<PAGE>
EXHIBIT (a)(8)
[LOGO OF KLLM TRANSPORT SERVICES]
Confidential Memorandum
October 1999
================================================================================
Morgan Keegan & Company, Inc.
<PAGE>
================================================================================
Confidential Disclaimer
The enclosed Confidential Descriptive Memorandum (the "Memorandum") has been
prepared by Morgan Keegan & Company, Inc. ("Morgan Keegan") from information
furnished to us by KLLM Transport Services, Inc. and its subsidiaries
(collectively, "KLLM" or the "Company"), and other trade and statistical sources
that we deem reliable. While KLLM and Morgan Keegan believe that the
information contained herein is accurate, we expressly disclaim any and all
liability for representations or warranties, expressed or implied, contained in,
or for omissions from, this Memorandum or any other written or oral
communication transmitted or made available to prospective purchasers. Any and
all representations and warranties regarding the information described in this
Memorandum shall be only as set forth in a definitive agreement. Any
prospective purchaser acknowledges its responsibility to perform a due diligence
review prior to consummating a transaction involving KLLM.
This Memorandum includes certain statements provided by the Company with respect
to its anticipated future performance. Such statements are based on estimates
and assumptions by KLLM's management that are subject to significant economic
and competitive uncertainties beyond the control of the Company. Morgan Keegan
has not attempted to independently verify any such statements and makes no
representation or warranty with respect to these statements, and there can be no
assurance that the future results can be realized or that actual results will
not be materially different from those projected.
This Memorandum and any other written or oral communication made available to
prospective purchasers has been provided for the purpose of introducing KLLM to
prospective purchasers and may not be reproduced or used for any other purpose
without the express written consent of Morgan Keegan and KLLM. By accepting
this Memorandum, the recipient acknowledges and agrees that all of the
information contained herein is confidential and subject to the Confidentiality
Agreement executed by the recipient.
In furnishing this Memorandum, neither Morgan Keegan nor KLLM undertakes any
obligation to provide the recipient with access to any additional information.
In addition, the Company reserves the right to negotiate with one or more
prospective purchasers at any time and to enter into a definitive written
agreement without prior notice to the recipient or other prospective purchasers.
Any communication or inquiries related to these materials should be directed to
Morgan Keegan. Under no circumstances should the management of the Company be
contacted directly without the express written consent of Morgan Keegan.
John H. Grayson, Jr. Kenton E. Novotny
Managing Director Vice President
Direct Line: (901) 529-3701 Direct Line: (901) 531-3270
Reggie Richter
Associate
Direct Line: (901) 531-3308
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
50 North Front Street, 19th Floor
Memphis, TN 38103
Phone: (800) 366-7426 . Fax (901) 579-4355
<PAGE>
Table of Contents
I. Executive Summary
A. Overview...................................... 1
B. Key Investment Highlights..................... 3
II. Industry Overview
A. KLLM's Industry Segments...................... 6
B. Dedicated Fleets.............................. 7
C. Major Industry and Segment Trends............. 8
III. Background
A. Company History............................... 10
B. Incorporation................................. 10
C. Ownership..................................... 11
IV. Operations
A. Operating Divisions........................... 12
B. Customers..................................... 13
C. Trucking Lanes................................ 15
D. Utilization................................... 16
E. Average Length of Haul........................ 17
F. Revenue Equipment............................. 18
G. Maintenance................................... 20
H. Facilities.................................... 20
I. Technology.................................... 20
J. Sales and Marketing........................... 21
V. Human Resources
A. Organizational Structure...................... 22
B. Management.................................... 22
C. Staffing by Major Function.................... 23
D. Drivers....................................... 24
E. Summary of Benefits........................... 26
VI. Legal, Environmental and Insurance
A. Litigation.................................... 27
B. Environmental................................. 27
C. Insurance..................................... 27
D. Accident Rates and Loss Development Reserves.. 27
E. Safety........................................ 27
F. Y2K Program................................... 29
<PAGE>
VII. Financial Overview
A. Sales............................ 30
B. Operating Expenses............... 32
C. Consolidated EBIT and EBITDA..... 33
D. Balance Sheet Review............. 34
E. Fixed Assets..................... 35
F. Net Operating Loss Carryforward.. 35
VIII. Appendices
A. Detailed List of Revenue Equipment
B. Audited Financial Statements
C. Latest 10-Q
<PAGE>
I. Executive Summary
A. Overview
KLLM Transport Services, Inc. and its subsidiaries (collectively, "KLLM" or the
"Company") is a full-truckload common carrier that provides transportation
services in North America for both temperature-sensitive and dry commodities.
KLLM's operations are carried out by two divisions: (i) the Temperature-
Controlled Division and (ii) Vernon Sawyer, the dry van division. In 1998, the
Temperature-Controlled Division accounted for approximately 83% of the Company's
total revenue. KLLM offers a wide spectrum of temperature-controlled
transportation services, including long-haul, regional and dedicated fleet
services. The Company uses both Company-operated and owner-operated equipment.
For the quarter ended July 2, 1999, the Company's tractor fleet averaged 1,501
Company-operated and 302 owner-operated tractors. For the same time period, the
Company operated 2,091 temperature-controlled and 695 dry van trailers.
Chart I-1
KLLM
Revenue, Tractor and Trailer Mix
<TABLE>
<CAPTION>
[THREE PIE CHARTS]
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Divisional Revenue Mix Tractor Fleet Mix Trailer Fleet Mix
Vernon Sawyer $ 38,600,000 17% Owner-Operated 302 17% Vernon Sawyer 695 26%
Temp-Controlled $190,400,000 83% Company-Operated 1,501 83% Temp-Controlled 2,091 74%
</TABLE>
KLLM has been in business for over 36 years and is highly regarded in the
trucking industry and by its customers for its on-time delivery and high-quality
service. KLLM is headquartered in Jackson, Mississippi and has over 1,900
employees nationwide. The Company has terminal operations in Atlanta, Georgia;
Bastrop, Louisiana; Fontana, California; Portage, Indiana; Carlisle,
Pennsylvania; and Jackson, Mississippi.
[MAP OF UNITED STATES]
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Beginning in 1997, KLLM has taken the appropriate steps and made the necessary
investments to strengthen and refocus its operations. The most significant of
these actions are as follows:
. Discontinued operations that were not critical to its core trucking business
as a means to simplify operations;
. Rationalized its customer base and trucking lanes to more profitably grow
certain accounts;
. Modernized its fleet, shortened its trade cycle and brought certain
maintenance functions back in-house to reduce operating costs; and
. Implemented a new driver compensation plan, improved its hiring practices and
intensified its recruiting efforts to significantly lower driver turnover,
reduce accidents and enhance service quality.
These corrective measures have negatively impacted historical financial results,
but are now starting to pay dividends. Today, KLLM is a stronger, more focused
and better-positioned company.
The Company had consolidated revenue and earnings before interest, taxes,
depreciation and amortization ("EBITDA") of $229.0 million and $23.9 million,
respectively, for the fiscal year ended January 1, 1999. As of July 2, 1999,
the Company had tangible stockholders' equity of $51.7 million, or $12.62 per
share and there were 4,095,134 shares outstanding. KLLM's common stock is
publicly traded on NASDAQ under the symbol KLLM.
Chart I-2
KLLM
Financial Highlights
(millions)
[TWO BAR CHARTS]
OPERATING REVENUE EBITDA
1995 $229.5 $29.5
1996 246.2 28.8
1997 240.8 21.7*
1998 229.0 23.9
*1997 results exclude a one-time charge of $15.8 million, primarily from
the acceleration of the conversion of the Company's temperature-
controlled trailer fleet to 53-foot trailers from 48-foot trailers.
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Table I-1
KLLM
Income Statement Highlights
(thousands)
<TABLE>
<CAPTION>
Last Twelve
Months Ended
1996 1997* 1998 July 2, 1999
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Operating Revenue from Truckload Operations $246,222 $240,766 $228,988 $226,455
Operating Expenses from Truckload Operations $239,520 $240,622 $223,346 $223,226
Operating Ratio 97.3% 99.9% 97.5% 98.7%
Operating Income from Truckload Operations $ 6,702 $ 144 $ 5,642 $ 3,019
EBITDA $ 28,757 $ 21,652 $ 23,912 $ 21,056
EBITDA Margin 11.7% 9.0% 10.4% 9.3%
</TABLE>
------------
* Excludes non-recurring charge of $15.8 million.
B. Key Investment Highlights
One of the Largest Temperature-Controlled Carriers in the United States
KLLM is the second largest publicly held temperature-controlled carrier in the
United States and, with $229 million in revenue in 1998, is among the five
largest temperature-controlled carriers in the United States. KLLM's size gives
it a distinct advantage when competing for new business and establishing long-
term relationships.
Blue-Chip Customer Base/Well Positioned as a Core Carrier
KLLM's customers are some of the largest and most prominent companies in the
world. Its customers include Pillsbury, Procter & Gamble, Kraft, BASF
Corporation, Fresh Express, Monsanto, International Paper, M&M/Mars, Abbott
Labs, Dupont, Georgia Pacific, Bayer, Rohm & Haas and Wal-Mart. Since most of
these customers require both temperature-controlled and dry van transportation
services and prefer to use a few core carriers, KLLM offers them a wide spectrum
of shipping solutions including long-haul, regional and dedicated fleet
temperature-controlled services and dry van transport. In addition, KLLM has
the infrastructure and technologies necessary to support these progressive
shippers. As such, KLLM is well positioned to materially expand its
relationship with its current customers, as well as with other customers who are
looking to shorten their vendor lists or outsource their transportation
operations.
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Modern Fleet
At the end of 1999, it is expected that the average age of the Company's tractor
fleet will be 1.7 years and the average age of its temperature-controlled and
dry van trailer fleet will be 2.9 years and 3.2 years, respectively. The
Company's standard tractors are Freightliner air-ride conventional sleeper cabs
with the latest in driver amenities, ABS brakes, Qualcomm satellites and Detroit
Diesel Series 60 engines. Most of the Company's temperature-controlled trailers
are 53-foot Wabash trailers with Carrier refrigeration units, and all of its dry
van trailers are 53-foot trailers. By the end of 1999, it is expected that 53-
foot trailers will comprise 70% of the Company's temperature-controlled trailer
fleet. The remaining 48-foot trailers will be exchanged for 53-foot trailers in
2000.
Experienced and Dedicated Driver Base
In September 1998, the Company implemented a number of short- and long-term
programs to improve driver retention and to enhance the quality of its driver
force. These programs have had a dramatic positive impact, as KLLM's driver
turnover rate has dropped, the level of driver experience has been increased,
the frequency and severity of accidents have been reduced, and the quality of
service has been raised. Currently, KLLM's driver turnover is 94%, which is
below the industry norm and down sharply from a Company high of 140%
approximately one year ago. Also, currently 82% of the Company's lead drivers
have more than one year of truck driving experience, while 43% have more than
five years of truck driving experience. Finally, the number of reportable DOT
accidents for the six months ended July 2, 1999 has been reduced by 50% when
compared to the first six months of fiscal 1998.
As of July 2, 1999, KLLM had 1,512 drivers (including approximately 85 permanent
teams) and 296 owner-operators.
State-of-the-Art Technology
The Company has been a pioneer in its use of technology and will continue to do
so as it strives to enhance customer service and operating efficiency. KLLM was
one of the first temperature-controlled carriers to be 100% equipped with
Qualcomm satellite tracking. The Company is very proficient in its use of
electronic data interchange ("EDI"), which allows customers to tender loads,
receive load-tracking information and pay invoices electronically. KLLM also has
a progressive website that facilitates communication between employees,
customers, investors and vendors, and allows customers to track their shipments.
Less Seasonal and Cyclical than Most Other Carriers
KLLM's top customers have temperature-controlled and dry freight shipping needs
and look to KLLM to offer solutions to both needs. Also, in recent years, the
Company has made a concerted effort to attract customers that are less price
sensitive and have more "driver-
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friendly" freight. As a result, approximately 65% of KLLM's freight is food or
food-related; the balance is spread among other products such as chemicals,
plastics, medical supplies and cosmetics. Management believes that KLLM has less
exposure to highly seasonal food-related products, and is therefore less
seasonal than other temperature-controlled carriers. In addition, management
estimates that KLLM has less exposure to capital goods and manufactured
products, and is therefore less cyclical than most dry freight carriers.
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II. Industry Overview
A. KLLM's Industry Segments
KLLM competes in two segments of the for-hire truckload carrier industry - the
temperature-controlled segment and the dry van truckload segment.
The Temperature-Controlled Market is Estimated at $9 billion
KLLM competes primarily in the interstate temperature-controlled market, which
is estimated at $9.0 billion annually. The for-hire temperature-controlled
market is highly fragmented with the top ten players controlling roughly 40% of
the for-hire segment. The largest company within the for-hire segment is Prime,
Inc., which in 1998 had revenue of $412 million and a 7% market share.
Chart II-1
Interstate Temperature-Controlled Market
1998 Estimated Size $9 Billion
[ONE PIE CHART]
Private fleets $3 billion 35%
For-hire $6 billion 65%
KLLM - 2.5% of total temperature-controlled market
Source: American Trucking Association and Company
estimates
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KLLM Ranks Fifth Among the Top Ten Temperature-Controlled Carriers
Table II-1
Top Ten Temperature-Control Carriers
(millions)
1998
Company Revenue
------- -------
Prime Inc. $ 404
C.R. England 383
FFE Transportation Services 350
Rocor International 347
KLLM 229
Marten Transport 194
Simon Trans. Services 194
Stevens Transport 170
Midwest Coast Transport 128
Willis Shaw Express 107
------
Total $2,506
======
Source: Transport Topics
The For-Hire Dry Van Truckload Carrier Market is Estimated to be $55 billion
The size of the for-hire dry van truckload carrier market has been estimated by
the Department of Transportation to be $55 billion, or about 30% of the entire
long-haul trucking market, making it the largest segment. KLLM entered this
segment with its 1995 acquisition of Vernon Sawyer.
B. Dedicated Fleets
The Use of Dedicated Fleets is Growing Dramatically
In August 1998, KLLM launched its new dedicated logistics program to manage the
private fleets and/or distribution channels of large shippers. This initiative
has added such customers as Ameriserve, First American Carriers (a division of
MBM-Meadowbrook Meats), Millard Refrigerated Services and SuperValu.
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The dedicated fleet market has grown in excess of 50% for each of the last
several years and is expected to continue to grow at a rapid pace as more
companies outsource their trucking operations. It is estimated that 75,000
companies have private trucking fleets, representing a market opportunity in
excess of $91 billion.
C. Major Industry and Segment Trends
In addition to general economic conditions, the trucking industry and KLLM are
affected by a number of other trends, including consolidation, technological
advancement, private-fleet outsourcing and driver shortages. These trends
clearly favor the larger, better-capitalized companies. Accordingly, owner-
operators, private fleets and small carriers are expected to lose considerable
market share to large carriers like KLLM.
Industry Consolidation Favors KLLM
As shippers realize that the use of numerous suppliers increases their traffic
management expenses and decreases efficiency, many have turned to a "core
carrier" strategy, which requires dealing with as few carriers as possible. In
C.H. Robinson's 1998 Temperature Controlled Logistics Report, a survey indicated
that 69% of shippers who manufacture and/or distribute temperature-controlled
goods used a core carrier strategy. Furthermore, 64% of the respondents said
that they use, on average, fewer than ten carriers and 43% said they would
continue to reduce their number of carriers. As shippers use fewer carriers,
they are choosing carriers that offer a broad range of services, have access to
a lot of equipment, and that deliver high quality service at a competitive
price. Smaller carriers are finding it difficult to grow and are increasingly
being forced to either choose a specific niche, merge, acquire, sell or go out
of business.
KLLM is well positioned to capitalize on the trend towards the use of core
carriers as it is one of the largest temperature-controlled carriers and offers
a comprehensive array of transportation services. In addition, KLLM has the
advanced informational technologies necessary to support these operations.
Technology is Driving the Trucking Industry
Real-time information flow is essential to shippers looking for ways to save
costs through such techniques as just-in-time inventory and logistics
management. Moreover, efficient and streamlined supply chain management is
particularly important when dealing with temperature-sensitive products. As a
result, shippers are increasingly using carriers that have made investments in
information technology systems for such uses as tracking and
[PHOTO OF DRIVER]
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tracing, temperature monitoring in transit, and EDI. Also, shippers are
increasingly using third-party logistics providers (3PLs) to analyze their
transportation methods and to implement more cost-effective practices. Therefore
as the use of 3PLs increases, carriers with increased technological capabilities
will have a distinct advantage over their competitors. The costs of keeping pace
with the rapid technological changes within this industry are likely to be most
efficiently recovered by large, for-hire carriers like KLLM.
Private Fleet Operators are Finding it Cost Effective to Outsource Their
Transportation Operations
The increased use of dedicated fleets provides a significant market opportunity
to large, for-hire carriers like KLLM. The outsourcing of dedicated fleets is
attractive to shippers because it enables them to reallocate resources to their
core competencies and can provide significant cost savings. Outsourcing enables
companies to i) eliminate capital expenditures for tractors, trailers and
maintenance equipment, ii) reduce overhead in terms of staff needed to comply
with shipping regulations, iii) decrease liability and legal exposure relating
to accidents and iv) free themselves from the labor intensive tasks of
recruiting and training drivers.
Driver Turnover Continues to be a Significant Issue
The most significant constraints in the trucking industry are recruiting and
retaining qualified drivers. It is estimated that the industry needs to recruit
almost 100,000 new drivers annually to meet shippers' demands. Average industry
turnover rates range from 100% to 120%, while turnover costs are estimated to
range from $6,000 to $10,000 per incident in retraining costs and lost
productivity. In addition, this chronic problem also consumes much of
management's time and energy.
KLLM is proactively addressing these issues and has recently implemented a new
pay package and other initiatives that have reduced driver turnover and
increased driver experience. The new pay package included a 20% increase in
base pay per mile and a less complicated incentive package. Expansion of KLLM's
dedicated fleet and regional operations will also help to reduce turnover as
these operations are driver-friendly with more consistent routes and less time
away from home. To attract new drivers, the Company has a full-time staff of
recruiting personnel and offers incentives to current drivers for referrals.
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III. Background
A. Company History
Tom Kobuke, W.J. "Billy" Liles, B.C. "Benny" Lee and Henry Moudy founded KLLM in
1963. From 1963 to 1967, KLLM operated primarily as a freight broker. In 1967,
the Company established its own fleet with the purchase of three tractor-trailer
combinations. Between 1967 and 1986, the Company grew rapidly and in 1986 the
Company completed its initial public offering. In 1995, KLLM acquired Vernon
Sawyer as its entree into the dry van market, and in 1998 KLLM launched its
dedicated logistics operations.
During the period between 1994 and 1997, KLLM initiated and subsequently
discontinued a number of new ventures not directly related to its core trucking
operations, including intermodal and maritime operations, which caused the
Company to lose focus and business suffered. Also, from January 1994 to July
1998, KLLM had three different Chief Executive Officers. However, under the
direction of Jack Liles and the current management team, KLLM has completed
steps to reorganize its operations and the Company's focus has returned.
Exhibit III-1 illustrates the simplification of its operating structure and
focus on its core trucking businesses.
Exhibit III-1
KLLM
Corporate Structure Changes
[1995 Corporate Organizational Chart
Current Corporate Organizational Chart]
B. Incorporation
KLLM Transport Services, Inc. is a Delaware corporation, which is the successor
by merger to KLLM Distributing, Inc., a Mississippi corporation incorporated in
1964. KLLM Transport Services, Inc. owns all of the outstanding shares of KLLM,
Inc., a Texas corporation, which owns (or leases) and operates substantially all
of the Company's tractors and trailers and holds all of the operating rights
presently used in the Company's business.
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C. Ownership
Table III-2 indicates the ownership of the Company's common stock by individuals
or affiliated groups known to hold more than five percent of the Company's
outstanding shares.
Table III-2
KLLM
Ownership Structure
Shares Ownership Filing
Name of Owner Held Percentage Source Date
------------- ------- ---------- ------ ------
Gilder Gagnon Howe 960,878 23.5% 13F 6/99
Liles Family 680,400 16.6% Proxy 3/99
Lee Family 550,000 13.4% Proxy 3/99
Brinson Partners 428,597 10.5% 13F 6/99
Franklin Resources 322,000 7.9% 13F 6/99
Dimensional Fund 299,998 7.3% 13F 6/99
Source: Bloomberg
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IV. Operations
A. Operating Divisions
KLLM's operations are carried out by two divisions: (i) the Temperature-
Controlled Division and (ii) Vernon Sawyer, the dry van division. Within the
Temperature-Controlled Division, KLLM offers long-haul, regional and dedicated
fleet truckload services in the United States, Canada and parts of Mexico.
Vernon Sawyer offers dry van truckload services primarily in the southeastern
United States. KLLM uses teams and single drivers to haul temperature-
controlled freight, whereas, Vernon Sawyer uses single drivers. Both Company-
owned and owner-operated tractors and trailers are used to provide the Company's
transportation services. However, temperature-controlled services using
Company-owned tractors and trailers account for the vast majority of the
Company's revenue. For 1998, the Temperature-Controlled Division accounted for
approximately 83% of the Company's total revenue, as presented in Chart IV-1.
Chart IV-1
KLLM
1998 Revenue by Division
(millions)
[ONE PIE CHART]
Vernon Sawyer $ 38.6 17%
Temperature-Controlled $190.4 83%
KLLM's regional temperature-controlled operations are used to complement its
long-haul operations and provide a value-added service not typically provided by
other long-haul, temperature-controlled carriers. KLLM's regional fleet is used
to transport goods from warehouse or hub to the final point of destination and
when combined with KLLM's long-haul operations, provides certain customers with
a comprehensive solution for transporting temperature-sensitive products.
KLLM's regional temperature-controlled service is available in four geographical
areas, which approximates a 400-mile radius around its terminals in Atlanta,
Georgia; Fontana, California; Portage, Indiana; and Carlisle, Pennsylvania.
Regional drivers become familiar with routes and customers through repeat
deliveries. Regional drivers receive compensation based on productivity.
Customers are charged on a time and variable expense basis.
KLLM's dedicated logistics operations enable a company to outsource all or part
of its temperature-controlled transportation/logistics requirements. In the
typical dedicated logistics engagement, KLLM provides its customers with a
predetermined number of
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tractors, temperature-controlled trailers and drivers over a defined time
period. KLLM's dedicated fleet customers include Ameriserve, First American
Carriers (a division of MBM-Meadowbrook Meats), Millard Refrigerated Services
and SuperValu. Currently, 65 tractors have been assigned to dedicated fleet
programs. Dedicated drivers are paid a salary and customers are charged weekly
on a time and variable expense basis. Because certain sole-transportation
provider relationships, such as those with Fresh Express and Swiss Colony, are
charged on a basis consistent with either long-haul or regional operations, they
are considered part of those operation and not dedicated fleet operations.
B. Customers
KLLM transports a wide variety of temperature-sensitive products, including
food, consumer products, beverages, medical supplies, and raw materials for many
of the leading companies in the United States. Because of the diversity of
KLLM's freight profile, management believes that KLLM is less seasonal than
other temperature-controlled carriers and less cyclical than most dry freight
carriers. Also, in the recent years the Company has made a concerted effort to
seek temperature-controlled customers who are more service sensitive than they
are price-sensitive and that have more "driver-friendly" freight, requiring less
handling and waiting. KLLM's freight profile for the fiscal year ended January
1, 1999 is depicted in Chart IV-2.
Chart IV-2
KLLM
1998 Freight Profile
[ONE PIE CHART]
Food & Beverage 65%
Chemicals & Plastics 20
Paper 3
Medical Supplies 3
Home & Personal 3
Other 6
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Sales by Customer
KLLM maintains strong customer relationships and is recognized throughout the
industry as a high-quality service provider. The Company recently received
Union Carbide's Supplier Quality Award, was named Carrier of the Year by both
Pillsbury and BASF, and was named Most Improved Carrier by both Baxter
Healthcare and Arch Chemicals. KLLM's largest 10 customers accounted for
approximately 50% of its revenue for the fiscal year ended January 1, 1999.
Fresh Express, the Company's largest customer, accounted for 17% of the
Company's 1998 revenue.
[PHOTOGRAPH OF PRODUCT LOGOS]
Table IV-1
KLLM
Top Ten Customers
(millions)
Company 1996 Rank 1997 Rank 1998 Rank
------- ----- ---- ----- ---- ----- ----
Fresh Express $20.4 2 $27.8 1 $39.7 1
Pillsbury 18.4 3 15.9 3 16.0 2
Procter & Gamble 8.3 7 13.3 4 12.8 3
Kraft 20.7 1 17.3 2 11.7 4
Georgia Pacific 7.1 8 8.9 6 8.8 5
M&M/N.A.L.S 12.7 4 8.8 8 8.8 6
Kroger Company 9.8 5 9.9 5 7.5 7
BASF Corporation 8.3 6 8.8 7 6.9 8
Allegiance Healthcare 2.5 12 6.4 9 5.3 9
Costco Wholesale None 3.8 10 3.2 10
KLLM has been involved with Fresh Express for over four years and transports
almost 100% of their temperature-sensitive products. As this relationship has
evolved, KLLM has become an integral part of Fresh Express' operations. KLLM
hauls raw product from growers primarily in California and Arizona to Fresh
Express' processing plants in Salinas, California; Atlanta, Georgia; Chicago,
Illinois and Green Castle, Pennsylvania. From the Salinas facility, KLLM
utilizes its long-haul and regional fleets to transport products to
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customers in a broad geographical area. From the other three Fresh Express
facilities, KLLM uses its regional fleet to transport products to customers in
those areas. Due to logistical complexities and a substantial learning curve
associated with this account, management believes it would be very difficult for
Fresh Express to replace KLLM as its primary temperature-controlled
transportation provider.
The decrease in sales to Kraft, M&M/Mars and BASF were primarily the result of
customer and trucking lane rationalization efforts by KLLM. This
rationalization process increased rates for outlying areas and less traveled
routes. As a result, sales declined for certain customers, but the accounts
became more profitable.
KLLM's largest dry van customers are Georgia Pacific, M&M/Mars, International
Paper and James River. Dry van sales have been consolidated with temperature-
controlled, by customer, and are included in Table IV-1.
C. Trucking Lanes
Temperature-Controlled Division
Table IV-2 lists the annual number of temperature-controlled deliveries for the
top ten states.
Table IV-2
Temperature-Controlled Division
1998 Number of Deliveries
State Deliveries
----- ----------
CA 16,757
TX 16,397
GA 12,181
IL 12,115
PA 10,516
OH 8,559
AL 7,364
NY 6,803
NC 5,927
TN 5,709
Vernon Sawyer
Vernon Sawyer's primary lanes are the southcentral and southeastern United
States, with Texas, Louisiana, Arkansas, Mississippi, Tennessee and Alabama
being the top states.
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D. Utilization
Since Jack Liles took over as Chief Executive Officer in July 1998, the Company
has regained its focus and its trucking operations have shown steady
improvement. As Chart IV-3 illustrates, revenue per tractor per week has
increased significantly since reaching its low in the third quarter of 1998. In
addition, for the quarter ended July 2, 1999, deadhead decreased for the second
quarter in a row to 12.9%. Deadhead is expected to decline further as a result
of improved driver staffing and the conversion to 53-foot trailers, which will
enable the Company to compete more effectively for dry freight back hauls.
Chart IV-3
KLLM
Revenue per Tractor per Week
[Bar chart of Revenue per Tractor per week by quarter and by Company-owned
temperature-controlled, Company-owned dry van and total, beginning 1Q97 and
ending 2Q99]
Chart IV-4
KLLM
Deadhead Percent
[Bar chart of Deadhead Percent by quarter and by Company-owned temperature-
controlled, Company-owned dry van and total, beginning 1Q97 and ending 2Q99]
Legend: CO = Company-owned, TC = Temperature-Controlled and DV = Dry Van
16
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Revenue per Loaded Mile
The average revenue per loaded mile was $1.270 and $1.297 for 1997 and 1998,
respectively. Chart IV-5 illustrates the average revenue per loaded mile for
the Company and each division by quarter. Revenue per loaded mile for the
Temperature-Controlled Division has increased due to the growth of the regional
and dedicated fleet operations.
Chart IV-5
KLLM
Revenue per Loaded Mile
[Bar chart of Revenue per Loaded Mile by quarter and by Company-owned
temperature-controlled, Company-owned dry van and total, beginning 1Q97 and
ending 2Q99]
E. Average Length of Haul
KLLM's overall average mile per haul is approximately 950 miles. This average
has been decreasing over the last three quarters due to the growth its regional
and dedicated temperature-controlled fleets. The average length of haul is
typically shorter for Vernon Sawyer than it is for the Temperature-Controlled
Division. In 1998, the average length of haul was 916 miles and 997 miles for
the Company-owned temperature-controlled tractors and Vernon Sawyer tractors,
respectively. In 1998, the average length of haul for owner-operated
temperature-controlled tractors was 1,059 miles.
17
<PAGE>
Chart IV-6
KLLM
Average Length of Haul
[Bar chart of Average Length of Haul]
F. Revenue Equipment
[TWO PHOTOS OF TRACTORS AND TRAILERS]
The Company's transportation services are provided through the use of Company-
operated and owner-operated equipment. KLLM utilizes modern tractors and
trailers for their fuel efficiency, improved capacity, lower maintenance
expense, visual appeal and driver retention characteristics. For the quarter
ended July 2, 1999, the Company's tractor fleet averaged 1,501 Company-operated
tractors and 302 owner-operated tractors. As of September 1999, the Company
either owned or leased 1,518 tractors, 2,158 temperature-controlled trailers and
18
<PAGE>
814 dry van trailers. A detailed list of the Company's revenue equipment is
included as Appendix A.
The Company's standard tractors are Freightliner air-ride conventional sleeper
cabs with ABS brakes, Qualcomm satellites and Detroit Diesel Series 60 engines.
Most of the Company's temperature-controlled trailers are 53-foot Wabash
trailers with Carrier cooling units, and all of its dry van trailers are 53-foot
trailers.
Revenue Equipment Replacement Policy and Use of Leases
In general, KLLM trades its tractors every three years, its temperature-
controlled trailers every five years and its dry van trailers every six to seven
years. The decision to lease or buy is made on a case-by-case basis. However,
since 1998 the Company has been leasing a greater proportion of revenue
equipment. As of September 1999, the Company has leased 400 tractors and 1,200
temperature-controlled trailers. Since 1997, virtually all of the Company's
operating leases are "walk away" leases, with three-year and five-year terms for
tractors and trailers, respectively. By the end of 1999, the Company will have
no operating leases that exceed these terms.
In 1998, KLLM upgraded its fleet with the purchase of approximately 200 new
tractors, the majority of which were Freightliner Century Class. KLLM plans to
further upgrade its tractor fleet with the purchase of 400 new Freightliner
Century Class before the end of 1999, all of which are replacement tractors.
KLLM has buy-back agreements with Freightliner that management believes to be
consistent with industry standards.
Management decided in December 1997 to accelerate its trailer fleet conversion
from 48-foot trailers to 53-foot trailers in order to maintain its position as a
leader in the temperature-controlled segment. To accomplish the conversion,
KLLM negotiated an agreement with Wabash to trade the Company's 48-foot
temperature-controlled trailers at predetermined values over the course of three
years. In return, KLLM will acquire from Wabash and lease from a third party a
like number of trailers for a predetermined price. The leases for these
trailers are "walk away" leases and KLLM does not guarantee the residual value
and it therefore has no financial exposure in this regard. Since KLLM requested
a number of bids for this transaction, both the value received for the old 48-
foot trailers and the cost of the new 53-foot trailers are believed to be
competitive. As of January 2, 1998, the Company had 1,860 48-foot temperature-
controlled trailer and to-date has either disposed of or traded 1,117 of these
trailers. Of the remaining 48-foot trailers, 136 will be traded in 1999 and 607
will be traded in 2000. The net impact of these trailer transactions has
already been reflected in the Company's 1997 financial results as impairment of
long lived assets.
19
<PAGE>
G. Maintenance
Prior to the end of 1997, KLLM had a four-year trade cycle for tractors and a
seven-year trade cycle for most trailers, which was longer than the warranty
period for this equipment. In addition, significant portions of KLLM's
maintenance operations were outsourced. As a result, maintenance expense as a
percent of revenue increased substantially. However, KLLM has taken the
necessary steps to correct this situation and reverse the trend. The Company
now handles the majority of its maintenance in-house and trades its tractors
every three years and its temperature-controlled trailers every five years,
which coincides with the warranty periods for this equipment.
H. Facilities
Table IV-3 lists the location, use, square footage and ownership of KLLM's
facilities.
Table IV-3
KLLM
Facilities
<TABLE>
<CAPTION>
Square Owned or
Location Main Use Feet Land Leased
----------- --------------------------------------------- ------- ------- ----------
<S> <C> <C> <C> <C>
Jackson, MS Admin. and dispatch office space 11,000 48 acres Owned
Jackson, MS Driver recruiting and office space 19,200 14 acres Owned*
Jackson, MS Office space and 14 bay maintenance 52,000 Owned*
Atlanta, GA Terminal office space and six bay maintenance 25,000 17 acres Owned
Bastrop, LA Terminal office space and four bay maintenance 44,300 17 acres Owned
Portage, IN Terminal office space 800 1 acre Leased
Carlisle, PA Terminal office space and six bay maintenance 14,600 5 acres Leased
Denison, TX Four bay maintenance 6,400 4 acres Leased
Laredo, TX Dispatch office space 400 Leased
Fontana, CA Terminal office space 2,000 2 acres Leased
------------
* Building is owned and land is leased from a related party.
</TABLE>
I. Technology
KLLM was the first nationwide temperature-controlled carrier to utilize fleet-
wide satellite communications. All KLLM trucks are linked to the Company's
Jackson, Mississippi headquarters through a Qualcomm satellite communications
system. This system enables the Company to monitor the status and location of
every KLLM truck on the road at any given time and facilitates the analysis of
operations with the data it generates. In addition, it provides a two-way
communication link between drivers and terminal personnel.
20
<PAGE>
[PHOTO]
KLLM also utilizes the latest in EDI technology, which allows the Company to
transmit and receive various types of information electronically, including
billing, status notification, notification of receipt of payment, bills of
lading, load tendering, service or performance standards and third party
messaging.
KLLM's website is another indication of the Company's commitment to being a
service and technology leader within the trucking industry. The KLLM website,
which is updated periodically throughout the day, contains customer service
telephone numbers, driver information, investor relations, and other useful
information and capabilities designed to facilitate communication among
employees, customers and vendors. Additionally, the Company's website enables
customers to track recent shipments in a secure environment.
[LOGOS OF KLLM TRANSPORT SERVICES]
J. Sales and Marketing
The Company has a full-time staff of eight salespersons who, along with certain
executives, are responsible for developing new accounts. Once a customer
relationship is established, the primary Company contact is an operations
manager who is either dedicated to a specific customer or is responsible for a
geographic territory. Working from the Company's corporate headquarters in
Jackson, Mississippi, the managers contact existing customers to solicit
additional business. KLLM's marketing strategy is to increase revenues by
devoting more of the Company's resources to providing better service to a more
focused segment of its existing customer base. In doing so, the company
believes it will develop a growing list of new accounts with better volume,
operating characteristics and profit potential.
21
<PAGE>
V. Human Resources
A. Organizational Structure
As Exhibit V-1 below illustrates, KLLM's structure is relatively flat and is
organized by function. KLLM uses cross-functional teams as well as other
participatory management techniques to facilitate communications among
employees. The Company is an equal-opportunity employer and is committed to
maintaining high employee morale and commitment by providing competitive pay and
a positive work environment.
Exhibit V-1
KLLM
Organization Chart
[Organization chart showing Vice-President and Senior Personnel]
B. Management
The top seven managers have over 87 years of combined experience at KLLM. Brief
informational biographies of the top managers are presented below.
Jack Liles, Chairman, President and Chief Executive Officer (age 48). Mr. Liles
joined KLLM in 1974 and was elected to his current position in July 1998. He is
the son of W.J. "Billy" Liles, one of the founders of KLLM. He has served the
Company in a variety of management positions, including Vice President of
Marketing and President of Rail Services.
Nancy Sawyer, Senior Vice President and Chief Operating Officer (age 55). Ms.
Sawyer joined KLLM in 1995 with the acquisition of Vernon Sawyer where she held
a variety of senior management positions during her tenure.
Steven Dutro, Senior Vice President and Chief Financial Officer (age 43). Mr.
Dutro joined KLLM in 1986 and since then he has served the Company in a variety
of management positions, including Vice President of Strategic Planning, Vice
President of Finance, and Controller. Before joining KLLM, Mr. Dutro was an
accountant with Big 10 Tire Company from 1981 to 1986 and was a senior auditor
with Ernst & Young from 1977 to 1981.
22
<PAGE>
Irene Howard, Chief Counsel, Vice President of Human Resources and Risk
Management, and Assistant Secretary (age 47). Ms. Howard joined KLLM in 1993
and before that she was a partner with the law firm of Thomas, Price, Alston,
Jones & Davis from 1986 to 1993. In addition, Ms. Howard served as a member of
the Mississippi State Legislature's PEER investigative group from 1985 to 1986,
and was a member of the Mississippi State Personnel Board from 1976 to 1985.
Jim Richards, Vice President of Customer Service (age 35). Mr. Richards joined
KLLM in 1987 and has served the Company in a variety of management positions
including Senior Customer Service Manager.
James Sorrels, Vice President of Safety and Training (age 43). Mr. Sorrels
joined KLLM in 1978 and has served the Company in a variety of management
positions, including President of Express Systems (owner operator fleet),
President of Contract Logistics, and Vice President of Customer Service.
Vince Schott, Vice President of Information Systems (age 33). Mr. Schott
joined KLLM in 1993 after serving as a senior analyst at Conway Computer &
Software from 1990 to 1993, and as a senior analyst at Anderson Consulting from
1987 to 1990.
C. Staffing by Major Function
Table V-1 contains a listing of the number of employees by function from 1995 to
1998. As of July 2, 1999, KLLM employed 1,928 full-time equivalent workers.
Table V-1
KLLM
Number of Employees by Function
1995 1996 1997 1998 As of 7/2/99
----- ----- ----- ----- ------------
Drivers (Excluding Owner-Operators) 1,833 1,657 1,742 1,551 1,512
Maintenance 215 171 110 114 147
Information Technologies 9 9 13 16 16
Sales & Marketing 15 16 12 12 12
Other 250 229 222 246 241
----- ----- ----- ----- -----
Subtotal Non-Drivers 489 425 357 388 416
----- ----- ----- ----- -----
Total Employees 2,322 2,082 2,099 1,939 1,928
===== ===== ===== ===== =====
23
<PAGE>
Ratio of Tractors to Non-Driver Employees
Non-driver staff has been reduced from its high in 1995. However, KLLM
increased non-driver staff slightly in 1998 in anticipation of modest fleet
growth in 1999. In 1999, KLLM increased its maintenance staff by 33, as it is
more cost effective to perform certain maintenance functions in-house.
Excluding the increase in maintenance personnel, KLLM reduced its non-driver
headcount in 1999 by five.
Chart V-1
KLLM
Ratio of Tractors to Non-Driver Employees
[BAR CHART]
1995 3.7
1996 4.0
1997 5.1
1998 4.6
6/1999 4.3
D. Drivers
KLLM's ratio of Company-employed drivers to Company-owned tractors is set forth
in Chart V-2. As of July 2, 1999, KLLM had 1,512 drivers (including
approximately 85 permanent teams) and 296 owner-operators. While the total
number of Company-employed drivers at July 2, 1999 is lower than it was at the
end of 1998, the reduction is mainly attributed to the planned decrease in
student-drivers. As a result of the new driver compensation package, improved
hiring techniques, and lower turnover of experienced drivers, KLLM was able to
dramatically cut its student driver force. As of December 31, 1999, KLLM had
128 student drivers. By July 2, 1999, the number of student drivers was cut by
58 to 70, representing a 45% reduction. Also, compared to July 1998, KLLM has
approximately 60 more drivers than it had the previous year.
24
<PAGE>
Chart V-2
KLLM
Ratio of Company-Employed Drivers to Company-Owned Tractors
[Bar Chart]
1995 1.3
1996 1.2
1997 1.2
1998 1.1
Driver Retention and Compensation
Driver turnover continues to be one of the most critical operating issues facing
trucking companies. However, while the industry generally averages between 100%
and 120% turnover, KLLM's turnover had reached 140% in 1998. KLLM's relatively
high turnover rate in 1998 resulted in an 11% reduction in driver-employees and
negatively impacted earnings. To combat driver turnover, the Company
implemented a new driver compensation plan in September 1998, which included a
20% increase in base pay per mile and a simplified incentive plan. KLLM's new
base pay per solo driver ranges from $.23 and $.39 per mile based on the
driver's amount of experience. Teams are paid a starting base rate of up to
$.41 per mile. Overall, management believes that the new pay package resulted
in a 7% annual increase in average driver compensation.
A number of other initiatives have also helped KLLM retain more drivers and
attract a higher quality driver. These initiatives include: (i) a $10,000
five-year anniversary bonus, (ii) an examination of driver "wait times" to
increase productivity, (iii) the implementation of a dedicated fleet program,
(iv) the expansion of KLLM's regional fleet with more "driver friendly" routes,
(v) upgraded trucks for drivers who obtain one million accident free-miles, (vi)
a drive to own program and (vii) a sincere commitment from senior management to
make KLLM a place where drivers want to work. Although these measures have
raised the Company's cost structure, management believes the increase will be
offset by lower
25
<PAGE>
recruiting and training costs, better driver availability, improved customer
service, reduction in student drivers, and fewer and less severe accidents.
KLLM's efforts are paying off as driver turnover is currently running below
industry norm and the Company has significantly increased the experience level
of its drivers. For the six months ended July 2, 1999, KLLM's driver turnover
rate was approximately 94%. As of September 1999, 82% of KLLM's lead drivers
had more than one year of truck driving experience and 43% had more than five
years of truck driving experience. In addition, 55% of lead drivers have been
with KLLM for more than one year.
E. Summary of Benefits
Medical, Dental and Life Insurance
KLLM provides group insurance after 90 days of employment to all full-time
employees who elect such coverage. The plan includes health, dental and life
insurance, and is third party administered by Blue Cross-Blue Shield of
Mississippi. In addition, optional supplemental life insurance is available for
KLLM employees through payroll deduction.
Long-Term Disability Insurance
KLLM employees are eligible for long-term disability insurance after one year of
full-time employment with the Company. Employees are automatically enrolled into
the plan twice a year. This coverage coordinates with the Company's worker's
compensation should the disability arise from a work-related injury.
Retirement Plan (401K)
After six months of active service, each KLLM employee is eligible to
participate in the KLLM Retirement Plan. Under the plan, an employee can
contribute anywhere from one to 16.5% of his or her income. The Company matches
the employee's contribution amount up to a maximum of four percent.
Stock Purchase Program
In October of each year, KLLM employees with one year of active service are
eligible to purchase KLLM's stock. The following October, the employee has the
option of either accepting the stock or of receiving a refund of the amount
withheld through payroll deduction, along with accrued interest.
26
<PAGE>
VI. Legal, Environmental and Insurance
A. Litigation
KLLM is involved in various claims and routine litigation incidental to its
business. Although the actual amount of liability, if any, with respect to
these matters cannot be accurately determined, management believes that these
matters will not have a materially adverse effect on the Company's consolidated
financial position.
B. Environmental
The operations of the Company are subject to various federal, state and local
laws and regulations relating to the environment. The Company believes that its
operations are in substantial compliance with such laws. Although the Company
is unable to predict what legislation or regulations may be adopted in the
future with respect to environmental protection and waste disposal, existing
legislation and regulations have had no material adverse impact on the Company's
competitive position.
The Company has above ground fuel tanks at its Jackson, Mississippi and Bastrop,
Louisiana facilities and has underground fuel tanks at its Atlanta, Georgia
facility. Management is not currently aware of any material environmental issue
relating to its fuel storage operations.
C. Insurance
The Company is self-insured in all states for liability up to $350,000 per
occurrence and maintains excess coverage up to $50,000,000 per occurrence. The
Company is also self-insured for worker's compensation claims in all states that
allow self-insurance. The self-insurance portion for workers' compensation is
$250,000 in Mississippi and $500,000 in all other states.
D. Accident Rates and Loss Development Reserves
As of July 2, 1999 the Company had reserves of $14.5 million for self-insured
risk. Management reasonably believes that the Company's current loss reserve
adequately covers the amount of its potential claims. KLLM uses an independent
advisor to access its self-insured liability risk on a regular basis and makes
the appropriate adjustments to its loss reserves.
E. Safety
As Chart VI-1 illustrates the twelve-month rolling average of the number of
preventable accidents per million miles has decreased dramatically, mainly as
the result of KLLM hiring
27
<PAGE>
more experienced drivers. In addition, the severity of accidents has also
decreased. Management estimates that drivers that have less than one year of
driving experience account for almost 75% of accidents. Engine governors are set
at 65 mph for most drivers and 68 mph for Million Milers.
As of September 1999, KLLM had 82 driver-employees that have driven over one
million accident free miles. For their accomplishments, Million Milers are
furnished with Freightliner Classics, which is a special truck with a larger cab
and is fully equipped with a television, VCR, refrigerator and a customized
graphics package. In addition, Million Milers are publicly recognized for their
accomplishments and they receive various other gifts and benefits.
In a June 12, 1998 audit by the U.S. Department of Transportation, KLLM received
a "Satisfactory" rating meaning that the Company had adequate safety management
controls in place to effect substantial compliance with the federal motor
carrier safety and/or hazardous material regulations.
Chart VI-1
KLLM
Number of Preventable Accidents per Million Miles
(Twelve-month rolling average)
[Line Graph]
January 1998 5.54
April 1998 6.17
July 1998 6.35
October 1998 5.95
January 1999 5.80
April 1999 5.12
July 1999 4.46
October 1999 4.19
28
<PAGE>
F. Y2K Program
Management has taken the Y2K issue seriously, and the Company is currently
finishing the final steps required to be Y2K compliant.
29
<PAGE>
VII. Financial Overview
The Company's historical financial results were derived from financial
statements audited by Ernst & Young, LLP and from other internal financial
reports. A copy of the January 1, 1999, audited statements is included as
Appendix B and the Company's latest 10-Q is included as Appendix C. Interim
financial results are unaudited and were derived from the Company's 10-Q.
KLLM's Pro Forma Historical Income Statements (Exhibit VII-1) are on the
following page. The Company's fiscal year-end is the Friday nearest December
31st.
A. Sales
Consolidated Sales
Chart VII-1, set forth below, depicts consolidated sales and sales by division
from 1995 to 1998. Other revenue consisted of certain intermodal and
international operations that were discontinued in 1996. In 1995, Vernon Sawyer
accounted for approximately 5% of consolidated sales, whereas in 1998, this
division accounted for almost 17% of consolidated sales. From 1995 to 1998,
Vernon Sawyer grew at a compound annual rate of almost 50%. The decrease in
temperature-controlled sales in 1998 was primarily due to a shortage of
qualified drivers. Sales for the Temperature-Controlled Division have been flat
for the last couple of years as the result of customer and trucking lane
rationalization efforts by KLLM.
Chart VII-1
KLLM
Consolidated Sales
(millions)
[Bar Chart]
1995 1996 1997 1998
------ ------ ------ ------
Vernon Sawyer $ 11.7 $ 26.3 $ 34.1 $ 38.6
Temperature-Controlled 199.9 209.1 206.7 190.4
Other 17.9 10.8 - -
------ ------ ------ ------
Total $229.5 $246.2 $240.8 $229.0
====== ====== ====== ======
30
<PAGE>
Exhibit VII-1
KLLM
Historical Income Statements--Consolidated Operations
(thousands)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
1996 1997 1998 July 3, 1998 July 2, 1999 LTM
-------- -------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE FROM TRUCKLOAD OPERATIONS $246,222 $240,766 $228,988 $119,303 $116,560 $226,245
OPERATING EXPENSES:
Salaries, wages and fringe benefits 71,318 75,748 73,143 37,837 40,357 75,663
Operating supplies and expenses 69,859 62,828 56,938 28,845 28,116 56,209
Insurance, claims, taxes and licenses 14,227 17,751 13,729 7,188 5,941 12,482
Depreciation and amortization 21,872 21,432 18,270 9,174 8,941 18,037
Purchased transportation and equipment rent 54,272 51,692 50,840 26,167 26,206 50,879
Other 9,629 10,986 11,657 5,714 5,545 11,488
(Gain) loss on sale of revenue equipment (1,657) 185 (1,231) (207) (508) (1,532)
-------- -------- -------- -------- -------- --------
TOTAL OPERATING EXPENSES FROM TRUCKLOAD OPERATIONS 239,520 240,622 223,346 114,718 114,598 223,226
-------- -------- -------- -------- -------- --------
OPERATING RATIO 97.3 % 99.9 % 97.5 % 96.2 % 98.3 % 98.7 %
OPERATING INCOME (LOSS) FROM TRUCKLOAD OPERATIONS 6,702 144 5,642 4,585 1,962 3,019
NON-RECURRING ITEMS AND DISCONTINUED OPERATIONS
Operating revenue from rail oeprations 10,466 3,319 --
Rail operations expenses (10,818) (4,228) --
Impairment of long lived assets/1/ (15,754) --
Restructuring charge (1,906) --
-------- -------- -------- -------- -------- --------
SUBTOTAL (352) (18,569) -- -- -- --
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) 6,350 (18,425) 5,642 4,585 1,962 3,019
OTHER INCOME AND EXPENSES:
Gain on sale of property 858 858 --
Interest and other income 59 68 87 68 21 40
Interest expense (4,783) (4,363) (3,551) (1,826) (1,711) (3,436)
-------- -------- -------- -------- -------- --------
SUBTOTAL (4,724) (4,295) (2,606) (900) (1,690) (3,396)
-------- -------- -------- -------- -------- --------
EARNINGS (LOSS) FROM CONTINUING OPS, BEFORE INCOME TAXES 1,626 (22,720) 3,036 3,685 272 (377)
Income tax expense (benefit) 721 (8,000) 1,200 1,475 100 (175)
-------- -------- -------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS 905 (14,720) 1,836 2,210 172 (202)
-------- -------- -------- -------- -------- --------
LOSS FROM NON-RECURRING ITEMS--NET OF TAXES (139) -- (247) (247)
-------- -------- -------- -------- -------- --------
NET EARNINGS (LOSS) $ 766 $(14,720) $ 1,836 $ 2,210 $ (75) $ (449)
======== ======== ======== ======== ======== ========
EBITDA Calculation:
Operating income from truckload operations $ 6,702 $ 144 $ 5,642 $ 4,585 $ 1,962 $ 3,019
Depreciation and Amortization 22,055 21,508 18,270 9,174 8,941 18,037
-------- -------- -------- -------- -------- --------
EBITDA $ 28,757 $ 21,652 $ 23,912 $ 13,759 $ 10,903 $ 21,056
EBITDA MARGIN 11.7 % 9.0 % 10.4 % 11.5 % 9.4 % 9.3 %
Percent of Operating Revenue:
Salaries, wages and fringe benefits 29.0 % 31.5 % 31.9 % 31.7 % 34.6 % 33.4 %
Operating supplies and expenses 28.4 % 26.1 % 24.9 % 24.2 % 24.1 % 24.8 %
Insurance, claims, taxes and licenses 5.8 % 7.4 % 6.0 % 6.0 % 5.1 % 5.5 %
Depreciation and amortization 8.9 % 8.9 % 8.0 % 7.7 % 7.7 % 8.0 %
Purchased transportation and equipment rent 22.0 % 21.5 % 22.2 % 21.9 % 22.5 % 22.5 %
Other 3.9 % 4.6 % 5.1 % 4.8 % 4.8 % 5.1 %
(Gain) loss on sale of revenue equipment (0.7)% 0.1 % (0.5)% (0.2)% (0.4)% (0.7)%
-------- -------- -------- -------- -------- --------
Total 97.3 % 99.9 % 97.5 % 96.2 % 98.3 % 98.7 %
-------- -------- -------- -------- -------- --------
</TABLE>
-----------
/1/ Impairment of long lived assets has been reclassified from an operating
expense as illustrated in the Company's audited financials to a non-
recurring item.
31
<PAGE>
B. Operating Expenses
Variable and Fixed Operating Expenses
Table VII-1 contains a breakdown of operating expenses by variable, fixed
transportation and general and administrative costs. An aggressive cost
containment program implemented in 1998 enabled the Company to reduce general
and administrative expenses by $2.0 million and fixed transportation costs by
$2.8 million compared against the previous year.
Table VII-1
KLLM
Statement of Variable, Fixed Transportation and General and Administrative Costs
(millions)
<TABLE>
<CAPTION>
1996 % 1997* % 1998 %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $246.2 100.0% $240.8 100.0% $229.0 100.0%
Variable Expenses:
Purchased Transportation 48.2 19.6% 46.0 19.1% 43.0 18.8%
Driver Pay, Benefits & Taxes 52.0 21.1% 53.6 22.3% 55.2 24.1%
Fuel 34.9 14.2% 33.2 13.8% 28.2 12.3%
Insurances 12.6 5.1% 16.4 6.8% 11.6 5.1%
Repairs & Maintenance 11.7 4.8% 12.6 5.2% 14.2 6.2%
Other 18.1 7.4% 15.5 6.4% 12.6 5.5%
------ ----- ------ ----- ------ -----
Total Variable Expenses 177.5 72.1% 177.3 73.6% 164.8 72.0%
Contribution Margin 68.7 27.9% 63.5 26.4% 64.2 28.0%
Fixed Transportation Costs:
Shop Wages, Benefits & Taxes 6.9 2.8% 4.7 2.0% 4.2 1.8%
Revenue Equipment Rent & Leases 4.8 1.9% 5.3 2.2% 7.8 3.4%
Revenue Equip. Depreciation 19.9 8.1% 19.4 8.1% 16.7 7.3%
Other 6.5 2.6% 7.8 3.2% 5.7 2.5%
------ ----- ------ ----- ------ -----
Total Fixed Trans. Costs 38.1 15.5% 37.2 15.4% 34.4 15.0%
General and Admin. Costs:
Salaries, Benefits & Taxes 13.0 5.3% 12.9 5.4% 10.6 4.6%
Other 10.9 4.4% 13.3 5.5% 13.6 5.9%
------ ----- ------ ----- ------ -----
Total General & Admin. Costs 23.9 9.7% 26.2 10.9% 24.2 10.6%
------ ----- ------ ----- ------ -----
Operating Income From Truckload Ops. $ 6.7 2.7% $ 0.1 0.0% $ 5.6 2.4%
====== ===== ====== ===== ====== =====
</TABLE>
-------------
* Operating expenses exclude $15.8 million for the impairment of long-lived
assets.
32
<PAGE>
Contribution Margin
KLLM's total contribution margin (trucking revenue less variable trucking
expenses) has averaged approximately 28% over the last four years.
Historically, the contribution margin for the Vernon Sawyer division has been
higher than that of the Temperature-Controlled Division. This is due to the
lower utilization, greater use of owner-operators and higher operating costs
associated with the Company's temperature-controlled operations versus its dry
van operations.
Chart VII-2
KLLM
Contribution Margin
(millions)
[Bar Chart]
1995 $70.3 30.6%
1996 68.7 27.9
1997 63.5 26.4
1998 64.2 28.0
C. Consolidated EBIT and EBITDA
Chart VII-3
KLLM
EBIT and EBITDA
(millions)
[Two Bar Charts]
EBIT EDITDA
1995 $6.5 $29.5
1996 6.7 28.8
1997 .1* 21.7*
1998 5.6 23.9
* Includes pro forma add-back of $15.8 million for impairment of
long-lived assets.
33
<PAGE>
D. Balance Sheet Review
KLLM's Historical Balance Sheets are presented as Exhibit VII-2 below.
Exhibit VII-2
KLLM
Historical Balance Sheets--Consolidated Operations
(thousands)
1/1/99 7/2/99
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 756 $ 1,142
Accounts receivable 21,132 24,390
Inventories - at cost 597 771
Prepaid expenses:
Tires 2,758 2,847
Other 2,490 3,395
-------- --------
5,248 6,242
-------- --------
Assets held for sale 1,530 1,530
Deferred income taxes 5,818 5,818
-------- --------
TOTAL CURRENT ASSETS 35,081 39,893
-------- --------
PROPERTY AND EQUIPMENT
Property and equipment 131,953 134,957
Accumulated depreciation and amortization (33,741) (39,703)
-------- --------
98,212 95,254
-------- --------
OTHER ASSETS 69 22
-------- --------
TOTAL ASSETS $133,362 $135,169
======== ========
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,745 $ 13,574
Accrued claims expense 15,041 14,452
Current maturities of long-term debt and
capital leases 2,857 --
-------- --------
TOTAL CURRENT LIABILITIES 29,643 28,026
LONG-TERM DEBT AND CAPITAL LEASES 36,571 41,000
DEFERRED INCOME TAXES 14,480 14,480
-------- --------
STOCKHOLDERS' EQUITY
Common stock 4,559 4,559
Additional paid-in capital 32,858 32,840
Retained earnings 18,569 18,494
-------- --------
55,986 55,893
-------- --------
Less common stock in treasury (3,318) (4,230)
TOTAL STOCKHOLDERS' EQUITY 52,668 51,663
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,362 $135,169
======== ========
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E. Fixed Assets
Table VII-2 outlines the Company's cost of fixed assets, accumulated
depreciation and book value by asset class.
Table VII-2
KLLM
Capital Equipment Summary
(millions as of July 2, 1999)
Accumulated Book
Cost Depreciation Value
------ ------------ -----
Tractors $ 82.3 $23.8 $58.5
Trailers 37.7 8.1 29.6
Land 1.0 - 1.0
Buildings & Improvements 7.2 2.7 4.5
Autos & Trucks 0.2 0.2 -
Shop Equipment 0.2 0.1 0.1
Furniture & Fixtures 1.3 0.9 0.4
Computer Software 2.7 2.2 0.5
Data Processing Equipment 2.4 1.7 0.7
------ ----- -----
Total $135.0 $39.7 $95.3
Depreciation Methods for Revenue Equipment
For tractors, the difference between the original cost and guaranteed buyback
amount is depreciated over three years using the straight-line method.
Generally the guaranteed buyback amount represents 50% to 55% of the original
cost. For dry van trailers, the difference between original cost and estimated
fair market value at time of disposal is depreciated over seven years using the
straight-line method. By the end of 2000, approximately 1,800 of the Company's
temperature-controlled trailer fleet will be subject to operating leases, which
are not capitalized and depreciated.
F. Net Operating Loss Carryforward
The Company has a net operating loss carryforward for income tax purposes of
approximately $27 million, which expires at various dates through the year 2018.
35
