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.
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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.
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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.
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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.
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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.
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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