UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1996 Commission File No. 000-22490 LANDAIR SERVICES, INC. (Exact name of registrant as specified in its charter) TENNESSEE 62-1120025 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 430 AIRPORT ROAD GREENEVILLE, TENNESSEE 37745 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (423) 636-7000 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) 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 period that the registrant was required to file 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. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 17, 1997 was approximately $29,907,639 based on the closing price of such stock on such date of $11.375. The number of shares outstanding of the registrant's common stock as of March 17, 1997 was 5,952,880. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the 1997 annual meeting of shareholders are incorporated by reference into Part III of this report. Such definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to December 31, 1996. TABLE OF CONTENTS
Page Number ----------- Part I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Executive Officers of the Registrant 9 Part II Item 5. Market for Registrant's Common Stock and 11 Related Shareholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on 16 Accounting and Financial Disclosure Part III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial 17 Owners and Management Item 13. Certain Relationships and Related Transactions 17 Part IV Item 14. Exhibits, Financial Statement Schedules and 18 Reports on Form 8-K Signatures 19
PART I ITEM 1. BUSINESS GENERAL Landair Services, Inc. (the "Company") is a high-service level truckload carrier and contractor to the air cargo industry providing time-definite service in the United States and Canada. The Company was incorporated in Tennessee in 1981. The Company provides scheduled trucking services to air freight forwarders, fully integrated air cargo carriers and domestic and international airlines through its Forward Air operations. The Company services its air freight forwarder, air cargo and airline customers primarily through a hub and spoke network of 62 terminals, located at or near major airports in the United States and Canada, and linked through a central sorting facility in Columbus, Ohio. Through its Truckload operations, the Company provides short- to medium-haul delivery to the high-service segment of the general commodities truckload market. The Truckload operations include a common carrier operation that serves customers on an "on demand" basis and a dedicated fleet operation in which trucks and drivers are dedicated to shippers with specific, high-service requirements. FORWARD AIR OPERATIONS The Company's Forward Air operations serve the unique and growing deferred air freight market. Unlike typical overnight letters and packages, deferred air freight is comprised of freight and packages that will have time-definite delivery in two to four days. Forward Air receives air freight from air freight forwarders, air cargo and airline customers at 62 terminal facilities and provides airport-to-airport transportation of the freight to the terminal nearest to the freight's destination. The transportation requirements of Forward Air are met through direct shuttles, some of which offer overnight service, and through the Columbus central sorting facility. The Company's freight forwarder customers vary in size from small independent, single facility air freight forwarders to large, international logistics companies. Since operations were commenced in November 1990, the average weekly volume of freight carried through the Forward Air network has grown from approximately 1.2 million pounds to approximately 10.5 million pounds in 1996. Forward Air operations accounted for approximately 50% of the Company's 1996 operating revenue. The Company's strategy in its Forward Air operations is to capitalize on the growing market for deferred air freight from both domestic and international air cargo customers through its unique hub-and-spoke network. 3 TRUCKLOAD OPERATIONS Common Carrier Services. The Company's common carrier operations primarily consist of short-to-medium haul shipments, typically between 250 and 700 miles. Although serving the contiguous 48 states, the Company's Truckload operations are primarily concentrated in the eastern half of the United States, allowing the Company to focus on selected operating lanes. The Company's ability to stay within these lanes allows it to maximize service for its customers while minimizing such operating costs as empty miles and driver layovers. The common carrier operations concentrate on providing high levels of consistent service for customers whose shipping requirements fall into the service-sensitive segment of the truckload market rather than that segment which uses price as its primary consideration. For example, these operations provide common carrier services to certain of the integrated air carriers and for just-in-time manufacturers with narrow delivery windows. The customers of the common carrier operations normally demand scheduled pick-up and delivery and often give short notice for equipment needs. The common carrier operations have been successful in meeting customer needs with on-time performance in excess of 98% in its primary service area. The trend of shippers over the past several years has been toward the use of a relatively small number of financially stable "core carriers". The Company's strategy in its common carrier operations is to take advantage of growth opportunities that exist as a result of this trend. In addition, an important element in the Company's strategy for expanding its core carrier operations lies in the cross-utilization of its revenue equipment to satisfy peak demands in its Forward Air operations. Dedicated Contract Carriage Services. The Company's dedicated contract carriage services involve management for all or a significant part of a customer's transportation operations. Under a dedicated carriage service agreement, the Company typically provides drivers, equipment and maintenance, and, in some instances, transportation management that replaces the customer's in-house transportation department. This service allows a customer to reduce overall transportation costs by minimizing both capital expenditures and personnel costs. At current operating levels, the annual revenue from dedicated contract carriage service agreements aggregates approximately $15.0 million. Management believes the dedicated contract carriage services operations are well positioned to capitalize on the increasing trend of many shippers to outsource virtually all of their transportation requirements. The Company's strategy in its dedicated contract carriage operations will be to continue to focus on expansion of services in this area, including business with existing common carrier customers, so that the Company's dedicated operations can ultimately manage most or all of a customer's transportation needs on a dedicated fleet basis. Logistics Services. The Company also offers logistics services for some of its customers by acting as an agent to arrange transportation of all loads tendered, regardless of destination, available power or the type of trailing equipment required. Truckload operations accounted for approximately 50% of the Company's 1996 operating revenue. 4 REVENUE EQUIPMENT The Company purchases high quality tractors to help attract and retain drivers, promote safe operations and minimize maintenance and repair costs. When purchasing new revenue equipment, the Company typically acquires standardized tractors and trailers manufactured to the Company's specifications. Standardization enables the Company to simplify driver training, control the cost of spare parts inventory and enhance its preventive maintenance program. The Company has purchased most of its tractors from Freightliner Corporation and its trailers from Great Dane Corporation. The majority of the tractors purchased are equipped with Series 60 Detroit Diesel electronic engines which have contributed significantly to increased fuel efficiency for the Company. It is the Company's current practice to trade in its tractors after three or four years and its trailers after seven years. The Company's purchase and lease agreements for tractors generally provide for a repurchase option by the manufacturer at predetermined prices. As of December 31, 1996, the Company operated 518 Company-owned tractors and leased 376 tractors from owner-operators. The average age of the Company-operated tractor fleet was approximately 2.5 years at December 31, 1996. As of December 31, 1996, the Company owned 1,922 van trailers, of which 1,758 are 53' long, 164 are 48' long, and 216 include specialized roller bed equipment required to serve air cargo industry customers. By having a majority of the Company's trailer fleet equipped with 53' trailers, the Company is able to provide its customers with more economy and convenience and increased driver productivity. The average age of the trailer fleet was approximately 2.8 years at December 31, 1996. The Company has installed Qualcomm two-way satellite communication systems in the majority of its tractors. The Qualcomm system provides the Company with continuous communications capability in the event a driver experiences a service delay or disruption. The Qualcomm system also allows the Company to track the exact location and route of any particular shipment and communicate instantly with drivers to improve operating efficiencies. EMPLOYEES AND OWNER-OPERATOR DRIVERS As of December 31, 1996, the Company employed approximately 1,500 persons. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. The Company recognizes that its professional driver workforce is one of its most valuable assets. Drivers are selected by the Company in accordance with guidelines relating to safety records, driving experience and personal evaluations. Over the past several years, the Company has introduced several driver retention programs including the creation of a pay package that more fairly compensates drivers for the work associated with their job. The pay package includes extra pay items in addition to the drivers' mileage-based pay. The expense and cost of driver retention 5 and recruitment has increased in recent years. Recruitment is difficult due to Company standards and an industry shortage of qualified drivers. See "Safety". The Company also recognizes that the selection process for owner-operators is equally as important as for Company drivers. The use of owner-operators provides the Company with marketing, operating, safety, driver recruiting, retention and financial advantages. The Company focuses on the special needs of owner-operators through programs designed to reduce their operating costs. The Company plans to continue its emphasis on recruiting owner-operators. SAFETY The Company has an active safety and loss prevention program and has established a driver qualification policy. Drivers who exceed the maximum acceptable number of accidents or traffic citations within a specified time period are reviewed and monitored by the safety department. The driving and employment records of drivers are verified. During the past two years, the Company enhanced its safety program with a series of safe driving campaigns, safety contests, quarterly driver terminal safety meetings, and communication of safety data to drivers and management personnel. The program is designed to heighten awareness of and focus attention on safety related issues. INSURANCE Claims exposure in the trucking industry consists primarily of cargo loss and damage, vehicle liability, property damage and workers' compensation. The Company maintains a significant deductible for auto liability claims, for physical damage claims and for cargo claims. The Company also is responsible for workers' compensation claims in certain of the states in which it operates, and is subject to state programs in certain states where employer participation in state sponsored programs is mandated. The Company maintains insurance with independent insurance carriers that provide certain coverage for claims in excess of deductible amounts. Management believes that the Company's insurance coverage is reasonable. REGULATION Prior to December 29, 1995, the Company's operations in interstate commerce were regulated by the Interstate Commerce Commission ("ICC"). Effective December 29, 1995, President Clinton signed into law the Interstate Commerce Commission Termination Act of 1995 which closed the ICC and transferred its remaining responsibilities to a new Surface Transportation Board and the Federal Highway Administration. In addition, interstate motor carrier operations are subject to safety requirements prescribed by the Department of Transportation. Such matters as weight and dimension of equipment are also subject to federal and state regulations. The Company's Canadian operations are subject to similar requirements imposed by the laws and regulations of the Dominion of Canada and various provincial laws and 6 regulations. The Company is subject to various federal, state and local environmental laws and regulations. Management believes that the Company is in substantial compliance with applicable regulatory requirements relating to its operations. Failure of the Company to comply with the applicable regulations could result in substantial fines or revocation of the Company's operating permits. The Company has aboveground fuel storage tanks at its Indianapolis, Indiana facility and underground fuel storage tanks at its Columbus, Ohio facility. Such storage tanks are subject to various federal and state environmental laws and regulations. Management believes that the Company is in substantial compliance with applicable environmental laws and regulations. No material increase for expenditures for compliance with federal, state and local environmental laws and regulations is anticipated in 1997. COMPETITION AND INDUSTRY TRENDS The Company competes with regional, inter-regional and national truckload carriers and, to a lesser extent, with less-than-truckload carriers, railroads and overnight delivery companies. Many of the Company's competitors have greater financial resources, more equipment or larger freight capacity than the Company. Service and price are the principal means of competition in the transportation industry. Management believes the market for its Forward Air operations will be less affected by competition than will most other segments of the transportation industry because of its unique network. The transportation of air freight requires significant capital assets, including a fleet of dependable equipment, a large centrally located sorting facility, an extensive communication system, a skilled workforce and a large sales operation. In order to effectively compete, any new entrant would have to be able to immediately develop a comparable network which would require it to dedicate a full complement of equipment and establish multiple terminals in order to demonstrate the ability to handle a large number of shipments destined for many geographically diverse locations and to meet critical delivery deadlines. Management also believes that in addition to its established market presence, the Company's ability to access additional revenue equipment, other support services and management from the Company's Truckload operations gives it greater flexibility to meet peak demands within its Forward Air operations without the attendant increase in capital expenditures. The Company's principal competitive strength is its ability to consistently provide reliable service at a competitive price. Many of the Company's customers are high volume shippers which require a flexible and dependable motor carrier service tailored to their specific needs, including pick-up within specified delivery times. 7 ITEM 2. PROPERTIES The Company's headquarters are located in Greeneville, Tennessee and are leased from the Greeneville-Greene County Airport Authority under a lease expiring in 2006. The headquarters lease is at a rate management believes is favorable. The Company leases, under a capital lease agreement, a 100-door cross dock hub facility constructed in 1994 in Columbus, Ohio from the Director of Development of the State of Ohio. A substantial portion of the cost of constructing the Columbus facility was funded by the State of Ohio through the sale of $6.3 million of revenue bonds. The Company is responsible for all taxes, assessments and other costs of ownership under the lease agreement. Certain terms of the lease include restrictions on the payment of dividends and the maintenance of certain levels of net worth and other financial ratios. Amounts due under the lease agreement are guaranteed by Scott M. Niswonger, the Company's Chairman, President and Chief Executive Officer. After the bonds are paid in full, the Company will have an option to purchase the terminal for a nominal payment. In July 1996, the Company acquired a 68-door cross dock terminal facility in Atlanta, Georgia. The facility houses both the Atlanta Truckload and Forward Air operations. The Company leases a facility in Greeneville, Tennessee from Greeneville Properties, Inc., a corporation previously owned by Mr. Niswonger. The following table provides information regarding the Company's principal terminal facilities:
APPROXIMATE GROSS SQUARE TERMINAL LOCATION FEET (1) ----------------- ------------ Atlanta, Georgia (2) 46,000 Columbus, Ohio (2) 83,800 Greeneville, Tennessee (3) 42,000 Indianapolis, Indiana (2) 15,200 Memphis, Tennessee (3) 19,875
- --------------------- (1) Includes both office and dock space. (2) Shared facility by Forward Air and Truckload operations. (3) The Company operates two separate locations in this city. The Company leases 43 additional terminal facilities for its Forward Air operations, which are typically leased on a short-term (three to five year) basis. Management believes that replacement space comparable to these terminal facilities is readily obtainable, if necessary. Management believes that its facilities are adequate to support its current operations. The balance of the Forward Air terminals are agent stations leased and operated by independent agents who generally handle the Company's freight on a commission basis. 8 ITEM 3. LEGAL PROCEEDINGS LITIGATION The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1996, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) to Form 10-K, the following information is included in Part I of this Form 10-K. The following table sets forth certain information concerning the executive officers of the Company as of December 31, 1996:
Name Age Position ---- --- -------- Scott M. Niswonger 49 Chairman, President and Chief Executive Officer Bruce A. Campbell 45 Executive Vice President and Chief Operating Officer Edward W. Cook 38 Chief Financial Officer, Senior Vice President and Treasurer Richard H. Roberts 42 Senior Vice President, General Counsel and Secretary Michael A. Roberts 52 Senior Vice President, FAF Sales and Marketing
There are no family relationships between any of the executive officers of the Company. All officers hold office at the pleasure of the Board of Directors. 9 The following background material is provided for each executive officer employed by the registrant, including employment history for at least the last five years: Scott M. Niswonger is a co-founder of the Company and has served as a director and as President of the Company since its founding in 1981, and as Chairman of the Board and Chief Executive Officer since February 1988. Mr. Niswonger also serves as a director of the Regional Advisory Board of First Tennessee Bank National Association. Bruce A. Campbell has been Executive Vice President and Chief Operating Officer of the Company since April 1990 and a director of the Company since April 1993. Prior to joining the Company in 1990, Mr. Campbell served as Vice President of Ryder-Temperature Controlled Carriage in Nashville, Tennessee from September 1985 until December 1989. Edward W. Cook joined the Company as Chief Financial Officer, Senior Vice President and director in September 1994. Since May 1995, he has also served as Treasurer. Prior to joining the Company, Mr. Cook was employed by Ernst & Young LLP for eleven years, most recently as a senior manager in the Nashville, Tennessee office. During the period March 1986 through February 1988, Mr. Cook served as Controller and Assistant Secretary of Ryder-Temperature Controlled Carriage in Nashville, Tennessee. Richard H. Roberts has served as Senior Vice President and General Counsel of the Company since July 1994, and as Secretary and director since May 1995. Prior to joining the Company, Mr. Roberts was a partner with the Baker, Worthington, Crossley & Stansberry law firm from January 1991, and an associate of the firm from June 1985. Mr. Roberts has also served as a director of Miller Industries, Inc. since April 1994. Michael A. Roberts has been Senior Vice President, FAF Sales and Marketing of the Company since April 1990 and was Vice President of Marketing of the Company from November 1987. Mr. Roberts served as a consultant to the Company from 1982 to 1987. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is publicly traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol LAND. The following table sets forth the high and low sales prices for the Company's common stock as reported by The Nasdaq Stock Market for each full quarterly period of fiscal 1995 and 1996.
1996 High Low ---- ---- --- First Quarter . . . . . . . . . . . . . . . . $16.50 $12.50 Second Quarter. . . . . . . . . . . . . . . . $16.25 $13.25 Third Quarter . . . . . . . . . . . . . . . . $16.50 $10.00 Fourth Quarter. . . . . . . . . . . . . . . . $11.75 $ 6.50
1995 High Low ---- ---- --- First Quarter . . . . . . . . . . . . . . . . $17.00 $11.75 Second Quarter. . . . . . . . . . . . . . . . $16.00 $11.625 Third Quarter . . . . . . . . . . . . . . . . $17.50 $11.75 Fourth Quarter. . . . . . . . . . . . . . . . $15.00 $11.25
There were approximately 1,200 shareholders of record (including brokerage firms and other nominees) of the Company's common stock as of March 17, 1997. The Company has not paid cash dividends on its common stock in the two preceding fiscal years, and it is the current intention of management to retain earnings to finance the growth of the Company's business. Future payment of dividends will depend upon the financial condition, results of operations, contractual restrictions and capital requirements of the Company as well as other factors deemed relevant by the Board of Directors. 11 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company. The selected financial data should be read in conjunction with the Company's financial statements and notes thereto, included elsewhere in this report.
FISCAL YEAR ENDED ---------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 25, DECEMBER 26, 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ----------- (In thousands, except per share data) STATEMENTS OF INCOME DATA: (1) (2) Operating revenue $157,098 $148,083 $135,032 $95,281 $66,264 Income from operations 9,341 10,501 8,164 4,309 2,543 Operating ratio (3) 94.1% 92.9% 94.0% 95.5% 96.2% Net income 3,979 4,517 4,017 1,963 1,234 Net income per share - primary 0.66 0.75 0.66 0.46 0.30 Net income per share - fully diluted 0.66 0.75 0.66 0.45 0.30 Cash dividends declared per common share -- -- -- -- -- BALANCE SHEET DATA (AT END OF PERIOD): Total assets $ 99,074 $ 98,279 $ 78,044 $49,027 $19,275 Long-term obligations, net of current portion 27,094 35,855 28,305 12,024 7,489 Shareholders' equity 41,264 36,644 31,778 27,295 3,518
(1) Results for 1994, 1993, and 1992 lack comparability to other periods because (i) 1993 and 1992 included special management bonuses of $1.7 million and $610,000, respectively, and (ii) 1994 included a charge relating to the sale and winding down of its refrigerated trucking operations of $805,000. In addition, 1994 results consist of 53 weeks of operations while 1996, 1995, 1993 and 1992 results consist of approximately 52 weeks of operations. (2) Net income and net income per share for 1993 and 1992 reflect pro forma income tax provisions as if the Company, previously an S Corporation prior to its initial public offering of common stock in November 1993, had been subject to income taxes for all of 1993 and 1992. Historical net income for 1993 and 1992 was $2.2 million and $2.0 million, respectively. (3) Operating expenses as a percentage of operating revenue. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the percentage relationship of revenue and expense items to operating revenue for the periods indicated.
FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ----------------------------------------------------- Operating revenue 100.0% 100.0% 100.0% Operating expenses: Purchased transportation 32.8 36.1 38.1 Salaries, wages and employee benefits 27.6 25.4 24.2 Fuel and fuel taxes 6.9 6.0 6.0 Operating leases 3.8 4.0 4.8 Depreciation and amortization 6.7 5.9 4.7 Insurance and claims 5.3 4.8 4.2 Loss on sale and winding down of refrigerated operations -- -- 0.6 Other operating expenses 11.0 10.7 11.4 ------------------------------------------------------ Total operating expenses 94.1 92.9 94.0 ------------------------------------------------------ Income from operations 5.9 7.1 6.0 Interest expense (1.8) (2.0) (1.1) Other income, net -- 0.2 0.3 ------------------------------------------------------ Income before income taxes 4.1 5.3 5.2 Income taxes 1.6 2.2 2.2 ------------------------------------------------------ Net income 2.5% 3.1% 3.0% ======================================================
RESULTS OF OPERATIONS The Company continued its growth in 1996 as operating revenues increased to a record $157.1 million compared to $148.1 million in 1995 and $135.0 million in 1994. The percentage increases in operating revenue for 1996, 1995 and 1994 were 6.1%, 9.7% and 41.7%, respectively. Excluding the Company's refrigerated operations, which were sold effective January 11, 1995 (see Note 6 of the Notes to Consolidated Financial Statements), the Company's operating revenue increased 16.8% during 1995. Operating revenue in the Company's Forward Air operations increased by $17.2 million (27%), $5.7 million (9%) and $27.1 million (74%) in 1996, 1995 and 1994, respectively, and represented approximately 50%, 43% and 43% of the Company's total operating revenue for these periods. Operating revenue increases in the Forward Air operations resulted from increasing the number of operating terminals, enhancements to the Forward Air network and greater volume from domestic and international air cargo customers. Operating revenue in the Company's Truckload operations, including intercompany revenue and excluding the sale of the Company's refrigerated operations, increased (decreased) by $(6.0) million, $14.8 million and $17.0 million in 1996, 1995 and 1994, respectively. Operating revenue increases (decreases) in the Truckload operations resulted primarily from the addition/reduction of revenue equipment levels utilized in 13 both the Company's common carrier and dedicated fleet operations coupled with fluctuations in equipment utilization. Purchased transportation was 32.8% of operating revenue in 1996 compared to 36.1% in 1995 and 38.1% in 1994. The decrease in purchased transportation between these years was primarily attributable to more efficient utilization of owner-operators in the Forward Air operations during 1996 and 1995 and a decrease in the ratio of owner-operators to Company drivers during 1996. Salaries, wages and benefits were 27.6% of operating revenue compared to 25.4% in 1995 and 24.2% in 1994. The increases in 1996 and 1995 were due primarily to increased cargo handling wages and terminal managers' salaries required to operate additional terminals and increased operating volumes in the Company's Forward Air operations in 1996 and 1995 coupled with an increase in the ratio of Company drivers to owner-operators during 1996. Fuel and fuel taxes were 6.9% of operating revenue in 1996 compared to 6.0% in 1995 and 6.0% in 1994. The increase in fuel and fuel taxes during 1996 was primarily attributed to an increase in fuel prices during 1996 which increased approximately 13%, increasing fuel and fuel taxes by approximately $1.3 million. Approximately 60% of the increase in fuel prices was passed on to customers in the form of a fuel surcharge during 1996. Operating leases were 3.8%, 4.0% and 4.8% of operating revenue during 1996, 1995 and 1994, respectively, while depreciation and amortization were 6.7%, 5.9% and 4.7% during the same periods. These changes resulted from increased ownership, rather than leasing, of revenue equipment. The increase in depreciation and amortization during 1996 is also attributable to an increase in the ratio of Company drivers to owner-operators during 1996. In addition, see the Property and Equipment section of Note 1 of the Notes to Consolidated Financial Statements. Insurance and claims were 5.3% of operating revenue in 1996 compared to 4.8% in 1995 and 4.2% in 1994. The increase in costs during 1996 and 1995 is due primarily to an increase in the frequency and severity of accidents coupled with adjustments to reflect increased liability related to claims incurred in prior periods. Other operating expenses were 11.0% in 1996 compared to 10.7% in 1995 and 11.4% in 1994. Gains on the sale of revenue equipment (which are netted against other operating expenses) were $413,000, $503,000 and $88,000 during 1996, 1995 and 1994, respectively. For information concerning the loss on sale and winding down of refrigerated operations in 1994 see Note 6 of the Notes to Consolidated Financial Statements. Interest expense was $3.0 million in 1996 and 1995 compared to $1.5 million in 1994. The increase in interest expense during 1995 is due to higher average net borrowing in 1995 primarily for revenue equipment purchases which were required to finance the continued growth of the Company. 14 The combined federal and state effective tax rates for 1996, 1995 and 1994 were 38.2%, 42.0% and 43.1%, respectively. For information concerning the provision for income taxes, as well as information regarding differences between effective tax rates and statutory rates, see Note 5 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The continued growth of the Company's business, and the nature of its operations, have required significant investment in new equipment. The Company has historically financed revenue equipment purchases with cash flows from operations, through borrowing under credit agreements with financial institutions and from proceeds of the initial public offering in November 1993. Working capital needs have generally been met with cash flows from operations and borrowing under the Company's line of credit. Net cash provided by operating activities totaled approximately $12.5, $15.8 and $9.2 in 1996, 1995 and 1994, respectively. Net cash used in investment activities was approximately $6.0, $21.5 and $31.8 million in 1996, 1995 and 1994, respectively. Investing activities consisted primarily of the acquisition of additional revenue equipment during 1996, 1995 and 1994, the acquisition of a terminal facility in 1996, enhanced management information systems in 1996 and 1995, and the construction of a new sorting hub facility in Columbus, Ohio during 1994. Net cash provided by (used in) financing activities was approximately $(10.3), $8.6 and $19.3 million in 1996, 1995 and 1994, respectively. These financing activities included the Company's continued financing of additional revenue equipment, based upon capital expenditure requirements, coupled with repayment of long-term debt and capital leases with cash generated from operations. In addition, 1994 included the financing of $6.3 million for a new hub facility in Columbus, Ohio. The Company expects net capital expenditures in 1997 for revenue equipment and management information systems, excluding acquisitions, to be less than $10 million. The Company expects to fund these expenditures through cash provided by operating activities. See Note 2 of the Notes to the Consolidated Financial Statements for more information concerning credit arrangements. At December 31, 1996, the Company had a line of credit with a bank in the amount of $15.0 million, which expires in May 1998. At December 31, 1996, approximately $9.0 million was available for borrowing under the credit line. At December 31, 1996, the Company also had equipment loan agreements which permit the Company to borrow up to $31.5 million for the purchase of revenue equipment. At December 31, 1996, approximately $20.0 million was available for borrowing under the equipment loan agreements. Management believes that available borrowings under the line of credit agreement, equipment loan agreements, future borrowings under installment notes for revenue equipment, and cash generated by operations will be sufficient to fund its cash needs and anticipated capital expenditures through at least 1997. 15 IMPACT OF SEASONALITY In the trucking industry, revenue and operating results generally reflect a seasonal pattern as customers reduce shipments during and after the winter holiday season and during the summer months due to temporary plant closings for vacations. Additionally, the volume of shipments is often affected by weather variations. The Company's operating expenses also have historically been higher in the winter months, due primarily to decreased fuel efficiency and increased maintenance costs of revenue equipment in colder weather. IMPACT OF INFLATION Inflation can be expected to have an impact on the Company's operating costs. With the exception of fuel price increases in 1996, inflation has had a minimal effect upon the Company's profitability over the past three years. CAUTIONARY STATEMENT REGULATING FORWARD-LOOKING STATEMENTS The Company, or its executive officers and directors on behalf of the Company, may from time to time make written or oral "forward-looking statements". Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to shareholders. Oral forward-looking statements may be made by the Company's executive officers and directors on behalf of the Company to the press, potential investors, securities analysts and others. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. In connection with this "safe harbor" provision, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Factors that might cause such a difference include, but are not limited to, economic recessions or downturns in customers' business cycles, competition, rapid fluctuations in fuel prices or availability, fluctuations in the frequency and severity of accidents, increases in interest rates, and the availability of qualified drivers. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to directors of the Company is incorporated herein by reference to the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement"). The 1997 Proxy Statement will be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days subsequent to December 31, 1996. Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1996. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) List of Financial Statements and Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. (a)(3) List of Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (b) Reports on Form 8-K. There were no reports filed on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1996. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Landair Services, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDAIR SERVICES, INC. By: /s/ Scott M. Niswonger --------------------------------------- Scott M. Niswonger, Chairman, President and Chief Executive Officer Date: March 26, 1997 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.
NAME CAPACITY DATE /s/ Scott M. Niswonger Chairman, President and March 26, 1997 - ------------------------------------- Chief Executive Officer Scott M. Niswonger (Principal Executive Officer) /s/ Edward W. Cook Chief Financial Officer, March 26, 1997 - ------------------------------------- Senior Vice President, Treasurer Edward W. Cook and Director (Principal Financial and Accounting Officer) /s/ Bruce A. Campbell Executive Vice President, March 26, 1997 - ------------------------------------- Chief Operating Officer Bruce A. Campbell and Director /s/ Richard H. Roberts Senior Vice President, General March 26, 1997 - ------------------------------------- Counsel, Secretary and Director Richard H. Roberts /s/ James A. Cronin, III Director March 26, 1997 - ------------------------------------- James A. Cronin, III /s/ Robert K. Gray Director March 26, 1997 - ------------------------------------- Hon. Robert K. Gray
19 Annual Report on Form 10-K Item 8, Item 14(a)(1) and (2), (c) and (d) List of Financial Statements and Financial Statement Schedule Financial Statements and Supplementary Data Certain Exhibits Financial Statement Schedule Year Ended December 31, 1996 Landair Services, Inc. Greeneville, Tennessee F-1 Landair Services, Inc. Form 10-K -- Item 8 and Item 14(a)(1) and (2) Index to Financial Statements and Financial Statement Schedule The following consolidated financial statements of Landair Services, Inc. are included as a separate section of this report:
Page No. -------- Report of Ernst & Young LLP, Independent Auditors.................................F-3 Consolidated Balance Sheets - December 31, 1996 and December 31, 1995.............F-4 Consolidated Statements of Income - Fiscal Years Ended December 31, 1996, December 31, 1995 and December 31, 1994........................................F-6 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 1996, December 31, 1995 and December 31, 1994.....................F-7 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 1996, December 31, 1995 and December 31, 1994........................................F-8 Notes to Consolidated Financial Statements - December 31, 1996....................F-9
The following financial statement schedule of Landair Services, Inc. is included as a separate section of this report. Schedule II - Valuation and Qualifying Accounts...................................S-1
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 Report of Independent Auditors The Board of Directors and Shareholders Landair Services, Inc. We have audited the accompanying consolidated balance sheets of Landair Services, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended December 31, 1996. 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 Landair Services, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three fiscal 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. ERNST & YOUNG LLP Nashville, Tennessee January 28, 1997 F-3 Landair Services, Inc. Consolidated Balance Sheets
DECEMBER 31, DECEMBER 31, 1996 1995 ------------------------------------ (In thousands) ASSETS Current assets: Cash and cash equivalents $ 28 $ 3,834 Accounts receivable, less allowance of $415 in 1996 and $292 in 1995 23,671 17,788 Inventories 552 360 Prepaid expenses 2,868 2,717 Income taxes receivable -- 707 Deferred income taxes 1,085 352 ----------------------------------- Total current assets 28,204 25,758 Property and equipment: Land 3,199 2,611 Buildings 6,298 4,817 Revenue equipment 75,578 72,742 Other equipment 11,480 8,907 Leasehold improvements 890 622 ----------------------------------- 97,445 89,699 Accumulated depreciation and amortization 27,166 17,577 ----------------------------------- 70,279 72,122 Other assets 591 399 ----------------------------------- Total assets $ 99,074 $ 98,279 ===================================
F-4
DECEMBER 31, DECEMBER 31, 1996 1995 ------------------------------------ (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,525 $ 5,074 Accrued payroll and related items 1,677 1,313 Insurance and claims accruals 4,435 3,445 Income taxes payable 168 -- Other accrued expenses 1,111 879 Current portion of long-term debt 7,701 8,158 Current portion of capital lease obligations 1,797 1,089 ------------------------------------ Total current liabilities 22,414 19,958 Long-term debt, less current portion 18,346 27,030 Capital lease obligations, less current portion 8,748 8,825 Deferred income taxes 8,302 5,822 Commitments and contingencies -- -- Shareholders' equity: Preferred stock, $.01 par value: Authorized shares - 5,000,000 No shares issued -- -- Common stock, $.01 par value: Authorized shares - 20,000,000 Issued and outstanding shares - 5,952,880 in 1996 and 5,864,200 in 1995 60 59 Additional paid-in capital 26,202 25,562 Retained earnings 15,002 11,023 ------------------------------------ Total shareholders' equity 41,264 36,644 ------------------------------------ Total liabilities and shareholders' equity $ 99,074 $ 98,279 ====================================
See accompanying notes. F-5 Landair Services, Inc. Consolidated Statements of Income
FISCAL YEAR ENDED --------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 --------------------------------------------------------- (In thousands, except per share data) Operating revenue $157,098 $148,083 $135,032 Operating expenses: Purchased transportation 51,393 53,488 51,448 Salaries, wages and employee benefits 43,355 37,774 32,724 Fuel and fuel taxes 10,837 8,941 8,065 Operating leases 5,950 5,859 6,537 Depreciation and amortization 10,523 8,687 6,384 Insurance and claims 8,381 7,040 5,709 Loss on sale and winding down of refrigerated operations -- -- 805 Other operating expenses 17,318 15,793 15,196 --------------------------------------------------------- 147,757 137,582 126,868 --------------------------------------------------------- Income from operations 9,341 10,501 8,164 Other income (expense): Interest expense (2,964) (3,020) (1,481) Other, net 61 309 378 --------------------------------------------------------- (2,903) (2,711) (1,103) --------------------------------------------------------- Income before income taxes 6,438 7,790 7,061 Income taxes 2,459 3,273 3,044 --------------------------------------------------------- Net income $ 3,979 $ 4,517 $ 4,017 ========================================================= Net income per share: Primary $ 0.66 $ 0.75 $ 0.66 Fully diluted $ 0.66 $ 0.75 $ 0.66 Weighted average shares outstanding: Primary 6,052 6,031 6,115 Fully diluted 6,057 6,032 6,123
See accompanying notes. F-6 Landair Services, Inc. Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL TOTAL ---------------------------- PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY -------------------------------------------------------------------------------- (In thousands) Balance at December 25, 1993 5,730 $ 57 $ 24,749 $ 2,489 $ 27,295 Net income for fiscal 1994 -- -- -- 4,017 4,017 Exercise of stock options 81 1 465 -- 466 -------------------------------------------------------------------------------- Balance at December 31, 1994 5,811 58 25,214 6,506 31,778 Net income for fiscal 1995 -- -- -- 4,517 4,517 Exercise of stock options 53 1 348 -- 349 -------------------------------------------------------------------------------- Balance at December 31, 1995 5,864 59 25,562 11,023 36,644 Net income for fiscal 1996 -- -- -- 3,979 3,979 Exercise of stock options 83 1 580 -- 581 Common stock issued under stock purchase plan 6 -- 60 -- 60 -------------------------------------------------------------------------------- Balance at December 31, 1996 5,953 $ 60 $ 26,202 $ 15,002 $ 41,264 ================================================================================
See accompanying notes. F-7 Landair Services, Inc. Consolidated Statements of Cash Flows
FISCAL YEAR ENDED ----------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ----------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income $ 3,979 $ 4,517 $ 4,017 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,523 8,687 6,384 Gain on sale of property and equipment (413) (503) (88) Provision for losses on receivables 540 445 290 Deferred income taxes 1,747 2,800 1,835 Changes in operating assets and liabilities: Accounts receivable (6,423) (86) (5,813) Inventories (192) (29) (96) Prepaid expenses (151) (1,483) (280) Accounts payable and accrued expenses 2,037 1,843 3,571 Income taxes 875 (425) (624) ----------------------------------------------------------- Net cash provided by operating activities 12,522 15,766 9,196 INVESTING ACTIVITIES Purchases of property and equipment (8,763) (24,670) (36,508) Proceeds from disposal of property and equipment 2,913 3,062 470 Other (192) 75 4,255 ----------------------------------------------------------- Net cash used in investing activities (6,042) (21,533) (31,783) FINANCING ACTIVITIES Proceeds from long-term debt 2,734 16,940 24,402 Payments of long-term debt (11,875) (7,546) (2,300) Net decrease in short-term borrowings -- -- (1,822) Payments of capital lease obligations (1,786) (1,109) (1,403) Proceeds from exercise of stock options 581 349 466 Proceeds from common stock issued under stock purchase plan 60 -- -- ----------------------------------------------------------- Net cash provided by (used in) financing activities (10,286) 8,634 19,343 ----------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,806) 2,867 (3,244) Cash and cash equivalents at beginning of year 3,834 967 4,211 ----------------------------------------------------------- Cash and cash equivalents at end of year $ 28 $ 3,834 $ 967 ===========================================================
See accompanying notes. F-8 Landair Services, Inc. Notes to Consolidated Financial Statements December 31, 1996 1. ACCOUNTING POLICIES ORGANIZATION Landair Services, Inc. (the "Company") is a high-service level truckload carrier and contractor to the air cargo industry providing time-definite service in the United States and Canada. Approximately 50% of revenue is derived from both the Company's Truckload operations (common carrier and contract carrier) and Forward Air operations (deferred air freight). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. OWNERSHIP The Company was wholly owned by Scott M. Niswonger until November 16, 1993, at which time the initial public offering of the Company's common stock was completed. As of December 31, 1996, Mr. Niswonger continues to be the majority owner of the Company's common stock. FISCAL YEAR During fiscal 1994, the Company changed from a 52-53 week year for accounting purposes, with each fiscal year ending on the last Saturday in December, to a fiscal year ending as of the last day of the calendar year. The 1994 fiscal year consisted of 53 weeks. F-9 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) OPERATING REVENUE Operating revenue and related costs are recognized as of the date shipments are completed. No single customer accounted for more than 10% of operating revenue in 1996, 1995 or 1994. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories of tires, replacement parts, supplies, and fuel for revenue equipment are stated at the lower of cost or market utilizing the FIFO (first-in, first-out) method of determining cost. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is calculated based upon the cost of the asset, reduced by its estimated salvage value, using the straight-line method over the estimated useful lives as follows: Buildings 30-40 years Revenue equipment 3-7 years Other equipment 3-10 years Leasehold improvements 1-15 years During 1996 and 1995, the Company changed the estimated salvage value and the estimated tire life of certain of its revenue equipment. The changes resulted in a net decrease in depreciation and other operating expenses of $405,000 and $664,000, an increase in net earnings of $251,000 and $385,000 and an increase in earnings per share of $0.04 and $0.06 during fiscal 1996 and 1995, respectively. The Company capitalized net interest costs of $-0- in 1996, $-0- in 1995 and $328,000 in 1994. Interest payments during 1996, 1995 and 1994 were $3,011,000, $2,981,000 and $1,730,000, respectively. During 1996, 1995 and 1994, the Company added to revenue and other equipment $2,417,000, $2,682,000 and $-0- of capital leases, respectively. F-10 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) INSURANCE AND CLAIMS ACCRUALS The primary claims in the Company's business are workers' compensation, property damage and auto liability, and medical benefits. Most of the Company's insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. The Company self-insures the per occurrence deductible for workers' compensation, property damage and auto liability, and medical benefits. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits. INCOME TAXES Income taxes have been provided using the liability method in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. NET INCOME PER SHARE Net income per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents consist of outstanding stock options and have been included in the calculation of net income per share using the treasury stock method. STOCK OPTIONS The Company grants options for a fixed number of shares to employees and outside directors with an exercise price equal to the fair value of the shares at the grant date. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. 2. CREDIT ARRANGEMENTS The Company has a $15 million line of credit agreement with a Tennessee bank which expires in May 1998. Advances outstanding under the line bear interest at the bank's base rate less 1.0% (7.25% and 7.5% at December 31, 1996 and 1995, respectively) and are collateralized primarily by accounts receivable. The agreement contains, among other things, restrictions that do not allow the payment of dividends, and requires the maintenance of certain levels of net worth and other financial ratios. At December 31, 1996, the Company had $1,508,000 outstanding under the line and had utilized $4,485,000 of availability for outstanding letters of credit. F-11 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 2. CREDIT ARRANGEMENTS (CONTINUED) The Company has equipment loan agreements (the "Equipment Loan Agreements") with two Tennessee banks which permit the Company to borrow up to $31.5 million for the purchase of revenue equipment. Advances outstanding under the Equipment Loan Agreements bear interest at the 30-day LIBOR rate plus 1.45% to 1.6% (6.80% to 6.95% and 7.10% to 7.30% at December 31, 1996 and 1995, respectively). The advances are collateralized by revenue equipment purchased with the proceeds from the Equipment Loan Agreements, and contain restrictions and covenants similar to the line of credit agreement described above. At December 31, 1996, the Company had additional borrowing capacity available of $20,028,000 under the Equipment Loan Agreements (see Note 3). 3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31, 1996 1995 ------------------------------------ (In thousands) Line of credit -- Note 2 $ 1,508 $ 611 Installment Equipment Loan Agreements -- Note 2 11,387 12,856 Installment notes payable with a finance company through 1999, including interest at the 30-day commercial paper rate plus 1.80% (7.75% and 7.7% at December 31, 1996 and 1995, respectively) and interest ranging from 6.7% to 7.3%, collateralized by revenue equipment 12,025 15,136 Installment notes payable with a bank through 1999, including interest at the bank's base rate less 1.00% (7.25% and 7.5% at December 31, 1996 and 1995, respectively), collateralized by revenue equipment 459 5,892 Other notes payable, including interest ranging from 5.4% to 6.9% 668 693 ------------------------------------ 26,047 35,188 Less current portion 7,701 8,158 ------------------------------------ $ 18,346 $ 27,030 ====================================
F-12 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 3. LONG-TERM DEBT (CONTINUED) Revenue equipment collateralizing these agreements has a carrying value of approximately $27,221,000 and $35,370,000 at December 31, 1996 and December 31, 1995, respectively. Maturities of long-term debt are as follows (in thousands): 1997 $ 7,701 1998 10,664 1999 5,333 2000 1,621 2001 728 Thereafter -- ------- $26,047 =======
4. SHAREHOLDERS' EQUITY AND STOCK OPTIONS Preferred Stock -- The Board of Directors is authorized to issue, at its discretion, up to 5,000,000 shares of preferred stock, par value $.01. The terms and conditions of the preferred shares are to be determined by the Board of Directors. No shares have been issued to date. Employee Stock Option and Incentive Plan -- The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 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. At December 31, 1996, 1995 and 1994, the Company had reserved 1,000,000, 1,000,000 and 600,000 shares of common stock under a Stock Option and Incentive Plan. Options issued under the Plan have eight to ten year terms and vest over a four to five year period. Pro forma information regarding net income and earnings per share is required by Statement No. 123, which also requires that the information be determined as if the Company has accounted for its employee and non-employee director stock options granted subsequent to December 31, 1994 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 F-13 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 4. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.4% and 5.5%; dividend ratio of zero; volatility factors of the expected market price of the Company's common stock of .4; and a weighted-average expected life of the option of seven years. 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 and non-employee director 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 and non-employee director stock options. For purposes of pro forma disclosures, the estimated fair value of the employee and non-employee director options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except for earnings per share information):
1996 1995 ------ ------ Pro forma net income $3,506 $4,464 Pro forma earnings per share: Primary $ 0.59 $ 0.74 Fully diluted $ 0.59 $ 0.74
Because Statement No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997. A summary of the Company's employee stock option activity and related information for the years ended December 31 follows:
1996 1995 1994 ---- ---- ---- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE ------- ---------------- -------------------------- -------- ---------------- Outstanding - beginning of year 421 $ 9 507 $ 9 550 $ 7 Granted 285 14 -- -- 60 18 Exercised (83) 7 (53) 7 (81) 6 Forfeited (48) 11 (33) 10 (22) 8 --- --- --- Outstanding - end of year 575 $12 421 $ 9 507 $ 9 === === === === === === Exercisable at end of year 199 $10 185 $ 9 84 $ 9 === === === === === === Options available for grant 209 445 12 === === === Weighted-average fair value of options granted during the year $ 6 $ -- === ====
Exercise prices for options outstanding, as of December 31, 1996, ranged from $5.00 to $18.50. F-14 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 4. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) Non-Employee Director Options -- In May 1996, May 1995 and September 1993, options to purchase 22,500, 30,000 and 60,000 shares of common stock, respectively, were granted to the non-employee directors of the Company at option prices of $15.00, $13.625 and $14.00 per share, respectively. The options are exercisable in installments which vest over two-year periods from the date of grant. At December 31, 1996, 60,000 options are outstanding and will expire on September 1, 1998 through May 1, 2006, unless a non-employee director resigns or is not reelected, in which event the options expire 90 days after the option holder is no longer a non-employee director. Employee Stock Purchase Plan -- The Company implemented an employee stock purchase plan effective January 1, 1996 at which time participating employees became entitled to purchase common stock through payroll deduction of up to 10% of the employee's annual compensation. The issue price of the common stock is equal to the lesser of (1) 85% of market price on the first trading day of the semi-annual enrollment period or (2) 85% of market price on the last trading day of the semi-annual enrollment period. The Company has reserved 300,000 shares of common stock for issuance pursuant to the plan. At December 31, 1996, 6,127 shares had been issued under the Plan. 5. INCOME TAXES The provision for income taxes consists of the following:
1996 1995 1994 ------------------------------------------- (In thousands) Current: Federal $ 536 $ 275 $ 1,078 State 176 198 131 ------------------------------------------- 712 473 1,209 Deferred: Federal 1,538 2,451 1,418 State 209 349 417 ------------------------------------------- 1,747 2,800 1,835 ------------------------------------------- $ 2,459 $ 3,273 $ 3,044 ===========================================
F-15 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 34% to income before income taxes as follows:
1996 1995 1994 ------------------------------------------ (In thousands) Tax expense at the statutory rate $ 2,189 $ 2,649 $ 2,401 State income taxes, net of federal benefit 177 230 326 Meals and entertainment 93 316 309 Other -- 78 8 ------------------------------------------ $ 2,459 $ 3,273 $ 3,044 ==========================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows:
1996 1995 ---------------------------------------- (In thousands) Deferred tax liabilities: Tax over book depreciation $ 10,820 $ 8,242 Prepaid expenses deductible when paid 1,048 994 Other 349 236 ---------------------------------------- Total deferred tax liabilities 12,217 9,472 Deferred tax assets: Accrued expenses 1,981 1,423 Alternative minimum tax 1,708 1,109 Net operating loss carryforward 1,134 1,388 Allowance for doubtful accounts 152 82 Other 25 -- ---------------------------------------- Total deferred tax assets 5,000 4,002 ---------------------------------------- Net deferred tax liabilities $ 7,217 $ 5,470 ========================================
Management believes that the deferred tax assets will ultimately be realized. Management's conclusion is based on future taxable income that will result from the reversal of the existing temporary differences. Additionally, management expects future taxable income from operations, exclusive of the reversal of temporary differences. F-16 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The balance sheet classification of deferred income taxes is as follows:
DECEMBER 31, DECEMBER 31, 1996 1995 ---------------------------------------- (In thousands) Current assets $ (1,085) $ (352) Noncurrent liabilities 8,302 5,822 ---------------------------------------- $ 7,217 $ 5,470 ========================================
Total income tax payments, net of refunds, during fiscal 1996, 1995 and 1994 were $(162,000), $898,000 and $1,833,000, respectively. At December 31, 1996, the Company had net operating loss carryforwards of $3,094,000 for income tax purposes that expire in 2011. 6. LOSS ON SALE AND WINDING DOWN OF REFRIGERATED OPERATIONS On October 11, 1994, the Company committed itself to a plan to dispose of its refrigerated trucking operations. On January 11, 1995, the Company completed the disposal to US 1 Industries, Inc. ("US 1 Industries") for consideration of $250,000. The Company has accounted for the disposal of the refrigerated trucking operations in accordance with AICPA Interpretation 1 of APB Opinion No. 30, Illustration of the Application of APB Opinion No. 30. (Interpretation 1 was subsequently superseded on a prospective basis on November 17, 1994 by consensus of the Emerging Issues Task Force.) The pre-tax operating losses of the refrigerated operations subsequent to October 11, 1994, plus related costs to dispose of the operations, less the net proceeds from the sale, totaled $805,000 and have been presented in the accompanying statement of income as loss on sale and winding down of refrigerated operations. The operating revenue of the refrigerated operations totaled $8,203,000 for the period from December 26, 1993 through October 11, 1994. 7. LEASES During October 1993, the Company entered into a capital lease agreement (with a bargain purchase option) with the Director of Development of the State of Ohio for the construction of a terminal facility located in Columbus, Ohio. To fund the construction of the new facility, the State of Ohio sold revenue bonds in the amount of $6,280,000. The amounts due under the lease have been included in capital lease obligations. The Company is responsible for all taxes, assessments, and other costs of ownership under the lease agreement. The lease also requires, among other things, restrictions on the payment of dividends and the maintenance of certain levels F-17 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 7. LEASES (CONTINUED) of net worth and other financial ratios. Amounts due under the lease agreement are guaranteed by the Company's majority shareholder. The Company leases certain revenue and other equipment under capital leases. These leases expire in various years through 1999. Certain of the revenue equipment leases contain guarantees of residual values which have been included in minimum lease payments. Property and equipment include the following amounts for leases that have been capitalized:
DECEMBER 31, DECEMBER 31, 1996 1995 ---------------------------------------- (In thousands) Land $ 2,605 $ 2,605 Building 3,675 3,675 Revenue equipment 5,465 5,459 Other equipment 2,417 -- --------------------------------------- 14,162 11,739 Less accumulated amortization 2,561 1,598 --------------------------------------- $ 11,601 $ 10,141 =======================================
Amortization of leased assets is included in depreciation and amortization expense. The Company also leases certain facilities and revenue equipment under noncancelable operating leases that expire in various years through 2006. Certain of these leases may be renewed for periods varying from one to ten years. Included in operating leases is one terminal facility leased from a company wholly-owned by the Company's majority shareholder which expires in January 1998, and two terminal facilities leased from the Company's majority shareholder under operating leases which expired in August 1994 and January 1995, respectively. Also included in operating leases is an aircraft leased, under a dry lease agreement, from the Company's majority shareholder which expires in July 1997 and may be renewed for an additional one year period. The total net amount of rent expense for these leases was $180,000, $84,000 and $267,000 in 1996, 1995 and 1994, respectively. F-18 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 7. LEASES (CONTINUED) Future minimum rental payments under capital leases and noncancelable operating leases with initial terms of one year or more consisted of the following at December 31:
CAPITAL OPERATING LEASES LEASES --------------------- FISCAL YEAR (In thousands) ----------- 1997 $ 2,480 $ 5,519 1998 4,481 3,864 1999 845 2,365 2000 699 935 2001 700 429 Thereafter 4,608 311 -------- ------- Total minimum lease payments 13,813 $13,423 ======= Amounts representing interest (3,268) -------- Present value of net minimum lease payments (including current portion of $1,797) $ 10,545 ========
8. COMMITMENTS AND CONTINGENCIES The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. 9. EMPLOYEE BENEFIT PLAN Effective July 1, 1994, the Company adopted a retirement savings plan (the "401(k) Plan"). The 401(k) Plan is a defined contribution plan whereby employees who have completed one year of service, a minimum of 1,000 hours of service, and are age 21 or older are eligible to participate. The 401(k) Plan allows eligible employees to make contributions of 2% to 10% of their annual compensation. Employer contributions are made at 25% of the employee's contribution up to a maximum of 4% of total annual compensation. Employer contributions vest 20% after two years of service and continue vesting 20% per year until fully vested. The Company's matching contribution for fiscal 1996, 1995 and 1994 was approximately $131,000, $119,000 and $65,000, respectively. F-19 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INSTRUMENTS Off Balance Sheet Risk At December 31, 1996, the Company had letters of credit outstanding totaling $4,485,000, all of which guarantee obligations carried on the balance sheet. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable. The Company does not generally require collateral from its customers. 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. 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: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value. Long-and short-term debt: The carrying amounts of the Company's borrowings under its revolving credit arrangement approximates fair value. The fair value of the Company's long-term debt and capital lease obligations is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. F-20 Landair Services, Inc. Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments are as follows:
1996 1995 --------------------------- ----------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------------------- ----------------------------- (In thousands) Cash and cash equivalents $ 28 $ 28 $ 3,834 $ 3,834 Accounts receivable 23,671 23,671 17,788 17,788 Accounts payable 5,525 5,525 5,074 5,074 Long-term debt and capital lease obligations 36,592 36,592 45,102 45,102
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and December 31, 1995:
1996 ------------------------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------------------------------------------------------------------------ (In thousands, except per share data) Operating revenue $36,979 $38,893 $39,295 $41,931 Income from operations 1,666 2,703 2,126 2,846 Net income 531 1,199 887 1,362 Net income per common share: Primary .09 .20 .15 .23 Fully diluted .09 .20 .15 .23
1995 ------------------------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------------------------------------------------------------------------ Operating revenue $35,744 $36,445 $37,451 $38,443 Income from operations 1,841 2,771 2,813 3,076 Net income 676 1,264 1,180 1,397 Net income per common share: Primary .11 .21 .20 .23 Fully diluted .11 .21 .20 .23
F-21 Landair Services, Inc. Schedule II -- Valuation and Qualifying Accounts
COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------ ADDITIONS ---------------------------- (1) (2) CHARGED CHARGED BALANCE AT TO COSTS TO OTHER BALANCE AT BEGINNING AND ACCOUNT- DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Fiscal year ended December 31, 1996: Allowance for doubtful accounts $ 292 $ 540 $ -- $ 417(1) $ 415 Fiscal year ended December 31, 1995: Allowance for doubtful accounts 394 445 -- 547(1) 292 Fiscal year ended December 31, 1994: Allowance for doubtful accounts 144 290 -- 40(1) 394
(1) Uncollectible accounts written off, net of recoveries. S-1 EXHIBIT INDEX
Exhibit No. in Exhibit No. Under Document Where Item 601 of Incorporated by Regulation S-K Reference ----------------- --------------- a 3.1 - Restated Charter of the registrant 3.1 a 3.2 - Bylaws of the registrant, as amended 3.2 a 4 - Specimen of Stock Certificate 4.1 e 10.1 - Registrant's Restated Employee Stock Purchase Plan 10 d 10.2 - Registrant's Amended and Restated Stock Option and Incentive Plan 10.1 a,g 10.3 - Form of registrant's Director Stock Option 10.3 Agreement a 10.4 - Lease Agreement, dated July 27, 1981, 10.18 between the Greeneville-Greene County Airport Authority and General Aviation of Tennessee, Inc., as assumed by the registrant by agreement, dated May 10, 1988 a 10.5 - Assignment, Assumption and Release 10.19 Agreement, dated May 10, 1988, between Greeneville-Greene County Airport, General Aviation, Inc., and the registrant a 10.6 - Air Carrier Certificate, effective 10.21 September 9, 1993 b 10.7 - Lease between the Director of 10.24 Development of the State of Ohio and the registrant dated as of October 1, 1993
c 10.8 - $5,062,250 Term Loan and Security 10.25 Agreement, dated as of July 13, 1994, among Third National Bank in Nashville, the registrant and Landair Transport, Inc. c 10.9 - $5,062,250 Term Promissory Note, 10.26 dated July 13, 1994, among Third National Bank in Nashville, the registrant and Landair Transport, Inc. c 10.10 - $5,500,000 Line of Credit Loan 10.27 Agreement, dated as of October 17, 1994, among First Tennessee Bank National Association, the registrant, and each of its subsidiaries c 10.11 - $11,152,000 Equipment Loan 10.30 Agreement, dated as of October 17, 1994, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc. and Landair International Airlines, Inc. c 10.12 - First Amendment to Loan and Security 10.33 Agreements, dated as of October 20, 1994, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc. and Landair International Airlines, Inc. c 10.13 - Second Amendment to Loan and 10.35 Security Agreements, dated as of December 23, 1994, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc. and Landair International Airlines, Inc. d,g 10.14 - Registrant's Non-Employee Director 10.2 Stock Option Plan
d 10.15 - Third Amendment to Loan and Security 10.3 Agreements, dated as of May 24, 1995, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc. and Landair International Airlines, Inc. d 10.16 - First Amendment to Line of Credit 10.4 Loan Agreement and to Amended and Restated Security Agreement, dated as of May 31, 1995, among First Tennessee Bank National Association, the registrant, and each of its Tennessee subsidiaries d 10.17 - $15,000,000 Restated, Amended and 10.5 Replacement Promissory Note (Line of Credit), dated as of May 31, 1995, between the registrant and First Tennessee Bank National Association d 10.18 - $15,000,000 Restated, Amended and 10.6 Replacement Promissory Note, (Equipment Loan) dated as of May 31, 1995, between the registrant and First Tennessee Bank National Association d 10.19 - Fourth Amendment to Loan and 10.7 Security Agreements, dated as of May 31, 1995, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc. and Landair International Airlines, Inc. d 10.20 - Term Loan and Security Agreement, 10.8 dated as of June 16, 1995, between Third National Bank in Nashville, the registrant and Landair Transport, Inc.
d 10.21 - $4,118,700 Promissory Note, dated 10.9 July 3, 1995, between the registrant, Landair Transport, Inc. and Third National Bank in Nashville d 10.22 - First Amendment to Term Loan and 10.10 Security Agreement, dated as of June 16, 1995, among Third National Bank in Nashville, the registrant and Landair Transport, Inc. f 11 - Computation of per share earnings f 21 - Subsidiaries of the registrant f 23 - Consent of Ernst & Young LLP f 27 - Financial Data Schedule (Electronic Filing Only)
aFiled as an exhibit to the registrant's Registration Statement of Form S-1, filed with the Commission on September 27, 1993. bFiled as an exhibit to the registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993, filed with the Commission on March 25, 1994. cFiled as an exhibit to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, filed with the Commission on March 31, 1995. dFiled as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, filed with the Commission on August 14, 1995. eFiled as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995, filed with the Commission on November 14, 1995. fFiled herewith. gManagement contract or compensatory plan.