<PAGE>
M.S. Carriers, Inc.
3171 Directors Row
Memphis, TN 38131
March 31, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
transmitting herewith the attached Form 10-K.
Sincerely,
s/ M.J. Barrow
M.J. Barrow, Senior Vice President
<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
-----------------------
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 0-14781
M.S. Carriers, Inc.
(Exact name of registrant as specified in its charter)
Tennessee 62-1014070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3171 Directors Row, Memphis, TN 38131
(Address of principal executive offices) (Zip Code)
(901) 332-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to filed such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the registrant's $.01 par value common stock
held by non-affiliates of the registrant as of March 5, 1999 was $270,104,534
(based on the closing sale price of $29.75 per share on that date, as reported
by NASDAQ).
As of March 5, 1999, 12,283,601 shares of the registrant's common stock were
outstanding.
Documents Incorporated by Reference
Materials from the Registrant's Proxy Statement relating to the 1999 Annual
Meeting of Shareholders to be held on May 7, 1999 have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
<PAGE>
Table of Contents
PART I
Item 1. Business......................................................1
Item 2. Properties....................................................3
Item 3. Legal Proceedings ............................................4
Item 4. Submission of Matters to a Vote of Security Holders ..........4
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters ..........................................4
Item 6. Selected Financial Data ......................................5
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Conditions .....................................6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...10
Item 8. Financial Statements and Supplementary Data .................10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ........................10
PART III
Item 10. Directors and Executive Officers of the Registrant...........10
Item 11. Executive Compensation.......................................10
Item 12. Security Ownership of Certain
Beneficial Owners and Management.............................10
Item 13. Certain Relationships and Related Transactions...............11
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................11
PART I
ITEM 1. BUSINESS
General
M.S. Carriers, Inc. (with its subsidiaries, the "Company" or "M.S.
Carriers") is a transportation company primarily engaged in the hauling of
truckload shipments of general commodities throughout the United States and
the provinces of Quebec and Ontario in Canada. The Company also provides
third-party logistics services. M.S. Carriers is a Tennessee corporation
headquartered in Memphis, Tennessee. The Company's principal executive's
offices are located at 3171 Directors Row, Memphis, Tennessee 38131, and its
telephone number is (901) 332-2500.
M.S. Carriers has both common and contract authority to transport any type
of freight (except certain types of explosives, household goods and
commodities in bulk) from any point in the continental United States to any
other point in any state over any route selected by the Company. The Company
has authority in Canada granted by the Quebec Transport Commission and the
Ontario Highway Transport Board to haul general commodities from points in the
United States to points in Quebec and Ontario and from points in Quebec and
Ontario into the United States. The Company also provides interline service to
and from Mexico.
The Company's primary line-haul traffic flows are between the Middle South
and the Southwest, Midwest, Central States, Southeast and Northeast. In
addition, the Company operates regional networks which serve the West,
Southeast, Southwest, Middle South, Central States and Northeast. The average
length of a trip (one-way) was approximately 689 miles in 1998 and 633 miles
in 1997. The principal types of freight transported are packages, retail
goods, nonperishable foodstuffs, paper and paper products, household
appliances, furniture and packaged petroleum products.
Business Strategy
M.S. Carriers has targeted the service-sensitive segment of the
transportation market rather than that segment which uses price as its primary
consideration. The Company has chosen to provide premium services and charge
compensating rates rather than to compete solely on the basis of price. The
principal elements of the Company's premium service are on-time deliveries,
dependable late-model equipment, fully integrated computer systems to monitor
shipment status and variations from schedules, on-board communications
systems, multiple and appointment pickups and deliveries, assistance in
loading and unloading, the availability of extra trailers which can be placed
for the convenience of customers and sufficient equipment to respond promptly
to customers' varying requirements.
Operations
The Company's operations are designed to maximize efficiency while
maintaining the emphasis placed on providing premium service to customers.
Through the use of the Company's information and satellite tracking systems,
the location of all shipments and equipment is continuously monitored to
coordinate routes and increase equipment utilization. The Company's usual
hauling method requires the unit carrying the shipment to proceed directly
from origin to destination with no delay en route occasioned by a change of
drivers, relays or circuitous routing. The Company's customer service
department maintains constant customer contact regarding overall service
requirements and specific freight movements and also attempts to produce
backhauls for each unit.
Because the average trip has been approximately 689 miles, most of the
Company's shipments are hauled by one driver rather than two. The relatively
short trips ordinarily run by the Company make this method of operation
preferable to team operations. Each of the Company's over-the-road tractors is
equipped with a sleeper cab so that the driver can comply with the Department
of Transportation's hours of service guidelines.
Marketing
The Company's individualized service requires a strong commitment to
marketing. The Company's marketing efforts concentrate on attracting customers
that ship multiple loads from numerous locations that complement the Company's
existing traffic flows. As shipping patterns of existing customers expand or
change, the Company attempts to obtain additional customers to complement the
new traffic flows. Thus, the effort to attract new customers varies from time
to time depending upon growth or changes in the shipping patterns of existing
customers.
The Company's major revenue source is the irregular route dry van truckload
market. In this market, the Company focuses on customers who value the broad
geographic coverage, premium services and flexibility available from a larger
carrier. These customers generally prefer to have their freight handled by a
few carriers with whom they can establish long-term relationships. The Company
also provides dedicated fleet services and logistics services. These services
supplement the Company's strengths in its traditional market and position the
Company to meet the anticipated needs of its customers.
The Company had revenues of $53.6 million in 1998 and $38.8 million in 1997
from freight shipments having either a point of origin or a point of
destination in Mexico. These shipments represented approximately 10.1% and
9.3%, respectively, of total revenues for 1998 and 1997.
1
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The largest 25, 10 and 5 customers accounted for approximately 52%, 37% and
29%, respectively, of the Company's revenues during 1998. Most of these
customers are large, publicly-held companies. One customer, Sears, accounted
for approximately 13% of the Company's revenues during 1998 and 14% in 1997.
No other customer accounted for more than 10% of the Company's revenues during
1998 or 1997.
Drivers and Employees
The Company recognizes the importance of maintaining a professional driver
work force. The Company has established several programs to increase driver
loyalty and to give drivers a stake in the Company. The drivers are
compensated on the basis of miles driven and other services such as loading
and unloading and number of deliveries. Base pay for miles driven increases
with a driver's length of employment with the Company.
Drivers are selected in accordance with specific Company guidelines relating
primarily to safety records, driving experience and personal evaluations. Once
selected, a driver is trained in all phases of Company policies and operations
as well as safety techniques and fuel efficient operation of equipment. In
addition, all new drivers must pass a road test prior to assignment to a
vehicle. Recognizing the importance of driver contact while on the road for
extended periods, the Company maintains an electronic mailbox system which
allows the drivers to transmit and receive messages 24 hours a day, equips
each of its tractors with a mobile two-way satellite communication system and
maintains regular telephonic contact between dispatchers and drivers.
The Company also recognizes that owner-operators provide the Company with
another source of drivers to support its operations. Traditional owner-
operators are independent contractors who supply their own tractors and
drivers, and are responsible for their operating expenses in return for a
negotiated fee based upon number of miles driven and accessorial services
provided. While the Company's primary benefit from traditional owner-operators
is the acquisition of the services of a qualified driver, an additional
benefit is the Company requires less capital for growth as owner-operators
provide their own tractors. In late 1997, the Company began utilizing leased
owner-operators. A leased owner-operator is an independent contractor who
enters into an agreement with the Company or one of its subsidiaries to lease,
with the option to purchase, a tractor and supplies that tractor and a driver
to the Company. The Company has determined that there are many drivers who
desire to own a tractor but who are unable to acquire a tractor without
financial accommodations from the Company. The Company intends to continue its
emphasis on recruiting and retaining owner-operators.
Since competition for qualified drivers is intense, the Company emphasizes
the importance of attracting and retaining qualified drivers. The Company
employs driver recruiters and owner-operator recruiters. The competitive
compensation programs, together with the Company's late-model equipment,
relatively short trips and get-home policies provide important incentives to
attract and retain qualified drivers. In addition, the Company operates a
professional driving academy to train new drivers and employs full-time
recruiters in connection therewith. Despite these incentives and programs, the
Company experiences difficulty from time to time in attracting and retaining
qualified drivers.
At December 31, 1998, the Company employed 3,336 persons, of whom 2,476 were
drivers, 221 were mechanics and other equipment maintenance personnel, and 639
were support personnel including management and administration. The Company
also leased 739 tractors with qualified drivers from traditional owner-
operators and had agreements with 264 leased owner-operators.
None of the Company's employees are represented by a collective bargaining
unit, and management considers the Company's relationship with its employees
to be excellent.
Acquisitions
The trucking industry has historically been a fragmented industry which
management of the Company believes is starting to consolidate. In 1997, the
Company adopted a strategy of seeking to acquire small-to-medium trucking
companies throughout the United States. The Company believes any acquisition
should be accretive to earnings within six months and should place the Company
in new markets for customers and drivers or provide additional capacity for
other new business opportunities.
In September 1997, the Company completed its first acquisition, Hi-Way
Express. This acquisition added 262 tractors to the Company's fleet. In March
1998, the Company concluded the purchase of certain assets of the U.S.
operations of Challenger Motor Freight (U.S.), Inc., adding 195 tractors and
481 trailers to its fleet. In November 1998, the Company hired 280 drivers and
added 803 trailers to its fleet in connection with a transaction with
Interstate Trucking Corporation of America.
Competition
The entire transportation industry, including the trucking industry, is
highly competitive. The Company competes primarily with other truckload
carriers. Competition for the freight transported by the Company is based, in
the long-term, primarily on service and efficiency and, to a lesser degree, on
freight rates. However, in recent years the Company has experienced an
increased focus on freight rates in certain of the markets served by the
Company. Several other truckload carriers have substantially greater financial
resources, own more equipment or carry a larger volume of freight than the
Company.
2
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Regulation
The Company is a motor carrier regulated by the United States Department of
Transportation. Additionally, such matters as weight and dimensions of
equipment are subject to federal, state and international regulations. The
Company believes that it is in substantial compliance with all licensing and
regulatory requirements in each jurisdiction in which it operates.
Seasonality
In the trucking industry generally, results of operations tend to show a
seasonal pattern as some customers reduce shipments during and after the
winter holiday season and during the summer months due to temporary plant
closings for vacations. Revenues can also be affected by bad weather and
holidays, since revenue is directly related to available working days.
Furthermore, operating expenses historically have been higher in the winter
months due primarily to decreased fuel efficiency and increased maintenance
costs of revenue equipment in cold weather.
Fuel
Shortages of fuel or increases in fuel prices could have a materially
adverse effect on the operations and profitability of the Company. From time
to time, the Company has implemented a fuel surcharge program in response to
sudden increases in the cost of fuel. However, there is no assurance that such
fuel surcharges could be used to offset future increases in fuel prices.
During 1998, fuel prices have remained at levels below historical norms.
The Company maintains fuel storage tanks at certain of its terminals.
Leakage or damage to these tanks could subject the Company to environmental
clean-up costs. The Company believes it is in substantial compliance with all
environmental laws and regulations.
ITEM 2. PROPERTIES
Office and Terminal Facilities
The Company's executive offices and principal terminal are located in
Memphis, Tennessee on 3-acre and 48-acre tracts of land, respectively, both of
which are owned by the Company. The executive offices have 57,000 square feet
of office space. The principal terminal consists of 52,000 square feet of
office space and 41,000 square feet of maintenance facilities.
The Company owns office and maintenance facilities of 34,500 square feet in
Columbus, Ohio, 16,500 square feet in Laredo, Texas, 16,500 square feet in
Martinsburg, West Virginia and 45,500 square feet in Atlanta, Georgia.
Additionally, the Company owns a 3,000 square foot office and terminal on a 4-
acre tract of land in Tupelo, Mississippi.
The Company leases several small offices and/or trailer parking yards
throughout the country.
Revenue Equipment
The Company has a policy of purchasing standardized tractors and trailers
manufactured to the Company's specifications. At December 31, 1998, the
Company owned and operated 2,750 Company-owned tractors; leased 739 tractors
owned by traditional owner-operators; and had agreements for 264 tractors with
leased owner-operators. The Company owns 12,164 van trailers; all trailers are
102 inches wide with a minimum of 109.5 inches of inside height. Most of the
tractors are manufactured by Freightliner and most of the trailers are
manufactured by Lufkin or Great Dane.
Standardization enables the Company to simplify driver training, control the
cost of spare parts inventory and enhance its preventive maintenance program.
The Company adheres to a comprehensive maintenance program, based on the
amount of use of the tractor, designed to minimize equipment down-time and
enhance the resale value of all of its equipment. The Company constantly
monitors the fuel efficiency of its power equipment.
The following table shows the type and age of equipment operated by the
Company at December 31, 1998:
<TABLE>
<CAPTION>
Model Year Tractors Trailers
<S> <C> <C>
1999 586 2,290
1998 821 3,086
1997 896 1,321
1996 365 1,219
1995 82 2,289
1994 1,087
1993 709
1992 163
----- ------
2,750 12,164
===== ======
</TABLE>
3
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business,
primarily involving claims for personal injuries and property damage incurred
in the transportation of freight. The Company believes adverse results in one
or more of these cases would not have a material adverse effect on its
financial position or its results of operations. Effective January 1, 1999,
the Company self-insures the first $500,000 of liability for each occurrence
involving bodily injury and property damage during the policy year. The
Company also self-insures the second $500,000 of liability for each occurrence
until an aggregate of $1,000,000 of liability has been paid by the Company on
claims exceeding $500,000. The Company maintains insurance which covers
liability in excess of the self-insured amounts at coverage levels that
management considers adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
The Company's Common Stock is traded in the Nasdaq National Market
("Nasdaq") under the symbol "MSCA". The following table sets forth, for the
calendar periods indicated, the high and low sales prices for the Company's
Common Stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
High Low
--------------------------------------
<S> <C> <C>
1998
1st Quarter $ 33.6875 $ 27.6875
2nd Quarter 34.6875 25.0625
3rd Quarter 31.8125 19.8125
4th Quarter 31.625 16.00
1997
1st Quarter $ 17.75 $ 15.75
2nd Quarter 25.125 16.50
3rd Quarter 26.75 21.875
4th Quarter 27.9375 20.00
</TABLE>
On March 5, 1999, the last reported sales price of the Company's common
stock was $29.75 per share. At that date, the number of shareholders of record
was 191. The Company estimates that there are approximately 3,000 beneficial
owners of the Company's outstanding shares of Common Stock.
Dividend Policy
The Company has never paid a cash dividend on its Common Stock. It is the
current intention of the Company's Board of Directors to continue to retain
earnings to finance the growth of the Company's business rather than to pay
dividends. Future payment of cash dividends will depend upon the financial
condition, results of operations and capital commitments of the Company as
well as other factors deemed relevant by the Board of Directors.
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial statements and notes
thereto appearing elsewhere herein.
Year ended December 31 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
[In Thousands, except per share amounts]
<S> <C> <C> <C> <C> <C>
Statement of income data:
Operating revenues $ 528,841 $ 415,933 $ 340,236 $ 333,070 $ 292,883
Operating expenses:
Salaries, wages and benefits 163,225 133,517 127,237 126,176 111,493
Operations and maintenance 84,260 71,381 66,224 66,961 64,498
Taxes and licenses 11,425 10,708 8,973 10,024 8,746
Insurance and claims 20,833 18,462 18,777 15,666 14,471
Communications and utilities 6,914 5,711 5,209 6,081 4,698
Depreciation and amortization 49,794 40,094 37,010 39,143 33,694
Gains on disposals of revenue equipment (1,200) ( 490) (2,397)
Rent and purchased transportation 142,766 99,584 53,014 41,946 23,564
Other 3,901 2,077 2,362 2,435 2,058
-----------------------------------------------------------------------------------------------------------
Total operating expenses 481,918 381,044 316,409 308,432 263,222
-----------------------------------------------------------------------------------------------------------
Operating income 46,923 34,889 23,827 24,638 29,661
Interest expense 8,484 5,775 4,844 5,525 1,802
Other income (1,353) (320) (487) (1,424) (147)
-----------------------------------------------------------------------------------------------------------
Income before income taxes 39,792 29,434 19,470 20,537 28,006
Income taxes 14,524 10,472 7,031 7,386 10,856
-----------------------------------------------------------------------------------------------------------
Net income $ 25,268 $ 18,962 $ 12,439 $ 13,151 $ 17,150
===========================================================================================================
Basic earnings per share $ 2.06 $ 1.57 $ 1.03 $ 1.02 $ 1.33
===========================================================================================================
Diluted earnings per share $ 1.99 $ 1.54 $ 1.02 $ 1.01 $ 1.31
===========================================================================================================
Year ended December 31 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
[In Thousands]
Balance sheet data:
Total assets $ 484,009 $ 362,246 $ 290,662 $ 279,934 $ 276,073
Long-term obligations 146,595 79,977 45,373 47,377 51,187
Stockholders' equity 203,753 177,391 154,211 152,524 147,924
</TABLE>
5
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<TABLE>
<CATION>
The following tables set forth data regarding the freight revenues, operations, revenue equipment and
employees of the Company.
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
For the year ended December 31:
<S> <C> <C> <C> <C> <C>
Operating ratio(1) 91.1% 91.6% 93.0% 92.6% 89.9%
Average number of truckloads per week(1) 9,839 9,385 9,277 8,265 6,971
Average revenues per tractor per week(2) $ 2,702 $ 2,652 $ 2,575 $ 2,569 $ 2,613
Average miles per trip(2) 689 633 534 584 617
Average revenue per mile(2) $ 1.20 $ 1.19 $ 1.23 $ 1.25 $ 1.26
At December 31:
Total tractors operated:
Company owned 2,750 2,370 2,046 2,078 2,106
Owner-Operator owned 739 711 419 253 207
Owner-Operator leased 264 60 - - -
-----------------------------------------------------------------------------------------------------------
Total tractors 3,753 3,141 2,465 2,331 2,313
Total trailers 12,164 8,981 7,156 7,190 6,481
Number of employees 3,336 3,112 2,886 2,947 3,238
</TABLE>
(1) Operating expenses as a percentage of operating revenues.
(2) Excludes revenues from logistics services.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
The following table sets forth the percentage relationship of revenue and expense items to operating revenues
for the periods indicated.
Percentage of Operating Revenues
---------------------------------------
Year ended December 31 1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and benefits 30.9 32.1 37.4
Operations and maintenance 15.9 17.2 19.5
Taxes and licenses 2.2 2.6 2.6
Insurance and claims 3.9 4.4 5.5
Communications and utilities 1.3 1.4 1.5
Depreciation and amortization 9.4 9.6 10.9
Gains on disposals of revenue equipment (0.2) (0.1) (0.7)
Rent and purchased transportation 27.0 23.9 15.6
Other 0.7 0.5 0.7
--------------------------------------------------------------------------------------
Total operating expenses 91.1 91.6 93.0
--------------------------------------------------------------------------------------
Operating income 8.9 8.4 7.0
Interest expense 1.6 1.4 1.4
Other income (0.2) (0.1) (0.1)
--------------------------------------------------------------------------------------
Income before income taxes 7.5 7.1 5.7
Income taxes 2.7 2.5 2.0
--------------------------------------------------------------------------------------
Net income 4.8% 4.6% 3.7%
======================================================================================
</TABLE>
6
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<PAGE>
The sources of the Company's operating revenues were as follows:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
------------------------------------------------------------------------------
[In Thousands]
<S> <C> <C> <C>
Trucking Revenues:
Domestic Irregular Route $374,829 $313,734 $258,687
International Irregular Route(1) 53,618 38,849 31,080
Dedicated Route 53,203 28,266 27,644
------------------------------------------------------------------------------
Total Trucking Revenues 481,650 380,849 317,411
Logistics Revenues 60,939 45,135 24,781
Intersegment Eliminations (13,748) (10,051) (1,956)
------------------------------------------------------------------------------
Total Operating Revenues $528,841 $415,933 $340,236
==============================================================================
</TABLE>
(1) Includes Mexico transborder only.
The operating ratios (operating expenses as a percentage of operating
revenues) for the trucking and logistics segments and the Company's total
business were as follows:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
Trucking Segment 90.8% 91.6% 93.1%
Logistics Segment 96.1% 93.2% 92.5%
Total Company 91.1% 91.6% 93.0%
1998 Compared to 1997
Operating revenues grew 27.1% to $529 million in 1998 from $416 million in
1997. The Company's increase in revenues was due primarily to increased demand
from customers, expansion of the Company's fleet and increased logistics
revenues. Total trucking revenues during 1998 increased 26.5% compared to
1997, and logistics revenues during 1998 increased 35.0% compared to 1997.
The Company's fleet increased to 3,753 tractors at December 31, 1998 from
3,141 at December 31, 1997, an increase of 612 tractors. In March 1998, the
Company concluded the acquisition of certain assets of Challenger Motor
Freight (U.S.), Inc. including 195 company-owned tractors.
Revenues per mile were $1.20 in 1998 compared to $1.19 in 1997, due to a
slight increase in the average loaded rate per mile experienced by the Company
in 1998. Average length of haul increased to 689 miles in 1998 up from 633
miles in 1997.
The operating ratio (operating expenses as a percentage of operating
revenues) for 1998 was 91.1% compared to 91.6% for 1997. For the trucking
segment of the Company's business, the operating ratio for 1998 was 90.8%
compared to 91.6% for 1997. For the logistics segment of the Company's
business, the operating ratio for 1998 was 96.1% compared to 93.2% for 1997.
Salaries, wages and benefits decreased to 30.9% of revenues in 1998 compared
to 32.1% of revenues in 1997. This decrease was due primarily to the owner-
operator tractors representing a larger percentage of the average number of
total tractors in service during 1998 compared to 1997, which caused a shift
in operating expenses as amounts paid to owner-operators are recorded as
purchased transportation. The Company had 1003 owner-operators at December 31,
1998 compared to 771 at December 31, 1997.
Operations and maintenance expenses decreased to 15.9% of revenues in 1998
from 17.2% of revenues in 1997. This decrease resulted from the expanded use
of owner-operators and lower fuel costs.
Insurance and claims expense was 3.9% of revenues in 1998 compared to 4.4%
of revenues in 1997. This decrease was due primarily to increased logistics
revenues in 1998 and an improved accident claims experience in 1998.
Depreciation and amortization decreased to 9.4% of revenues in 1998 compared
to 9.6% of revenues in 1997. This decrease resulted primarily from the
expanded use of owner-operators and increased logistics revenues.
The Company reported gains equal to .2% of revenues, or approximately
$1,200,000, from the disposal of revenue equipment in 1998 compared to .1% of
revenues, or approximately $500,000, in 1997.
Rent and purchased transportation increased to 27.0% of revenues in 1998 from
23.9% of revenues in 1997. This increase was attributable primarily to the
expanded use of owner-operators by the Company and increased expenses related
to logistics services.
7
<PAGE>
Interest expense was $8,483,852 in 1998 compared to $5,775,020 in 1997. This
increase in interest expense was due to an increase in average outstanding
debt during 1998 as compared to 1997 as the Company incurred debt to finance
its expanded operations.
The effective income tax rate increased to 36.5% in 1998 compared to 35.6%
in 1997, as described in Note 7 to the Notes to Consolidated Financial
Statements.
1997 Compared to 1996
Operating revenues grew 22.2% to $416 million in 1997 from $340 million in
1996. The Company's increase in revenues was due primarily to increased demand
from customers, expansion of the Company's fleet and increased logistics
revenues. Total trucking revenues during 1997 increased 20.0% compared to 1996
and logistics revenues during 1997 increased 82.1% compared to 1996.
The Company's fleet increased to 3,141 tractors at December 31, 1997 from
2,465 at December 31, 1996, an increase of 676 tractors. In September 1997,
the Company concluded the acquisition of certain assets of New Hi-Way Express,
Inc., including 220 company-owned tractors and contracts with 42 owner-
operators.
Revenues per mile were $1.19 in 1997 compared to $1.23 in 1996, due to a
decrease in the average loaded rate per mile experienced by the Company in
1997. The decrease resulted from a change in freight mix rather than a change
in freight rates. Average length of haul increased to 633 miles in 1997 up
from 534 miles in 1996.
The operating ratio (operating expenses as a percentage of operating
revenues) for 1997 was 91.6% compared to 93.0% for 1996. For the trucking
segment of the Company's business, the operating ratio was 91.6% for 1997
compared to 93.1% for 1996. For the logistics segment of the Company's
business, the operating ratio was 93.2% for 1997 compared to 92.5% for 1996.
Salaries, wages and benefits decreased to 32.1% of revenues in 1997 compared
to 37.4% of revenues in 1996. This decrease was due primarily to the owner-
operator tractors representing a larger percentage of the average number of
total tractors in service during 1997 compared to 1996, which caused a shift
in operating expenses as amounts paid to owner-operators are recorded as
purchased transportation. The Company had 771 owner-operators at December 31,
1997 compared to 419 at December 31, 1996.
Operations and maintenance expenses decreased to 17.2% of revenues in 1997
from 19.5% of revenues in 1996. This decrease resulted from the expanded use
of owner-operators and lower fuel costs.
Insurance and claims expense was 4.4% of revenues in 1997 compared to 5.5%
of revenues in 1996. This decrease was due primarily to increased logistics
revenues in 1997 and to unfavorable claims experience during the last quarter
of 1996.
Depreciation and amortization decreased to 9.6% of revenues in 1997 compared
to 10.9% of revenues in 1996. This decrease resulted primarily from the
expanded use of owner-operators and increased logistics revenues.
The Company reported gains equal to .1% of revenues, or approximately
$500,000, from the disposal of revenue equipment in 1997 compared to .7% of
revenues, or approximately $2.4 million, in 1996.
Rent and purchased transportation increased to 23.9% of revenues in 1997
from 15.6% of revenues in 1996. This increase was attributable primarily to
the expanded use of owner-operators by the Company and increased expenses
related to logistics services.
Interest expense was $5,775,020 in 1997 compared to $4,844,062 in 1996. This
increase in interest expense was due to an increase in average outstanding
debt during 1997 as compared to 1996.
The effective income tax rate decreased to 35.6% in 1997 compared to 36.1%
in 1996, as described in Note 7 to the Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
The Company's business continues to require significant investments in new
revenue equipment and office and terminal facilities. These investments have
been financed largely from cash provided by operating activities, secured and
unsecured borrowing and unsecured credit facilities during the past three
years.
Net cash provided by operating activities was approximately $74.3 million in
1998, $59.2 million in 1997 and $53.7 million in 1996. At December 31, 1998,
the Company had total outstanding obligations of $173.8 million related to
purchases of revenue equipment.
The Company expects to have expenditures, net of sales, of approximately
$100 million for additional revenue equipment in 1999. The Company expects to
fund these expenditures through cash provided by operating activities, secured
borrowings, or existing credit facilities. Prevailing interest rates and the
market for used revenue equipment may affect the timing of the Company's
purchase of new and replacement revenue equipment. Historically, cash provided
by operating activities, secured and unsecured borrowing and existing credit
facilities have been sufficient to satisfy substantially all of the Company's
working capital and capital expenditure requirements. The Company has bank
lines of credit providing for total borrowings of up to $80 million, with
interest at the lower of the bank's prime rate or the 30-day LIBOR rate plus
.45%. At December 31, 1998, there was $58.6 million outstanding under these
lines of credit. Management expects to maintain these or similar credit
facilities for an indefinite period.
8
<PAGE>
Year 2000 Issues
The Company continues to assess the potential impact of the Year 2000 on the
Company's internal business systems and operations. The Company's Year 2000
initiatives include (i) testing and upgrading internal business systems and
facilities; (ii) contacting key suppliers, vendors and customers to determine
their Year 2000 compliance status; (iii) testing the interfacing of the
Company's internal information technology (IT) systems with the IT systems of
its principal customers and other third parties with whom the Company has
material relationships; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has completed its initial assessment of its IT systems for Year
2000 compliance. During this assessment, the Company identified certain
software applications that will have to be modified or updated for IT systems
to be Year 2000 compliant. The Company has obtained or will obtain such
modifications and updates. Based upon its initial assessment, the Company
believes that substantially all of its critical IT systems are Year 2000
compliant. The Company anticipates all critical IT systems will be Year 2000
compliant by July 31, 1999. The Company will continue periodic testing and
verification that its critical IT systems are Year 2000 compliant.
The Company has also assessed and identified embedded technology contained
in the Company's non-IT systems. As part of the Company's review of its Year
2000 issues, the Company is obtaining verification of the Year 2000 readiness
of this imbedded technology from its vendors and suppliers. As part of the
effort, the Company has developed and is distributing questionnaires relating
to Year 2000 compliance to its significant suppliers and vendors. The Company
intends to follow-up and monitor the Year 2000 compliance progress of its
significant suppliers and vendors.
During the first quarter of 1999, the Company commenced testing the
interfacing of the Company's IT systems with the IT systems of certain of its
principal customers and other third parties with whom the Company has material
relationships. The Company will continue this testing in an effort to minimize
operating disruptions due to Year 2000 issues. At present, the Company has not
identified any material customer or vendor which will not be Year 2000
compliant.
Estimated Costs to Address Year 2000 Issues
To date, costs incurred in connection with Year 2000 issues have not been
material. Management estimates that the total Year 2000 project costs will not
have a material impact on the Company's results of operation, liquidity or
financial condition. Except for expenditures for capital items, Year 2000
project costs are being expensed and are funded through cash from operations.
The Company has not yet deferred any IT project due to its Year 2000 efforts.
Risks of the Company's Year 2000 Issues
Virtually every aspect of the Company's trucking and logistics operations
might be disrupted if the Company's systems or the systems of the Company's
material customers, suppliers or vendors are not Year 2000 compliant. While
the Company is attempting to minimize any negative consequences arising from
Year 2000 issues, there can be no assurance that Year 2000 issues will not
have a material adverse impact on the Company's business, operations or
financial condition. Moreover, while the Company expects that upgrades to its
IT systems will be completed in a timely manner, there can be no assurances
that the Company will not encounter unexpected costs or delays. Further, if
any of the Company's significant customers, suppliers or vendors experience
business disruptions due to Year 2000 issues, the Company might be adversely
affected. At present, the Company is not able to determine whether there would
be a material impact on the Company's results of operations, liquidity or
financial condition if the Company's material customers and vendors are not
Year 2000 compliant.
Contingency Plans
The Company will formulate a contingency plan at that point in time when the
Company does not believe that a material customer, supplier or vendor will be
Year 2000 compliant. As the Company anticipates that all its material
customers, suppliers and vendors will be Year 2000 compliant, the Company has
not yet established a contingency plan.
Forward-Looking Statements
Certain statements and information included herein constitute "forward-
looking statements" within the meaning of the Federal Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed implied by
such forward-looking statements. Such factors include, among other things, the
ability to develop and implement operational and financial systems to manage
growing operations; the ability to acquire and integrate businesses and the
risks associated with such businesses; the ability to obtain financing on
acceptable terms to finance the Company's operations and growth; competition
within the industry; the ability to attract and retain quality drivers, and
other factors contained in the Company's filings with the Securities and
Exchange Commission.
9
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company has market risk exposure to changing interest rates. The
Company's policy is to manage interest rates through the use of a combination
of fixed and floating rate debt. Interest rate swaps may be used to adjust
interest rate exposure based on market conditions. These swaps are entered
into with a group of financial institutions with investment grade credit
ratings, thereby minimizing the risk of credit loss. At December 31, 1998, the
fair value of the Company's total long-term debt is approximately $174
million, using yields obtained for similar types of borrowing arrangements and
taking into consideration the underlying terms of the debt. Market risk is
estimated as the potential change in fair value resulting from a hypothetical
ten percent decrease in interest rates and amounts to $660,000 at December 31,
1998.
At December 31, 1998, the Company had $93.1 million of variable-rate debt.
The Company has entered into interest rate swaps which convert floating rates
to fixed rates for a total notional amount of $70 million. If interest rates
on the Company's variable-rate debt, after considering interest rate swaps,
were to increase by ten percent from their 1998 year-end rates for the whole
of 1999, the increase in interest expense for 1999 would be approximately
$125,000. The potential change in fair value of the Company's interest rate
swaps resulting from a hypothetical ten percent decrease in interest rates
would not be material to the Company's financial position at December 31,
1998.
Commodity Derivative Product Exposure
The Company has market risk exposure to changing diesel fuel prices. The
Company's policy is to manage fuel price exposure through the use of a
combination of spot price purchases, fixed price contracts from vendors and
commodity derivative products. Currently, the Company has entered into fuel
price swaps which convert floating spot fuel prices to fixed fuel prices for a
notional amount of 800,000 gallons per month through December 31, 1999 (which
represents approximately 18% of fuel consumed by Company owned fleet
operations at the current capacity and fleet configuration). If the fuel index
on which these derivatives are based were to decrease ten percent from its
1998 year-end level for the whole of 1999, the Company would have an increase
in fuel expense for the 1999 year of $336,000 as a result of the fuel price
swaps on the notional 800,000 gallons per month.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Financial Statement
Schedule are included on pages 14 to 27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers of the Company
is set forth under the captions "Information Regarding Directors and Executive
Officers," "Additional Information Related to the Board of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Registrant's Proxy Statement relating to its 1999 Annual Meeting of
Shareholders (the "1999 Proxy Statement") to be held on May 7, 1999, which is
incorporated by reference in this Form 10-K. With the exception of the
foregoing information and other information specifically incorporated by
reference in this Form 10-K, the 1999 Proxy Statement is not being filed as a
part hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth under the
captions "Executive Compensation," "Summary Compensation Table," "Option
Grants in 1998," "Aggregated Option Exercises in 1998 and Year-End Value
Table" and "Employment Contracts" in the 1999 Proxy Statement and is
incorporated by reference in the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is included under the caption "Beneficial Ownership of Common
Stock" in the 1999 Proxy Statement and is incorporated by reference in the
Form 10-K.
10
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Executive Compensation Committee of the Board of Directors is comprised
of Michael S. Starnes, Morris H. Fair and Jack H. Morris, III, all of whom
participated in deliberations concerning executive officer compensation. Mr.
Starnes also serves as President and Chief Executive Officer of the Company.
The Committee establishes the compensation for Mr. Starnes and reviews
compensation set by Mr. Starnes for other executive officers. Mr. Starnes does
not participate in the Committee's deliberations concerning his compensation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
(1) Financial Statements.
Report of Independent Auditors..........................14
Consolidated Balance Sheets.............................15
Consolidated Statements of Income.......................16
Consolidated Statements of Stockholders' Equity.........17
Consolidated Statements of Cash Flow....................18
Notes to Consolidated Financial Statements..............19
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the Company is
included herein on page 27. No other financial statement schedules are required.
(b) Reports on Form 8-K.
The Company did not file any report on Form 8-K during the last quarter of
1998.
(c) Exhibits.
An Exhibit Index of the exhibits required by Item 601 of Regulation S-K is
included on page 13.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
M.S. Carriers, Inc.
By: s/ Michael S. Starnes
-----------------------
Michael S. Starnes
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
s/ Michael S. Starnes Chairman of the Board, President, March 30, 1999
------------------- --------------
Michael S. Starnes Chief Executive Officer and Date
Director
s/ James W. Welch Senior Vice President - March 30, 1999
------------------- --------------
James W. Welch Marketing and Director Date
s/ M.J. Barrow Senior Vice President - March 30,1999
------------------- -------------
M.J. Barrow Finance and Administration, Date
Secretary-Treasurer and Director
s/ Dwight M. Bassett Vice President, Chief Accounting March 30,1999
------------------- --------------
Dwight M. Bassett Officer and Assistant Secretary Date
s/ Jack H. Morris, III Director March 30,1999
------------------- --------------
Jack H. Morris, III Date
Director
------------------- --------------
Carl J. Mungenast Date
s/ Morris H. Fair Director March 30,1999
------------------- --------------
Morris H. Fair Date
12
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Page Number or Incorporation
Number Description By Reference
3(i).1 Restated Charter of Incorporated by reference from
M.S. Carriers, Inc. exhibits to the Registrant's
Registration Statement on Form S-1
(Registration Number 33-12070).
3(i).2 Articles of Amendment to Incorporated by reference from
Charter of M.S. Carriers, exhibits to the
Inc. Registrant's Registration Statement
on Form S-3
(Registration Number 33-63280).
3(ii) Amended and Restated Incorporated by reference from
By-Laws of exhibits to the Registrant's
M.S. Carriers, Inc. Registration Statement on Form S-3
(Registration Number 33-63280).
10.1* Incentive Stock Option Incorporated by reference from
Plan exhibits to the Registrant's
Registration Statement on Form S-1
(Registration Number 33-12070).
10.2* Amendment to Incentive Incorporated by reference from
Stock Option Plan exhibits to the Registrant's
Registration Statement on Form S-1
(Registration Number 33-12070).
10.3* 1993 Stock Option Plan Incorporated by reference from
exhibits to the Registrant's
Registration Statement on Form S-3
(Registration Number 33-63280).
10.4* Non-Employee Directors Incorporated by reference from
Stock Option Plan Registrant's Proxy Statement dated
March 31, 1995.
10.5* Employment Agreements Incorporated by reference
with James W. Welch, from exhibits to the Registrant's
M.J. Barrow and Statement on Form S-1
Robert P. Hurt (Registration Number 33-12070).
10.6* Employment Agreement with Incorporated by reference from
Michael S. Starnes exhibits to the Registrant's 2nd
Quarter 1995 Form 10-Q.
10.7* M.S. Carriers, Inc. 1996 Incorporated by reference Option
Stock Option Plan Plan from exhibits to the Registrant's
Proxy Statement dated April 4, 1996
21 Subsidiaries of the Incorporated by reference to Exhibit
Registrant 21 of the Registrant's Form 10-K for
the year ended December 31, 1997
27 Financial Data Schedule Filed herewith
* Indicates management contract or compensatory plan or arrangement
13
<PAGE>
Report of Independent Auditors
Board of Directors
M.S. Carriers, Inc.
We have audited the accompanying consolidated balance sheets of M.S.
Carriers, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of M.S.
Carriers, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
S/Ernst & Young LLP
Memphis, Tennessee
January 27, 1999
14
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
M.S. Carriers, Inc.
Consolidated Balance Sheets
Year ended December 31 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,465,303 $351,919
Accounts receivable:
Trade, less allowance for doubtful accounts of
$2,418,000 in 1998 and $1,498,000 in 1997 54,892,449 44,551,316
Officers and employees 1,285,890 660,370
------------------------------------------------------------------------------
56,178,339 45,211,686
Recoverable income taxes 4,520,917
Deferred income taxes 7,143,000 5,427,000
Prepaid expenses and other 9,436,180 4,979,826
------------------------------------------------------------------------------
Total current assets 74,222,822 60,491,348
Property and equipment:
Land and land improvements 6,804,552 6,221,032
Buildings 30,128,055 30,128,055
Revenue equipment 444,639,971 326,709,385
Service equipment and other 43,202,780 40,089,062
Construction in progress 2,421,531 114,015
------------------------------------------------------------------------------
527,196,889 403,261,549
Accumulated depreciation and amortization 128,045,907 106,090,776
------------------------------------------------------------------------------
399,150,982 297,170,773
Other assets 10,635,682 4,584,340
------------------------------------------------------------------------------
Total assets $484,009,486 $362,246,461
==============================================================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $14,856,055 $5,448,110
Accrued compensation and related costs 5,066,654 2,343,595
Other accrued expenses 11,729,668 8,438,898
Claims payable 18,072,814 14,826,627
Income taxes payable 2,943,883
Current maturities of long-term obligations 27,214,227 15,737,609
------------------------------------------------------------------------------
Total current liabilities 79,883,301 46,794,839
Long-term obligations, less current maturities 146,595,170 79,977,266
Deferred income taxes 53,777,739 58,083,519
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued and outstanding shares-12,260,101 in
1998 and 12,210,601 in 1997 122,601 122,106
Additional paid-in capital 65,269,015 64,175,260
Retained earnings 140,365,314 115,097,125
Cumulative other comprehensive loss (2,003,654) (2,003,654)
------------------------------------------------------------------------------
Total stockholders' equity 203,753,276 177,390,837
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $484,009,486 $362,246,461
==============================================================================
</TABLE>
See accompanying notes.
15
<PAGE>
<TABLE>
<CAPTION>
M.S. Carriers, Inc.
Consolidated Statements of Income
Year ended December 31 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $528,841,314 $415,932,825 $340,235,583
Operating expenses:
Salaries, wages and benefits 163,224,933 133,517,321 127,236,924
Operations and maintenance 84,260,614 71,380,518 66,224,264
Taxes and licenses 11,425,054 10,707,885 8,972,386
Insurance and claims 20,832,807 18,462,037 18,776,953
Communications and utilities 6,913,782 5,710,433 5,208,967
Depreciation and amortization 49,794,229 40,093,988 37,010,281
Gains on disposals of (1,199,851) (489,519) (2,397,205)
revenue equipment
Rent and purchased transportation 142,765,753 99,584,257 53,014,083
Other 3,901,274 2,077,206 2,361,881
-------------------------------------------------------------------------------
481,918,595 381,044,126 316,408,534
- -------------------------------------------------------------------------------
Operating income 46,922,719 34,888,699 23,827,049
Other expense (income):
Interest expense 8,483,852 5,775,020 4,844,062
Other (1,353,558) (319,977) (487,414)
-------------------------------------------------------------------------------
7,130,294 5,455,043 4,356,648
- -------------------------------------------------------------------------------
Income before income taxes 39,792,425 29,433,656 19,470,401
Income taxes 14,524,236 10,471,883 7,031,357
Net income $25,268,189 $18,961,773 $12,439,044
===============================================================================
Basic earnings per share $ 2.06 $ 1.57 $ 1.03
===============================================================================
Diluted earnings per share $ 1.99 $ 1.54 $ 1.02
===============================================================================
</TABLE>
See accompanying notes.
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
M.S. Carriers, Inc.
Consolidated Statements of Stockholders' Equity
Cumulative
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 12,464,400 $124,644 $62,076,687 $92,301,919 $(1,979,231) $152,524,019
Comprehensive income:
Net income 12,439,044 12,439,044
Other comprehensive income:
Foreign currency translation (24,423) (24,423)
----------
Comprehensive income 12,414,621
Other changes in stockholders' equity:
Exercise of stock options 131,333 1,313 801,681 802,994
Repurchase of common stock (586,100) (5,861) (2,918,778) (8,605,611) (11,530,250)
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 12,009,633 120,096 59,959,590 96,135,352 (2,003,654) 154,211,384
Net income 18,961,773 18,961,773
Issuance of common stock
upon business acquisition 153,468 1,535 3,574,270 3,575,805
Exercise of stock options 47,500 475 641,400 641,875
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 12,210,601 122,106 64,175,260 115,097,125 (2,003,654) 177,390,837
Net income 25,268,189 25,268,189
Exercise of stock options 49,500 495 1,093,755 1,094,250
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 12,260,101 $122,601 $65,269,015 $140,365,314 $(2,003,654) $203,753,276
================================================================================================================
</TABLE>
See accompanying notes.
17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
M.S. Carriers, Inc.
Consolidated Statements of Cash Flows
Year ended December 31 1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $25,268,189 $18,961,773 $12,439,044
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 49,580,210 40,093,988 37,010,281
Amortization 214,019
Gain on disposals of revenue equipment (1,199,851) (489,519) (2,397,205)
Other (91,113) (220,695) (324,759)
Deferred income taxes (6,021,780) 8,366,096 10,669,902
Changes in operating assets and liabilities:
Accounts receivable (10,966,653) (10,687,051) (5,699,198)
Other (3,150,798) 1,533,687 (1,084,198)
Trade accounts payable 9,407,945 (1,840,039) 2,951,302
Other current liabilities 11,253,899 3,485,198 154,542
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 74,294,067 59,203,438 53,719,711
Investing activities
Purchases of property and equipment (75,114,762) (96,025,327) (57,929,668)
Proceeds from disposals of property and equipment 29,754,012 34,064,457 19,958,710
Business acquisitions (17,033,000) (672,739)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (62,393,750) (62,633,609) (37,970,958)
Financing activities
Proceeds from long-term obligations 139,515
Net change in line of credit obligations 10,102,811 23,403,189 12,213,000
Proceeds from issuance of common stock 1,094,250 641,875 802,994
Repurchase of common stock (11,530,250)
Principal payments on long-term obligations (21,983,994) (21,416,967) (16,706,478)
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (10,786,933) 2,628,097 (15,081,219)
-----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,113,384 (802,074) 667,534
Cash and cash equivalents at beginning of year 351,919 1,153,993 486,459
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,465,303 $ 351,919 $ 1,153,993
===============================================================================================
</TABLE>
See accompanying notes.
18
<PAGE>
<PAGE>
M.S. Carriers, Inc.
Notes to Consolidated Financial statements
1. Nature of Business
M.S. Carriers, Inc. (the Company) operates an irregular route, truckload
carrier transporting a wide range of commodities throughout the United
States, and between the United States and the provinces of Ontario and Quebec,
Canada. The Company also provides interline service to and from Mexico. The
Company's primary traffic flows are between the Middle South and the
Southwest, Midwest, Central States, Southeast and Northeast. The principal
types of freight transported are packages, retail goods, nonperishable
foodstuffs, paper and paper products, household appliances, furniture and
packaged petroleum products.
The Company also provides logistics services.
2. Significant Accounting Policies
Organization and Principles of Consolidation
The consolidated financial statements include the accounts of M.S. Carriers,
Inc. and its wholly-owned subsidiaries, M.S. Carriers Warehousing and
Distribution, Inc., M.S. Carriers Logistics Mexico, S.A. de C.V., M.S.
International, Inc. and M.S. Global, Inc. Significant intercompany accounts
and transactions have been eliminated in consolidation. The Company accounts
for its 50% investment in Transportes EASO S.A. de C.V. (EASO), a Mexican
trucking company, by the equity method. This investment is classified as other
assets in the consolidated financial statements and is approximately
$2,458,000 and $1,503,000 at December 31, 1998 and 1997, respectively. The
Company recognized income of approximately $955,000 in 1998 and $306,000 in
1997 from its investment in EASO. The operations of EASO were approximately
breakeven in 1996.
Revenue Recognition
Operating revenues are recognized on the date freight is delivered.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation, which includes
amortization of assets held under capital leases, is computed on the straight-
line method over the estimated useful lives as follows:
Buildings 15-30 years
Revenue equipment 3-6 years
Service equipment and other 3-5 years
Tires and tubes purchased as part of revenue equipment are capitalized as a
cost of the equipment. Replacement tires and tubes are expensed when placed in
service.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of businesses acquired over fair
value of net tangible and identifiable intangible assets at the date of
acquisition. Goodwill, which is net of accumulated amortization of $100,000 at
December 31, 1998, is being amortized using the straight-line method over
estimated useful lives of 5 to 10 years. Other intangible assets, which are
net of accumulated amortization of $114,000 at December 31, 1998, are being
amortized using the straight-line method over periods of up to five years.
Foreign Currency Translation
Prior to January 1, 1997, the functional currency of the Company's foreign
subsidiary and equity investee was the local currency, the Mexican peso.
Balance sheet accounts were translated at exchange rates in effect at the end
of the year and income statement accounts were translated at average exchange
rates for the year. Translation gains and losses were included as a separate
component of stockholders' equity.
Effective January 1, 1997, Mexico was designated as a highly inflationary
economy. As a result, the functional currency was changed from the local
currency to the reporting currency. Translation gains and losses beginning
January 1, 1997, are recorded in the statement of income rather than as a
separate component of stockholders' equity. Effective January 1, 1999, Mexico
is no longer designated as a highly inflationary economy.
19
<PAGE>
Income Taxes
The Company accounts for income taxes using the liability method.
Earnings Per Share
Basic earnings per share has been computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options, calculated using the treasury stock
method.
Risks and Uncertainties
The preparation of 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
the accompanying notes. Actual results could differ from those estimates.
Valuation of Long-Lived Assets
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on the amount that
the carrying value exceeds the fair market value of such asset.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25) and related interpretations as
permitted by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123).
Interest Rate Swaps
The Company enters into interest rate swap agreements to modify the interest
characteristics of its outstanding debt. These agreements involve the
exchange of amounts based on a fixed interest rate for amounts based on
variable interest rates over the life of the agreement without an exchange of
the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt. The related amount
payable to or receivable from counterparties is included in accrued expenses
or other current assets. The fair value of the swap agreements and changes in
the fair value as a result of changes in market interest rates are not
recognized in the financial statements.
Concentrations of Credit and Market Risks
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base and their dispersion across many different industries. The Company
performs ongoing credit evaluations and generally does not require collateral.
The Company's sales are principally denominated and collected in the U.S.
dollar.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes
rules for the reporting of comprehensive income and its components.
Comprehensive income for the Company is presented in the consolidated
statement of stockholders' equity. The adoption of SFAS No. 130 by the
Company had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform with the requirements of SFAS No.
130. The Company's comprehensive income consists of net income and foreign
currency translation adjustments.
Recently Issued Accounting Pronouncements
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This statement requires companies to
record derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values
of a derivative are accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 is effective for the
Company's fiscal year 2000. Management anticipates that the adoption of SFAS
No. 133 will not have a significant effect on the results of operations or
financial position of the Company.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified to conform with the 1998 presentation.
20
<PAGE>
3. Change in Accounting Estimate
Effective February 1, 1996, the Company changed the estimated salvage value
of substantially all of its trailers to more accurately reflect market
conditions. This change in accounting estimate decreased depreciation expense
in 1996 by approximately $3,500,000, resulting in an increase in net income of
approximately $2,200,000 and an increase in both basic and diluted earnings
per share of $.18 per share for the year ended December 31, 1996.
4. Business Acquisitions
In March 1998, the Company acquired substantially all of the assets,
consisting primarily of revenue equipment, and assumed certain liabilities of
a truckload carrier located in Ohio. In connection with this acquisition, the
Company paid cash of approximately $7,556,000 and recorded a holdback
liability of $700,000. The acquisition resulted in goodwill of $500,000.
In November 1998, the Company acquired substantially all of the assets,
consisting primarily of revenue equipment, and assumed certain liabilities of
a truckload caier located in Wisconsin. In connection with this acquisition,
the Company paid cash of approximately $9,477,000 and recorded a holdback
liability of $250,000. The acquisition resulted in goodwill of $450,000.
In September 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of a truckload carrier located in Arkansas. The
Company acquired assets, which consisted primarily of revenue equipment,
totaling approximately $19,575,000 and assumed liabilities, which consisted
primarily of capitalized lease obligations, totaling approximately
$15,943,000. In connection with this acquisition, the Company issued to the
seller 153,468 shares of the Company's common stock valued at $3,575,805,
recorded approximately $443,000 in deferred payments and paid cash of
$673,000. The acquisition resulted in goodwill of approximately $1,060,000.
Each of the acquisitions was accounted for using the purchase method of
accounting. Therefore, the results of operations of the acquired businesses
are included in the consolidated financial statements of the Company from
their respective acquisition dates.
5. Long-Term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 31 1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Capitalized lease obligations $ 115,234,397 $ 42,604,559
Equipment loans 4,638,127
Revolving lines of credit 58,575,000 48,472,189
-----------------------------------------------------------------
173,809,397 95,714,875
Less current maturities (27,214,227) (15,737,609)
-----------------------------------------------------------------
$ 146,595,170 $ 79,977,266
=================================================================
</TABLE>
The Company has a line of credit available for borrowings of up to
$60,000,000 with interest at the lower of the bank's prime rate or the 30-day
LIBOR rate plus .45% (5.99% at December 31, 1998). The balance outstanding
under this line of credit was $38,575,000 and $38,472,189 at December 31, 1998
and 1997, respectively. There are no commitment fees or compensating balance
requirements for the line of credit, which expires June 1, 2000.
The Company also has an agreement with a bank to provide for borrowings of
up to $10,000,000 under a line of credit. The line of credit bears interest at
varying rates based upon the lower of the bank's prime rate or the 30-day
LIBOR rate plus .45% (5.9 at December 31, 1998). The balance outstanding under
this line of credit, which expires June 3, 1999, was $10,000,000 at December
31, 1998 and 1997. This amount is classified as a long-term obligation in the
accompanying consolidated balance sheets because the Company intends to
refinance the line of credit on a long-term basis through a new credit
facility or through the existing $60,000,000 line of credit.
During 1998, the Company entered into an agreement with a bank to provide
for borrowings of up to $10,000,000 under a new line of credit. The line of
credit bears interest at the lower of the banks' prime rate or the 30-day
LIBOR rate plus .45% (5.99% at December 31, 1988) and expires April 26, 2000.
The balance outstanding under this line of credit was $10,000,000 at December
31, 1998.
During 1998, the Company entered into various lease agreements to lease
revenue equipment with a fair value of approximately $86,802,000. These
capital leases are secured by the related revenue equipment and bear interest
at fixed and variable rates. Additionally, in connection with the 1998
acquisitions described in Note 4, the Company assumed approximately $3,174,000
in capitalized lease obligations related to acquired revenue equipment with a
fair value of approximately $10,330,000 at the time of acquisition.
21
<PAGE>
During 1997, the Company entered into a sale-leaseback transaction related
to revenue equipment with a fair value of approximately $18,300,000. These
capital leases are secured by the related revenue equipment and bear interest
at varying rates based upon the 30-day LIBOR less .60%. Additionally, in
connection with the 1997 acquisition described in Note 4, the Company assumed
approximately $15,700,000 in capitalized lease obligations related to acquired
revenue equipment with a fair value of approximately $19,175,000 at the time
of acquisition.
The Company's capital leases, including new leases entered into or assumed
in 1998 and 1997, have remaining lease terms of 1 to 5 years and contain
guarantees of residual value at the end of the lease terms. Certain of the
leases contain renewal or fixed-price purchase options. The leases are secured
by revenue equipment with a net book value at December 31, 1998 and 1997, of
approximately $116,256,000 and $56,445,000, respectively, which is net of
accumulated amortization of $17,962,000 and $10,630,000, respectively, and
bear interest at fixed and variable rates ranging from 4.2% to 8.0%. The
weighted-average interest rate on the Company's fixed-rate debt is
approximately 5.9% at December 31, 1998.
At December 31, 1998, the Company has entered into interest rate swaps which
convert floating interest rates to fixed interest rates ranging from 5.74% to
6.50% for a total notional amount of $70 million.
Certain of the Company's debt agreements contain covenants including
required ratios of notes payable to net worth and notes payable to cash flow.
The future maturities of long-term debt and future minimum lease payments
under capitalized lease obligations, by year and in the aggregate, consist of
the following at December 31, 1998:
<TABLE>
<CAPTION>
Long-Term Capitalized
Debt Lease Obligations
------------------------------------------------------------------
<S> <C> <C>
1999 $ $ 32,517,914
2000 58,575,000 31,495,870
2001 29,488,153
2002 15,077,699
2003 20,216,220
------------------------------------------------------------------
58,575,000 128,795,856
Amounts representing interest 13,561,459
------------------------------------------------------------------
Total long-term obligations $ 58,575,000 $ 115,234,397
==================================================================
</TABLE>
The Company paid interest of approximately $8,344,000 in 1998, $5,775,000 in
1997, and $4,769,000 in 1996.
6. Claims Payable
Under an agreement with its insurance underwriters through December 31,
1998, the Company self-insured for accident liabilities of $1,500,000 for the
initial occurrence per policy year, $1,250,000 for the second occurrence per
policy year, and $1,000,000 for each occurrence thereafter involving bodily
injury and property damage. Excess liability is assumed by the insurance
underwriters. Reserves for claims are provided in amounts which management
considers adequate. Effective January 1, 1999, the Company entered into a new
agreement to reduce its self-insured retention limit for accident claims.
The Company self-insures employee health claims up to $175,000 per employee
per policy year and workers' compensation claims up to $300,000 per employee
per policy year and has provided reserves which management considers adequate
for the Company's estimated liability for covered claims.
22
<PAGE>
7. Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Income tax
expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $17,616,578 $1,931,443 $(3,085,513)
State 2,929,438 174,344 (553,032)
-------------------------------------------------------------------
20,546,016 2,105,787 (3,638,545)
Deferred:
Federal (5,163,198) 7,173,148 9,148,595
State (858,582) 1,192,948 1,521,307
-------------------------------------------------------------------
(6,021,780) 8,366,096 10,669,902
-------------------------------------------------------------------
$14,524,236 $10,471,883 $7,031,357
===================================================================
</TABLE>
The effective tax rate varied from the statutory federal income tax rate of
35% as follows:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Taxes at statutory rate $13,927,349 $10,301,780 $6,814,640
State income taxes, net of 1,422,578 919,231 696,066
federal tax benefits
Other (825,691) (749,128) (479,349)
-------------------------------------------------------------------
$14,524,236 $10,471,883 $7,031,357
===================================================================
</TABLE>
Income tax payments (refunds) were approximately $13,078,000 in 1998, $351,000
in 1997, and $(2,046,000) in 1996.
Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 54,919,170 $ 59,234,157
Other net 1,958,669 1,969,673
----------------------------------------------------------
Total deferred tax liabilities 56,877,839 61,203,830
Deferred tax assets:
Claims payable 6,971,588 5,719,357
Other-net 3,271,512 2,827,954
----------------------------------------------------------
Total deferred tax assets 10,243,100 8,547,311
----------------------------------------------------------
Net deferred tax liabilities $ 46,634,739 $ 52,656,519
==========================================================
</TABLE>
8. Employee Benefit Plans
The M.S. Carriers, Inc. Retirement Savings Plan (the Plan) is a defined
contribution plan under Section 401(k) of the Internal Revenue Code (IRC) and
provides for voluntary contributions by employees and matching contributions
by the Company. All employees who are 19 years of age or older and have
completed six months of service are eligible for the Plan. The Plan provides
each participant with the option of contributing from 1% to 15% of the
employee's annual compensation subject to IRC limitations. The Company matches
the employee contribution up to 50% of the participant's contribution, but
limited to a maximum of 3% of the participant's compensation. The Company's
contribution to the Plan, net of forfeitures, was approximately $1,318,000 in
1998, $1,098,000 for 1997, and $1,178,000 for 1996.
23
<PAGE>
9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income available to common
stockholders $25,268,189 $18,961,773 $12,439,044
==============================================================================
Denominator:
Weighted-average shares for basic
earnings per share 12,254,067 12,074,140 12,123,472
Dilutive employee stock options 475,339 261,064 121,401
------------------------------------------------------------------------------
Adjusted weighted-average shares for
diluted earnings per share 12,729,406 12,335,204 12,244,873
==============================================================================
Basic earnings per share $ 2.06 $ 1.57 $ 1.03
==============================================================================
Diluted earnings per share $ 1.99 $ 1.54 $ 1.02
==============================================================================
</TABLE>
10. Stock Options
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123 requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company's Stock Option Plans (the Option Plans) provide for the granting
of either qualified or nonqualified stock options. Options are subject to
terms and conditions determined by the Compensation Committee of the Board of
Directors. Options granted under the 1986 Incentive Stock Option Plan
generally are exercisable in increments of one-third per year beginning two
years from the date of grant. Options granted under the 1993 and 1996 Stock
Option Plans are exercisable five years from the date of grant. All options
expire ten years from the date of grant. Under the Option Plans, the Company
may grant options to purchase up to a total of 2,600,000 shares of common
stock at the prevailing market price at the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
No. 123. The fair value for the Company's options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997, and 1996, respectively: risk-free
interest rates of 5.7% in 1998, 5.3% in 1997, and 6.6% in 1996, a volatility
factor of the expected market price of the Company's common stock of .30 in
1998, .27 in 1997, and .25 in 1996; a weighted-average expected life of the
options of 7 years, and no dividend payments.
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 is amortized to expense over the respective options' vesting period.
The Company's SFAS No. 123 pro forma information follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $25,268,189 $18,961,773 $12,439,044
Pro forma compensation expense (1,308,983) (1,323,462) (762,396)
-----------------------------------------------------------------------------
Pro forma net income $23,959,206 $17,638,311 $11,676,648
=============================================================================
Pro forma basic earnings per share $1.98 $1.46 $.96
=============================================================================
Pro forma diluted earnings per share $1.90 $1.43 $.95
=============================================================================
</TABLE>
Because SFAS No. 123 applies only to stock-based compensation awards for 1995
and future years, the pro forma disclosures under SFAS No. 123 are not likely
to be indicative of future disclosures until the disclosures reflect all
outstanding, nonvested awards.
24
<PAGE>
A summary of the Company's stock option plan activity is as follows:
<TABLE>
<CAPTION>
Number of Shares Weighted Average
Under Option Exercise Price
----------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1996 654,000 $ 15.18
Granted 1,539,000 19.03
Exercised (131,333) 6.11
Canceled (365,667) 19.86
----------------------------------------------------------------
Balance at December 31, 1996 1,696,000 18.37
Granted 516,500 20.93
Exercised (47,500) 13.93
Canceled (429,000) 18.67
----------------------------------------------------------------
Balance at December 31, 1997 1,736,000 19.01
Granted 758,000 28.85
Exercised (49,500) 22.11
Canceled (476,500) 23.92
----------------------------------------------------------------
Balance at December 31, 1998 1,968,000 $ 21.53
================================================================
</TABLE>
Options exercisable were 315,500, 200,833 and 177,999 at December 31, 1998,
1997, and 1996, respectively. The weighted-average fair value of options
granted during 1998, 1997, and 1996 was $11.43, $8.86, and $8.37,
respectively. Exercise prices for options outstanding as of December 31, 1998
ranged from $7.19 to $34.25. At December 31, 1998, the Company had reserved
403,667 shares of its common stock for issuance pursuant to stock option
plans.
The following table segregates option information between ranges of exercise
prices as of December 31, 1998:
<TABLE>
<CAPTION>
Exercise Price
Less Than $10 Greater Than $10 Total
--------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares under option 132,000 1,836,000 1,968,000
Weighted-average exercise price $7.19 $22.56 $21.53
Weighted-average years of 2.0 7.65 7.27
remaining contractual life
Exercisable options 132,000 183,500 315,500
Weighted-average exercise price $7.19 $19.75 $14.50
of exercisable options
</TABLE>
11. Commitments and Contingencies
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material effect on the
Company's financial position or results of operations.
12. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value. The book value of long-term
obligations, including current portion, approximates fair value based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the Company's interest rate swap agreements is
a liability of approximately $3.8 million at December 31, 1998.
13. Industry Segments
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information,
which changes the way the Company reports information about its operating
segments. The information for 1997 and 1996 has been restated from the prior
years' presentation in order to conform with the 1998 presentation.
The Company's two reportable segments are trucking operations and logistics.
These segments are classified primarily by the type of services they provide.
Performance of the segments is generally evaluated by their operating income.
The trucking operations provide irregular route freight transport services
to customers. The logistics operations arrange freight transportation for
customers using various carriers, including the trucking segment of the
Company, through agency relationships with its customers. Customers of both
the trucking operations and logistics operations primarily include
manufacturing, retail, wholesale and courier service companies.
A trucking customer, Sears, accounted for 10% or more of revenues in 1998,
1997, and 1996 with revenues of $66,428,000, $59,577,000, and $57,358,000,
respectively.
25
<PAGE>
Summarized segment information is shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
-------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating revenues:
Trucking (including trucking revenues
received from logistics) $481,650 $380,849 $317,411
Logistics 60,939 45,135 24,781
Elimination of trucking revenues
received from logistics (13,748) (10,051) (1,956)
-------------------------------------------------------------------------
$ 528,841 $ 415,933 $ 340,236
=========================================================================
Operating income:
Trucking $ 44,546 $ 31,820 $ 21,968
Logistics 2,377 3,069 1,859
-------------------------------------------------------------------------
$ 46,923 $ 34,889 $ 23,827
=========================================================================
</TABLE>
Due to the minimal amount of long-lived assets required by the logistics
operations, the Company does not separately report such assets and related
depreciation and amortization expense in its financial records used for
allocating Company resources and evaluating operating performance. The Company
allocated operating overhead costs of approximately $2,930,000, $2,300,000,
and $1,260,000 in 1998, 1997, and 1996, respectively, to the logistics
operations for purposes of determining operating income and evaluating
performance. Cost allocations to the logistics operations are based primarily
on payroll costs.
14. Selected Quarterly Data (Unaudited)
Summarized quarterly data for 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $117,203,825 $133,624,361 $137,512,075 $140,501,053
Operating expenses 108,848,896 120,815,512 124,360,633 127,893,554
-------------------------------------------------------------------------------
Operating income 8,354,929 12,808,849 13,151,442 12,607,499
Other expense 1,440,546 1,870,274 1,949,900 1,869,574
-------------------------------------------------------------------------------
Income before taxes 6,914,383 10,938,575 11,201,542 10,737,925
Income taxes 2,523,750 3,992,579 4,088,562 3,919,345
-------------------------------------------------------------------------------
Net income $4,390,633 $6,945,996 $7,112,980 $6,818,580
===============================================================================
Basic earnings
per share $ .36 $ .57 $ .58 $ .56
===============================================================================
Diluted earnings
per share $ .35 $ .54 $ .56 $ .54
===============================================================================
1997
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------
Operating revenues $92,699,990 $101,511,950 $107,465,935 $114,254,950
Operating expenses 86,806,599 92,422,387 97,140,083 104,675,057
-------------------------------------------------------------------------------
Operating income 5,893,391 9,089,563 10,325,852 9,579,893
Other expense 1,249,589 1,397,517 1,670,508 1,137,429
-------------------------------------------------------------------------------
Income before taxes 4,643,802 7,692,046 8,655,344 8,442,464
Income taxes 1,643,822 2,790,178 3,085,265 2,952,618
-------------------------------------------------------------------------------
Net income $2,999,980 $4,901,868 $5,570,079 $5,489,846
===============================================================================
Basic earnings
per share $ .25 $ .41 $ .46 $ .45
===============================================================================
Diluted earnings
per share $ .25 $ .40 $ .45 $ .44
===============================================================================
</TABLE>
26
<PAGE>
<PAGE>
Schedule II
Valuation and Qualifying Accounts
M.S. Carriers, Inc.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description Of Period Expenses Accounts Deductions Of Period
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $1,497,651 $1,122,289 $201,464 (1) $2,418,476
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $ 514,610 $1,268,497 $285,456 (1) $1,497,651
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $ 508,919 $ 400,000 $394,309 (1) $ 514,610
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
27
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, AND
THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
DECEMBER 31, 1998, AND THE NOTES RELATED THERETO AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,465,303
<SECURITIES> 0
<RECEIVABLES> 57,310,925
<ALLOWANCES> 2,418,476
<INVENTORY> 0
<CURRENT-ASSETS> 74,222,822
<PP&E> 527,196,889
<DEPRECIATION> 128,045,907
<TOTAL-ASSETS> 484,009,846
<CURRENT-LIABILITIES> 79,883,301
<BONDS> 146,595,170
<COMMON> 122,601
0
0
<OTHER-SE> 203,753,276
<TOTAL-LIABILITY-AND-EQUITY> 484,009,486
<SALES> 0
<TOTAL-REVENUES> 528,841,314
<CGS> 0
<TOTAL-COSTS> 481,918,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,483,852
<INCOME-PRETAX> 39,792,425
<INCOME-TAX> 14,524,236
<INCOME-CONTINUING> 25,268,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,268,186
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 1.99
</TABLE>
