ITEM 1. BUSINESS
M.S. Carriers, Inc. 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 has both common and contract authority, granted by the Interstate Commerce Commission 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 Western, Southeast, Southwest, Middle South, Central States and Northeast. The average length of a trip (one-way) was approximately 534 miles in 1996 and 584 miles in 1995. The principal types of freight transported are packages, retail goods, nonperishable foodstuffs, paper and paper products, household appliances, furniture and packaged petroleum products.
Marketing _________
M.S. Carriers, Inc. 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 dependable late-model equipment which allows timely deliveries, 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.
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 sources are the medium to long line-haul and the regional short-haul segments of the dry van truckload market. In these markets, 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 markets and position the Company to meet the anticipated needs of its customers.
The Company had revenues of $31.1 million in 1996 and $28.3 million in 1995 from freight shipments having either a point of origin or a point of destination in Mexico. These shipments represented approximately 9.1% and 8.4%, respectively, of total revenues for 1996 and 1995.
The largest 25, 10 and 5 customers accounted for approximately 65%, 48% and 36%, respectively, of the Company's revenues during 1996. Most of these customers are large, publicly-held companies. One customer, Sears, accounted for approximately 17% of the Company's revenues during 1996 and 18% in 1995. No other customer accounted for more than 10% of the Company's revenues during 1996 or 1995.
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 enroute 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 550 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.
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.
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. Fuel prices in 1996 rose substantially as compared to 1995.
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.
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.
The Company maintains a defined contribution plan under Section 401(k) of the Internal Revenue Code for drivers and all other employees. The Company matches 50% of the employee's contribution, but limited to a maximum of 3% of the employee's compensation. The Company also grants to each driver and other employees, after the completion of six months of service, an option to purchase 500 shares of the Company's Common Stock at the market price on the date of grant. The option is exercisable five years from the date of grant provided the driver or employee continues 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. 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 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. The Company intends to continue its emphasis on recruiting owner-operators.
Since competition for qualified drivers is intense, the Company emphasizes the importance of attracting and retaining qualified drivers. The Company employs eight full-time driver recruiters and three full-time owner-operator recruiters. The driver compensation programs, together with the Company's late-model equipment and relatively short trips, provide important incentives to attract and retain qualified drivers. Despite these incentives, the Company experiences difficulty from time to time in attracting and retaining qualified drivers.
At December 31, 1996, the Company employed 2,886 persons, of whom 2,124 were drivers, 238 were mechanics and other equipment maintenance personnel, and 524 were support personnel including management and administration. The Company also leased 419 tractors with qualified drivers from 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.
ITEM 2.

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, 1996, the Company owned and operated 2,070 Company- owned tractors and leased 419 tractors owned by owner-operators. The Company's tractors include 2,046 over-the-road and 24 local tractors. The Company owns 7,156 van trailers, of which 429 are 48 feet long and 6,727 are 53 feet long; 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. During 1996, the Company
reduced its replacement cycle on tractors from 4 years to 3 years. The Company constantly monitors the fuel efficiency of its power equipment. The miles-per-gallon average of the entire fleet was approximately 5.58 in 1996.
The following table shows the type and age of equipment operated by the Company at December 31, 1996:
ITEM 3.

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. The Company self-insures for liability of $1,500,000 for the largest occurrence per policy year, $1,250,000 for the second largest occurrence per policy year, and $1,000,000 for each other occurence involving bodily injury and property damage. The Company maintains insurance which covers liability in excess of the self-insured amounts at coverage levels that management considers adequate.
ITEM 4.

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 1996.
PART II
ITEM 5.

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 over-the-counter market 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 the National Association of Securities Dealers Automated Quotations System (NASDAQ).
As of March 7, 1997, the Company's common stock was held by approximately 3,000 stockholders of record or through nominee or street name accounts with brokers.
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.
ITEM 6.

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.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth the percentage relationship of revenue and expense items to operating revenues for the periods indicated.
RESULTS OF OPERATIONS
1996 Compared to 1995
Operating revenues increased to $340 million in 1996 from $333 million in 1995. This 2.1% increase in revenue was due primarily to increased revenue from logistics and dedicated fleet services. Total trucking revenues during 1996 increased slightly compared to 1995. Revenues per mile were $1.23 in 1996 compared to $1.25 in 1995, due to a decrease in the average loaded rate per mile experienced by the Company in 1996.
Salaries, wages and benefits were 37.4% of revenues in 1996 compared to 37.9% of revenues in 1995. The decrease was due to owner-operator tractors representing a larger percentage of the average number of total tractors in service during 1996 as compared to 1995, which caused a shift in operating expenses as amounts paid to owner-operators are recorded as purchased transportation.
Operations and maintenance expenses decreased to 19.5% of revenues in 1996 from 20.1% of revenues in 1995, despite higher fuel costs. This decrease resulted from the larger percentage of owner-operator tractors used in 1996 and an updated fleet of tractors due to a reduction in the disposal cycle of tractors.
Taxes and licenses expense was 2.6% of revenues in 1996 compared to 3.0% in 1995. This decrease was due to various unexpected sales and operating tax refunds received from overpayments of taxes in prior years.
Insurance and claims expense was 5.5% of revenues in 1996 compared to 4.7% in 1995. This increase was attributable primarily to unfavorable claims experience during the last quarter of 1996.
Depreciation and amortization decreased to 10.9% of revenues in 1996 compared to 11.8% of revenues in 1995. This decrease resulted primarily from a change in accounting estimate to increase the estimated salvage value of substantially all of the Company's trailers to more accurately reflect market conditions. See Note 3 of the Notes to Consolidated Financial Statements.
The Company reported gains equal to .7% of operating revenues, or approximately $2.4 million, from the disposal of revenue equipment in 1996. Prior to 1996, the Company traded in revenue equipment and reduced the basis of new additions.
Rent and purchased transportation increase to 15.6% of revenues in 1996 compared to 12.6% of revenues in 1995. This increase was attributable primarily to the increased use of owner-operators by the Company and increased expenses related to logistics services.
Interest expense was $4,844,062 in 1996 compared to $5,524,467 in 1995. This decrease in interest expense was due to the decrease in average outstanding debt during 1996 as compared to 1995.
The effective income tax rate increased to 36.1% in 1996 compared to 36.0% in 1995, as described in Note 6 of the Notes to Consolidated Financial Statements.
1995 Compared to 1994
Operating revenues grew 13.7% to $333 million in 1995 from $293 million in 1994. This growth was due to the increase in the average number of tractors in service during the year and increased revenues from logistics services.
Revenues per mile were $1.25 in 1995 compared to $1.26 in 1994. There were no material rate increases during 1995.
Salaries, wages and benefits were 37.9% of revenues in 1995 compared to 38.1% of revenues in 1994. This decrease was due to owner-operator tractors representing a larger percentage of the average number of total tractors in service during 1995 compared to 1994.
Operations and maintenance expenses decreased to 20.1% of revenues in 1995 from 22.0% of revenues in 1994. This decrease resulted from the larger percentage of owner-operator tractors used in 1995.
Insurance and claims expense was 4.7% of revenues in 1995 compared to 5.0% in 1994. This decrease was due principally to improvement in claims handling and experience.
Depreciation and amortization increased slightly in 1995 to 11.8% of revenues from 11.5% of revenues in 1994. This increase resulted from the Company reducing its trade-in cycle of tractors during 1995, a reduced utilization of tractors in 1995 and the addition of a fleet-wide satellite tracking system which was installed in the latter part of 1994. This was partially offset by an increase in the use of owner-operators and expanded revenues from logistics services.
Rent and purchased transportation rose to 12.6% of revenues in 1995 compared to 8.0% of revenues in 1994. The increase was attributable primarily to increased use of owner-operators and expenses incurred related to the Company's logistics services.
Interest expense was $5,524,467 in 1995 compared to $1,801,981 in 1994. This increase in interest expense was due to the increase in average outstanding debt during 1995.
The effective income tax rate decreased to 36.0% in 1995 from 38.8% in 1994, as described in Note 6 of 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 $53.7 million in 1996, $55.4 million in 1995, and $55.8 million in 1994. At December 31, 1996, the Company had total outstanding obligations of $60 million related to purchases of revenue equipment.
The Company expects to have expenditures, net of sales, of approximately $48 million for additional revenue equipment in 1997. 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 separate bank lines of credit providing for borrowings of up to $30 million and $5 million, respectively, with interest at the lower of the bank's prime rate or the 30-day LIBOR rate plus .45%. At December 31, 1996, there was $25.1 million outstanding under these lines of credit. Management expects to maintain these lines of credit for an indefinite period.
In 1995, the Company announced a plan to repurchase 1,000,000 of its shares of common stock. The Company repurchased 586,100 of its shares during 1996 and 413,900 of its shares during 1995 at the aggregate costs of approximately $11.5 million and $7.8 million, respectively. Primarily as a result of the repurchase of these shares, the Company's weighted average common shares and common share equivalents have decreased from 13,097,586 in 1994 to 12,244,873 in 1996
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Financial Statement Schedules are included on pages 28 to 46.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and certain other information about the Company's directors, executive officers and other officers as of March 7, 1997 are set forth below:
Name Age Position
Michael S. Starnes 52 Chairman of the Board, President, Chief Executive Officer and Director
James W. Welch 53 Senior Vice President - Marketing and Director
M. J. Barrow 52 Senior Vice President - Finance and Administration, Secretary - Treasurer and Director
Mike Reaves 52 Senior Vice President - Driver Services
Robert P. Hurt 62 Vice President - Maintenance, Assistant Secretary and Director
John W. Hudson 56 Vice President - Human Resources
Jerry L. Stairs 55 Vice President - Safety and Risk Management
Kenneth B. Stonebrook 35 Vice President - Asset Utilization
Carl J. Mungenast 57 Advisor to the Chairman and Director
Daniel P. Goodspeed 30 Controller
Morris H. Fair 67 Director
Jack H. Morris, III 66 Director
Michael S. Starnes has served as a director, Chief Executive Officer and President of the Company since 1978. In 1986, Mr. Starnes was named Chairman of the Board. Mr. Starnes is also a director of RFS Hotel Investors, Inc., a real estate investment trust.
James W. Welch joined the Company in 1982 as a director and Vice President- Sales. In 1989, Mr. Welch was named Senior Vice President-Marketing of the Company and is an executive officer of the Company.
M. J. Barrow joined the Company in 1982 as Controller and Treasurer. Shortly thereafter, he was elected as a director of the Company and named Vice President-Finance. Mr. Barrow was named Secretary-Treasurer of the Company in 1986 and Senior Vice President-Finance of the Company in 1989. In 1996, he was named Senior Vice President - Finance and Administration.
Mike Reaves joined the Company on June 20, 1994 and was named Vice President-Driver Services of the Company in 1995. In 1996, he was named Senior Vice President - Driver Services. Prior to joining the Company, Mr. Reaves was employed by Yellow Corporation, the parent company of several less-than-truckload carriers, for more than five years in various sales management positions.
Robert P. Hurt joined the Company in 1983 as a director and Vice President- Operations and Maintenance. Mr. Hurt was named Vice President-Maintenance of the Company in 1984.
John M. Hudson joined the Company in 1990 and was named Vice President- Human Resources of the Company in 1991 and Vice President-Process and Individual Development of the Company in 1994. In 1996, he resumed the position of Vice President - Human Resources
Jerry L. Stairs joined the Company in 1986 and was named Vice President- Safety and Risk Management of the Company in 1993.
Kenneth B. Stonebrook joined the Company 1983 and was named Vice President-Human Resources of the Company in 1994. He was named Vice President and General Manager - Southeast Region in 1996 and became Vice President - Asset Utilization in 1997.
Carl J. Mungenast joined the Company as Executive Vice President and Chief Operating Officer in April 1994. Mr. Mungenast was elected as a director of the Company in May 1994. In June 1996, for health reasons, Mr. Mungenast's duties were curtailed and he was named Advisor to the Chairman. Mr. Mungenast was employed by Sears Roebuck and Company from 1958 until his retirement in December 1993. At the time of his retirement, he was Senior Vice President for Sears Logistics Services in Itasca, Illinois and responsible for all distribution, transportation and home delivery services for Sears.
Daniel P. Goodspeed joined the Company in 1995 and was named Controller of the Company in 1997. Mr. Goodspeed was employed by Deloitte & Touche LLP from October 1991 until he joined the Company.
Morris H. Fair has served as a director of the Company since 1986. Mr. Fair has been a Senior Vice President of Union Planters Corporation, a bank holding company, for more than five years.
Jack H. Morris, III has served as a director of the Company since 1986. Mr. Morris has been Chief Executive Officer of Auto Glass of Memphis, Inc. for more than five years.
The Amended and Restated Bylaws of the Company provide for a Board of Directors consisting of not less than three members, which number may be fixed from time to time by resolution of the Board of Directors. The term of each director expires at the next annual meeting of shareholders following the election of the director.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The following table and related notes summarizes the compensation paid by the Company to its Chief Executive Officer and the four other most highly compensated executive officers for the three fiscal years ended December 31, 1996.
The following table sets forth information with respect to stock options granted to the Chief Executive Officer and each of the four other most highly compensated executive officers during the year ended December 31, 1996.
The following table sets forth information with respect to stock options exercised by the Chief Executive Officer and each of the four other most highly compensated executive officers during the year ended December 31, 1996.
Employment Contracts ____________________
The Company has employment agreements with Michael S. Starnes, Carl J. Mungenast, James W. Welch and M.J. Barrow. Under each of these employment agreements, the Executive Compensation Committee of the Company's Board of Directors determines the annual base salary of the executive officer and may award discretionary bonuses to the executive officer. Each executive officer is entitled to participate in all employee benefit plans generally available to the Company's employees. The Company shall reimburse all ordinary and necessary business expenses incurred by each of these executive officers. Each of these employment agreements provide that the employment of the executive officer may be terminated by either the Company or the executive officer upon thirty days notice. Mr. Mungenast's and Mr. Welch's employment agreements contain certain non-competition and confidentiality provisions which continue after the term of their employment.
Compensation of Director ________________________
Directors who are not full-time employees receive a fee of $1,500 for each meeting of the Board of Directors they attend and for each Committee meeting they attend if not held on a day on which a meeting of the Board of Directors is held. Directors who are also officers of the Company receive no additional compensation for services as directors. Under the Company's Non-Employee Director Stock Option Plan, which was approved by the shareholders, each non-employee director received on September 14, 1994, an automatic, non- discretionary award of an option to purchase 2,500 shares of Common Stock and all new non-employee directors will receive a similar award upon their election to the Board. The option price per share is equal to the fair market value of the Common Stock on the date of the grant. Each stock option shall vest and become exercisable in five (5) equal annual installments on the anniversary dates of the date of the grant. If a non-employee director ceases to be a director of the Company for any reason other than death or disability, all options granted to him or her shall immediately terminate; provided, however, the non-employee director shall have thirty (30) days from the date on which he or she ceased to be a director to exercise any portion of the option which was exercisable on the date that the non-employee director ceased to be a director of the Company.
Compensation Committee Interlocks and Inside Participation in Compensation Decisions ______________________________________________
Compensation decisions regarding the executive officers of the Company are made by the Executive Compensation Committee of the Company's Board of Directors. The Executive Compensation Committee consists of Michael S. Starnes, the Company's President and Chief Executive Officer, and the Company's two non-employee directors, Morris H. Fair and Jack H. Morris, III.
Compliance With Section 16(a) of the Securities Exchange Act of 1934 ____________________________________
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than ten-percent shareholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
The Company believes that, during the fiscal year ended December 31, 1996, all filing requirements under Section 16(a) of the Exchange Act applicable to its officers, directors and greater than ten percent beneficial owners were complied with on a timely basis.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's authorized capital stock consists of 20,000,000 shares of Common Stock, par value $.01 per share. As of March 7, 1997, the Company had 12,009,633 shares outstanding. The following table sets forth certain information as of March 7, 1997, with respect to the beneficial ownership of the Company's Common Stock by (i) each person known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock; (ii) each director of the Company; (iii) each executive officer named in the Summary Compensation Table in Item 11; and (iv) all directors and executive officers as a group.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Starnes owns 20% and his brother, C.R. Bobby Starnes, owns 40% of the common stock of Southern Drayage, Inc., a Mississippi corporation ("SDI"). SDI is a motor common carrier providing services in markets which are not served by the Company. During 1996, the Company paid SDI $547,000 for transportation services provided by SDI to the Company's logistics operations. The terms on which SDI provided services to the Company were no less favorable than those which the Company could have obtained from other carriers.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
(1) The following consolidated Financial Statements of the Company and its Subsidiaries are included herein on the page indicated.
Page No. Report of Independent Auditor 29 Consolidated Balance Sheets 30-31 Consolidated Statements of Income 32 Consolidated Statements of Stockholders' Equity 33 Consolidated Statements of Cash Flow 34 Notes of Consolidated Statements 35-45
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the Company is included herein on page 46.
(3) Exhibits -- An Exhibit Index of the exhibits required by Item 601 of Regulation S-K is included herein on page 26-27.
(b) Reports on Form 8-K.
The Company did not file any report on Form 8-K during the last quarter of 1996.
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. (Registrant)
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, Michael S. Starnes Chief Executive Officer and March 28, 1997 Director Date
s/ Carl J. Mungenast Advisor to the Chairman and Carl J. Mungenast Director March 28, 1997 Date
s/ James W. Welch Senior Vice President - March 28, 1997 James W. Welch Marketing and Director Date
s/ M.J. Barrow Senior Vice President - March 28, 1997 M.J. Barrow Finance and Administration, Date Secretary-Treasurer and Director
s/ Robert P. Hurt Vice President - Maintenance, March 28, 1997 Robert P. Hurt Assistant Secretary and Director Date
Jack H. Morris, III Director
Morris H. Fair Director
s/ Daniel P. Goodspeed Controller March 28, 1997 Daniel P. Goodspeed Date
EXHIBIT INDEX
Exhibit Page Number or Incorporation Number Description By Reference
3(i).1 Restated Charter of M.S. Carriers, Incorporated by reference from Inc. exhibits to the registrant's Registration Statement on Form S-1 (Registration Number 33-12070).
3(i).2 Articles of Amendment to Charter Incorporated by reference from of M.S. Carriers, Inc. exhibits to the registrant's Registration Statement on Form S-3 (Registration Number 33-63280).
3(ii) Amended and Restated By-Laws of M.S. Incorporated by reference from Carriers, Inc. exhibits to the registrant's Registration Statement on Form S-3 (Registration Number 33-63280).
10.1 Incentive Stock Option Plan Incorporated by reference from exhibits to the registrant's Registration Statement on Form S-1 (Registration Number 33-12070).
10.2 Amendment to Incentive Stock Option Incorporated by reference from 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 Stock Option Incorporated by reference Plan from registrant's Proxy Statement dated March 31, 1995.
10.5 Employment Agreements with James W. Incorporated by reference Welch, M.J. Barrow and Robert P. from exhibits to the Hurt registrant's Statement on Form S-1 (Registration Number 33-12070).
10.6 Employment Agreement with Michael S. Incorporated by reference Starnes from exhibits to the registrant's 2nd Quarter 1995 Form 10-Q.
10.7(i) Employment Agreement with Carl J. Incorporated by reference Mungenast from exhibits to the registrant's 2nd Quarter 1995 Form 10-Q.
10.7(ii) Amendment to Employment Agreement Page 47-48 with Carl J. Mungenast
10.8 1993 Incentive Plan for Designated Incorporated by reference Key Employees from exhibits to the registrant's 2nd Quarter 1995 Form 10-Q.
10.9 M.S. Carriers, Inc. 1996 Stock Incorporated by reference Option Plan from exhibits to the registrant's Proxy Statement dated April 4,
21 Subsidiaries of the Registrant Page 49
27 Financial Data Schedule NOT INCLUDED WITH PAPER FILING
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
Index of Financial Statements and Financial Statement Schedule
Financial Statements and Supplementary Data
Certain Exhibits
Financial Statement Schedule
Year ended December 31, 1996
M.S. Carriers, Inc.
Memphis, Tennessee
Report of Independent Auditors
Board of Directors M.S. Carriers, Inc.
We have audited the accompanying consolidated balance sheets of M.S. Carriers, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in 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 the 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. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 17, 1997
M.S. Carriers, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Nature of Business
M.S. Carriers, Inc. is an irregular route, truckload carrier transporting a wide range of commodities throughout the United States, and the provinces of Ontario and Quebec, Canada, with interline service to Mexico. The Company may 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 another state over any route selected by the Company. The Company's primary traffic flows are between the Middle South and Southwest, Midwest, Central States, Southeast and Northeast. The principal types of freight transported are packages, retail goods, non-perishable foodstuffs, paper and paper products, household appliances, furniture and packaged petroleum products.
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.
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 Trasportes EASO S.A. de C.V. (EASO), a Mexican trucking company, by the equity method. This investment is included in other assets in the consolidated financial statements and is approximately $1,197,000 and $1,254,000 at December 31, 1996 and 1995 respectively. The operations of EASO were approximately break even in 1996, 1995 and 1994.
Revenue Recognition
Operating revenues are recognized on the date the 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.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary and equity investee is the local currency, the Mexican peso. Balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the year. Translation gains and losses are included as a separate component of stockholders' equity. Transaction gains and losses included in the statement of income were not significant.
Effective January 1, 1997, Mexico is considered to be a highly inflationary economy. As a result, the functional currency will change from the local currency to the reporting currency and translation gains and losses will be made to income beginning in the first quarter of 1997 rather than as a separate component of stockholders' equity.
Income Taxes
The Company accounts for income taxes using the liability method.
Earnings Per Share
Earnings per share is computed based on the weighted average number of common shares outstanding during the year, adjusted to include common stock equivalents attributable to dilutive options.
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.
Stock-Based Compensation
The Company accounts for stock-based compensation awards under provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
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 by approximately $3,500,000 and increased net income by approximately $2,200,000, or $.18 per share, for the year ended December 31, 1996.
4. Long-Term Obligations
Long-term obligations consist of the following:
The equipment loans are payable through 1998 in varying monthly installments with interest at rates ranging from 5.7% to 8.12% and $1,000,000 of these loans are secured by revenue equipment with a net book value of approximately $4,100,000.
The Company has separate lines of credit available for borrowings up to $30,000,000 and $5,000,000, respectively, with interest at the lower of the bank's prime rate or the 30-day LIBOR rate plus .45% (6.01% and 6.26% at December 31, 1996 and 1995, respectively). There are no commitment fees or compensating balance requirements for the lines of credit, which expire June 1, 1998 and April 30, 1997, respectively.
During 1994, the Company entered into sale leaseback transactions related to revenue equipment. These capitalized leases are secured by the related revenue equipment with a net book value at December 31, 1996 and 1995 of approximately $23,100,000 and $26,100,000, respectively, which is net of accumulated amortization of $6,900,000 and $3,900,000, respectively. The remaining lease terms are from 1 to 3 years and contain renewal or fixed price purchase options and guarantees of residual value at the end of the lease terms.
Certain of the Company's debt agreements contain covenants including the 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 capital lease obligations, by year and in the aggregate, consist of the following at December 31, 1996:
The Company paid interest of approximately $4,769,000 in 1996, $5,524,000 in 1995 and $1,819,000 in 1994.
5. Claims Payable
Under an agreement with its insurance underwriters, the Company self-insures for liability of $1,500,000 for the initial occurence 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.
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.
6. 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 basis 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:
The effective tax rate varied from the statutory federal income tax rate of 35% as follows:
Income tax payments (refunds) were approximately $(2,046,000) in 1996, $6,593,000 in 1995 and $2,573,000 in 1994.
The Company has alternative minimum tax credit carryforwards of approximately $1,057,000 at December 31, 1996 which have no expiration date and which have been utilized for financial statement purposes.
Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows:
7. Employee Benefit Plans
Effective October 1, 1996 the M.S. Carriers, Inc. Profit Sharing Plan and Trust (the Profit Sharing Plan) was merged into M.S. Carriers, Inc. Retirement Savings Plan (the Savings Plan). Pursuant to the merger, the individual account balances of all employees in the Profit Sharing Plan were transferred to the Savings Plan. Concurrent with the merger of the plans, the Savings Plan was amended and restated.
The amended and restated Savings Plan is a defined contribution plan under Section 401(k) of the Internal Revenue Code which 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 Savings Plan. The Savings Plan provides each participant with the option of contributing from 1% to 15% of the employee's annual compensation. 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 Savings Plan, net of forfeitures, was approximately $1,178,000 for 1996, $1,078,000 for 1995 and $840,000 for 1994. The Company's contribution to the Profit Sharing Plan was approximately $323,000 for 1994. No contributions were made to the Profit Sharing Plan by the Company during 1995 and 1996.
8. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 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 and expire ten 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. 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 FASB Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.6% and 6.5%; a volatility factor of the expected market price of the Company's common stock of .25; 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 pro forma information follows:
Year Ended December 31 1996 1995 _______________________________
Pro forma net income $11,676,648 $13,104,073 Pro forma net income per share $ .95 $ 1.01
Because Statement 123 applies only to stock-based compensation awards for 1995 and future years, the pro forma disclosures under Statement 123 are not likely to be indicative of future disclosures until the disclosures reflect all outstanding, nonvested awards.
Options exercisable were 177,999, 229,669 and 214,002 at December 31, 1996, 1995 and 1994, respectively. The weighted-average fair value of options granted during 1996 and 1995 was $8.37 and $9.82, respectively. Exercise prices for options outstanding as of December 31, 1996 ranged from $7.19 to $25.50.
9. Stockholders' Equity
In November 1995, the Board of Directors authorized the purchase of up to one million shares of the Company's common stock in the open market. The Company repurchased and retired approximately 586,000 shares at a cost of approximately $11,500,000 in 1996 and approximately 414,000 shares at a cost of approximately $7,800,000 in 1995 under this authorization.
At December 31, 1996, the Company had reserved 772,667 shares of its common stock for issuance pursuant to stock option plans.
10. Significant Customers
The Company operates primarily in one business segment, that of a truckload carrier. One customer, Sears, accounted for 10% or more of revenues in 1996, 1995, and 1994 with revenues of $57,358,000, $59,533,000 and $43,876,000, respectively.
11. Commitments and Contingencies
The Company has noncancelable contracts to purchase revenue equipment of approximately $66,000,000 during 1997.
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 following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, accounts receivable, and accounts payable: The carrying amounts reported in the balance sheet approximate fair value.
Long-term obligations, including current portion: Using a discounted cash flow analyses, the book value approximates fair value based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
13. Selected Quarterly Data (Unaudited)
(A) Includes the effect of a change in accounting estimate. See note 3.