuel cost over the hedge
period.
During 1996, the Internal Revenue Service assessed the Company for certain
employment taxes for the years 1992 through 1994. The Company disputes the
assessment and believes that the matter will be resolved in the Company's
favor. Accordingly, the Company has not accrued for such amounts in the
accompanying financial statements.
The Company is also involved in various claims and routine litigation
incidental to its business. Management is of the opinion that the outcome
of these other matters will not have a material adverse effect on the
consolidated financial position or operations of the Company.
NOTE L _ FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheet for cash
and cash equivalents and short-term notes payable to banks approximate
their fair values. The fair values of the Company's long-term debt and
capital lease obligations are estimated using discounted cash flow analysis,
based upon the Company's current incremental borrowing rates for similar
types of borrowing arrangements, which approximate the carrying amounts at
January 2, 1998.
Report of Independent Auditors
The Board of Directors and Stockholders
KLLM Transport Services, Inc.
We have audited the accompanying consolidated balance sheets of KLLM
Transport Services, Inc. and subsidiaries as of January 2, 1998 and
January 3, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended January 2, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
KLLM Transport Services, Inc. and subsidiaries at January 2, 1998 and
January 3, 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
January 2, 1998, in conformity with generally accepted accounting
principles.
s/Ernst & Young LLP
Jackson, Mississippi
January 30, 1998, except for Note C
as to which the date is February 24, 1998
Directors and officers
BOARD OF DIRECTORS
BENJAMIN C. LEE, JR.
Chairman of the Board
KLLM Transport Services, Inc.
STEVEN K. BEVILAQUA
President and Chief Executive Officer
KLLM Transport Services, Inc.
WALTER P. NEELY, PH. D.
J. Army Brown
Chair of Business Administration
Professor of Finance
Else School of Management,
Millsaps College
JAMES L. YOUNG
Attorney
Young, Williams, Henderson and
Fuselier, P.A.
LELAND R. SPEED
Chairman of the Board
and Chief Executive Officer
The Parkway Company
C. TOM CLOWE, JR.
President and Chief Operating Officer
Missouri Gas Energy
OFFICERS
BENJAMIN C. LEE, JR.
Chairman of the Board
STEVEN K. BEVILAQUA
President and Chief Executive Officer
STEVEN L. DUTRO
Chief Financial Officer
JOHN J. RITCHIE
Senior Vice President _
Sales and Marketing
NANCY M. SAWYER
President _ Vernon Sawyer Division
IRENE C. HOWARD
Vice President _ Human Resources
and Risk Management
WILLIAM J. LILES III
Vice President _ Sales and Marketing
JAMES M. RICHARDS, JR.
Vice President of Operations _ Customer Service
OFFICERS _ continued
VINCENT A. SCHOTT
Vice President _ Information Systems
LARRY C. SIMPSON
Vice President _ Maintenance
JAMES P. SORRELS
Vice President of Operations _
Driver Retention
Shareholder Information
CORPORATE OFFICES
KLLM Transport Services, Inc.
135 Riverview Drive
Richland, Mississippi 39218
(601) 939-2545
TRANSFER AGENT
Harris Trust & Savings Bank
Corporate Trust Division
600 Superior Avenue E, Suite 600
Cleveland, Ohio 44115
(216) 263-3639
INDEPENDENT AUDITORS
Ernst & Young LLP
188 East Capitol Street, Suite 400
Jackson, Mississippi 39201
FORM 10-K
Information about KLLM Transport Services, Inc., including the Form 10-K,
may be obtained without charge by writing to Mr. Steven L. Dutro, Chief
Financial Officer, at the Company's corporate offices.
ANNUAL MEETING
10:00 a.m.
April 21, 1998
KLLM Corporate Offices
135 Riverview Drive
Richland, Mississippi 39218