-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ISi5vNTToVuk2dvpruOtlVbR+VmpQ8WZpM1d3YZr9EvxdKmiZDu1Uc0JnOlu8X6U dfal0iw+tPNYTSFT7n9tDg== 0000950147-99-000247.txt : 19990322 0000950147-99-000247.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950147-99-000247 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SWIFT TRANSPORTATION CO INC CENTRAL INDEX KEY: 0000863557 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 860666860 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18605 FILM NUMBER: 99568827 BUSINESS ADDRESS: STREET 1: 1455 HUDA WAY CITY: SPARKS STATE: NV ZIP: 89431 BUSINESS PHONE: 6022699700 MAIL ADDRESS: STREET 1: 2200 SOUTH 75TH AVENUE CITY: PHOENIX STATE: AZ ZIP: 85043 10-K 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File No. 0-18605 SWIFT TRANSPORTATION CO., INC. (Exact name of registrant as specified in its charter) Nevada 86-0666860 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2200 South 75th Avenue Phoenix, AZ 85043 (Address of principal executive offices) (Zip Code) (602) 269-9700 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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. [ ] At March 16, 1999, the aggregate market value of common stock held by non-affiliates of the Registrant was $504,386,574. The number of shares outstanding of the Registrant's common stock on March 16, 1999 was 42,511,914. DOCUMENTS INCORPORATED BY REFERENCE Materials from the Registrant's Notice and Proxy Statement relating to the 1999 Annual Meeting of Stockholders have been incorporated by reference into Part III, Items 10, 11, 12 and 13. Exhibit Index at page 43 Total pages 52 TABLE OF CONTENTS Page ---- PART I Item 1. Business..................................................... 3 Item 2. Properties................................................... 10 Item 3. Legal Proceedings............................................ 11 Item 4. Submission of Matters to a Vote of Security Holders.......... 11 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................................ 11 Item 6. Selected Financial and Operating Data........................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 21 Item 8. Financial Statements and Supplementary Data.................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 42 PART III Item 10. Directors and Executive Officers of the Registrant........... 42 Item 11. Executive Compensation....................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 42 Item 13. Certain Relationships and Related Transactions............... 42 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 43 SIGNATURES............................................................... S-1 2 PART I ITEM 1. BUSINESS GENERAL Swift Transportation Co., Inc. (with its subsidiaries, "Swift" or the "Company") is the third largest publicly-held, national truckload carrier in the United States. Swift operates primarily throughout the continental United States, combining strong regional operations with a transcontinental van operation. The principal types of freight transported by Swift include retail and discount department store merchandise, manufactured goods, paper products, non-perishable food, beverages and beverage containers and building materials. By meeting its customers' specific needs for both regional and transcontinental service and through selective acquisitions, Swift has been able to achieve significant growth in revenues over the past five years. Operating revenue has grown at a compound annual growth rate of 25.8% from $277.0 million in 1993 to $873.4 million in 1998. During that same period, net earnings have grown at a compound annual growth rate of 35.2% from $12.3 million to $55.5 million. Swift Transportation Co., Inc., a Nevada corporation headquartered in Sparks, Nevada, is a holding company for the operating corporations named Swift Transportation Co., Inc. and Swift Transportation Corporation. These companies are collectively referred to herein as the "Company." The Company's headquarters are located at 2200 South 75th Avenue, Phoenix, Arizona 85043, and its telephone number is (602) 269-9700. This Annual Report on Form 10-K contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "expect," "anticipate," and "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, the impact of inflation and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report, including the Notes to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements are set forth in "Business" and "Market for the Registrant's Common Stock and Related Stockholder Matters" in this Annual Report. OPERATING STRATEGY Swift focuses on achieving high density for service-sensitive customers in short-to-medium haul traffic lanes. Through its network of 30 terminals, Swift is able to provide regional service on a nationwide basis. Swift's terminal network establishes a local market presence in the regions Swift serves and enables Swift to respond more rapidly to its customers' changing requirements. This regional network also enables Swift to enhance driver recruitment and retention by returning drivers to their homes regularly, reduce its purchases of higher priced fuel at truck stops and expedite lower cost, 3 in-house equipment maintenance. With an average length of haul of 567 miles in 1998, Swift is able to limit its direct competition with railroads, intermodal services and longer-haul, less specialized truckload carriers. Swift seeks to provide premium service with commensurate rates, rather than compete primarily on the basis of price. The principal elements of Swift's premium service include: regional terminals to facilitate single and multiple pick-ups and deliveries and maintain local contact with customers; well-maintained, late model equipment; a fully-integrated computer system to monitor shipment status and variations from schedule; an onboard communications system that enables the Company to dispatch and monitor traffic; timely deliveries; and extra equipment to respond promptly to customers' varying requirements. To manage the higher costs and greater logistical complexity inherent in operating in short-to-medium haul traffic lanes, Swift employs sophisticated computerized management control systems to monitor key aspects of its operations, such as availability of equipment, truck productivity and fuel consumption. Swift has a three-year replacement program for substantially all of its tractors, which allows Swift to maximize equipment utilization and fuel economy by capitalizing on improved engine efficiency and vehicle aerodynamics and to minimize maintenance expense. For 1998 and 1997, Swift maintained an operating ratio of 88.7% and 89.6%, respectively. GROWTH STRATEGY Major shippers continue to reduce the number of carriers they use for their regular freight needs. This has resulted in a relatively small number of financially stable "core carriers" and has contributed to consolidation in the truckload industry in recent years. The truckload industry remains highly fragmented, and management believes that overall growth in the truckload industry and continued industry consolidation will present opportunities for well managed, financially stable carriers such as Swift to expand. The Company intends to take advantage of growth opportunities through a combination of internal growth and selective acquisitions. The key elements of Swift's growth strategy are: + Strengthen Core Carrier Relationships. Swift intends to continue to strengthen its core carrier relationships, expand its services to its existing customers and pursue new customer relationships. By concentrating on expanding its services to its existing customers, Swift's revenues from its top 25 customers of 1996 increased by 50% from 1996 to 1998. The largest 25, 10 and 5 customers, respectively, accounted for 46%, 33% and 22% of revenues in 1998, with no customer accounting for more than 7% of Swift's revenues during that same period. In addition to expanding its services to existing customers, Swift actively pursues new traffic commitments from high volume, financially stable shippers for whom it has not previously provided services. + Pursue Strategic Acquisitions. Swift's revenue growth has been attributable, in significant part, to eight acquisitions completed in the last ten years. These acquisitions have enabled Swift to expand from its historical operations base in the Western United States and develop a strong regional presence in the Midwestern, Eastern and Southeastern United States. Swift generally limits its consideration of acquisitions to those it believes will be accretive to earnings within six months, and historically all of its acquisitions have met this objective. + Exploit Private Fleet Outsourcing. A number of large companies maintain their own private trucking fleets to facilitate distribution of their products. Swift believes that a high percentage of private fleet traffic is short-to-medium haul in nature, traveling an average of 500 miles or less per round trip. In order to reduce operating costs associated with private fleets, a number of large companies have begun to outsource their transportation and logistics requirements. Swift believes that its 4 strong regional operations and average length of haul of less than 600 miles position it to take advantage of this trend, and Swift already serves as a preferred supplier or "core carrier" to many major shippers who are considering, or may in the future consider, outsourcing their transportation and logistics requirements. OPERATIONS In the Western United States, Swift has developed a network of regional terminals and offices strategically located in areas which have strong, diverse economies and provide access to other key Western population centers. In addition to Phoenix, Swift's Western terminals are located in the areas of Los Angeles and San Francisco, California; Portland, Oregon; Salt Lake City, Utah; Lewiston, Idaho; Reno, Nevada; Pueblo and Denver, Colorado. In the Eastern United States, Swift has terminals located in Auburn, New York; Carlisle, Pennsylvania; Richmond, Virginia; Eden, North Carolina; Greer, South Carolina; Ocala, Florida; Atlanta and Albany, Georgia. Swift's Midwest terminals are located in Gary and Shoals, Indiana; Monroe and Columbus, Ohio; Dallas, Corsicana and Laredo, Texas; Oklahoma City, Oklahoma; Memphis, Tennessee; Kansas City, Kansas; Plymouth, Michigan; and Town of Menasha, Wisconsin. The terminals are located in close proximity to major customers who tender significant traffic volume to Swift. To minimize competition with long-haul truckload carriers and railroads, Swift operates principally within short-to-medium-haul traffic lanes. Although the Company's transcontinental division allows it to serve a broad spectrum of shipper needs, the primary regions in which Swift operates are ideally suited to short-to-medium-haul lanes because of the distribution of population and economic centers. During 1998 and 1997, Swift's average length of haul was 567 and 571 miles, respectively. Swift focuses the marketing of its services to large, service-sensitive customers that regularly ship over established routes within Swift's regional service areas. Swift's service includes the availability of specialized equipment suitable for the requirements of certain industries; high cubic capacity trailers; computerized tracking of and frequent reporting on customer shipments; onboard communications that enable instant re-routing or modification of traffic; well-maintained, late-model equipment that enhances on-time deliveries; multiple drops, appointment pick-ups and deliveries; assistance in loading and unloading; extra trailers that can be placed for the convenience of customers; and sufficient equipment to respond promptly to customers' varying requirements. The achievement of significant regular freight volumes on high-density routes and consistent shipment scheduling over these routes are key elements of Swift's operations. As a result, Swift's terminal managers are better able to match available equipment to available loads and schedule regular maintenance and fueling at Company terminals, thereby improving productivity and asset utilization and minimizing empty miles and expensive over-the-road fueling and repair costs. Consistent scheduling also allows Swift to be more responsive to its customers' needs. Swift's regular scheduling and relatively short length of haul enable drivers to return to their homes regularly, which has helped Swift improve recruitment. In order to reduce the higher operating costs traditionally associated with medium-length hauls and specialized equipment, Swift has installed sophisticated computerized management control systems to monitor key aspects of its operations. Swift has a significant investment in its computer hardware and utilizes state-of-the-art software specially designed for the trucking industry. The Company's fully integrated computer network allows its managers to coordinate available equipment with the transportation needs of its customers, monitor truck productivity and fuel consumption and schedule regular equipment maintenance. Dispatchers monitor the location and delivery schedules of all shipments and equipment to coordinate routes and increase equipment utilization. The Company's computer system provides immediate access to current information regarding driver and equipment status and location, special load and equipment instructions, routing and dispatching. 5 Swift's larger terminals are staffed with terminal managers, fleet managers and customer service representatives. Terminal managers work with both the fleet managers and the customer service representatives, as well as all other operations personnel, to coordinate the needs of both customers and drivers. Terminal managers are also responsible for soliciting new customers and serving existing customers in their areas. Each driver manager is responsible for the general operation of approximately 35 trucks and their drivers, including driver retention, productivity per truck, routing, fuel consumption, safety and scheduled maintenance. Customer service representatives are assigned specific customers to ensure specialized, high-quality service and frequent customer contact. ACQUISITIONS The growth of the Company has been, and will continue to be, dependent in part upon the acquisition of trucking companies throughout the United States. In 1988, the Company acquired Cooper Motor Lines ("Cooper"), which established the Company's operations in the Eastern United States. In September 1991, Swift further expanded its eastern operations by acquiring Arthur H. Fulton, Inc. ("Fulton"). In June 1993, the Company strengthened its presence in the Northwestern United States with the acquisition of West's Best Freight Systems, Inc. ("West's Best"). During 1994, the Company completed the acquisitions of both East-West Transportation, Inc. ("East-West") and Missouri-Nebraska Express, Inc. ("MNX"). The MNX acquisition established a significant regional operation in the Midwestern United States. In September 1996, the Company acquired the dry freight van division of Navajo Shippers, Inc., Digby Leasing, Inc. and Digby-Ringsby Truck Line, Inc. (collectively, "Navajo Shippers"). In April 1997, the Company acquired certain assets of Direct Transit, Inc. ("DTI"), a Debtor-In-Possession in United States Bankruptcy Court. DTI was a dry van carrier based in North Sioux City, South Dakota and operated predominantly in the eastern two-thirds of the United States. See "Factors That May Affect Future Results and Financial Condition" under Item 7. REVENUE EQUIPMENT Swift acquires premium tractors to help attract and retain drivers, promote safe operations and minimize maintenance and repair costs. Management believes the higher initial investment is recovered through improved resale value. The following table shows the type and age of Company-owned and leased equipment at December 31, 1998: 57', 53' AND SETS OF FLATBED SPECIALIZED MODEL YEAR TRACTORS (1) 48' VANS DOUBLE VANS TRAILERS TRAILERS ---------- ------------ -------- ----------- -------- -------- 1999 .............. 1,302 1,720 51 1998 .............. 1,481 3,187 20 2 1997 .............. 1,518 3,385 164 308 97 1996 .............. 776 2,191 202 1995 .............. 245 765 94 1994 .............. 165 1,399 40 1993 and prior..... 86 3,914 475 161 173 ------ ------ ------ ------ ------ Total ........ 5,573 16,561 639 825 323 ====== ====== ====== ====== ====== - ---------- (1) Excludes 1,225 owner-operator tractors. When purchasing new revenue equipment, Swift acquires standardized tractors and trailers manufactured to the Company's specifications. Since 1990, 6 Swift has acquired predominantly tractors manufactured by Freightliner powered by Series 60 Detroit Diesel engines. Standardization of drive-line components allows Swift to operate with a minimum spare parts inventory, enhances Swift's maintenance program and simplifies driver training. Swift adheres to a comprehensive maintenance program that minimizes downtime and enhances the resale value of its equipment. In addition to its primary maintenance facility in Phoenix, Arizona, Swift performs routine servicing and maintenance of its equipment at most of its regional terminal facilities, thus avoiding costly on-road repairs and out-of-route trips. Swift has adopted a three-year replacement program on the majority of its line-haul tractors. This replacement policy enhances Swift's ability to attract drivers, maximize its fuel economy by capitalizing on improvement in both engine efficiency and vehicle aerodynamics, stabilize maintenance expense and maximize equipment utilization. Swift has installed Qualcomm onboard, two-way vehicle satellite communication systems in the majority of its tractors. This communications system links drivers to regional terminals and corporate headquarters, allowing Swift to alter rapidly its routes in response to customer requirements and to eliminate the need for driver stops to report problems or delays. This system allows drivers to inform dispatchers and driver managers of the status of routing, loading and unloading or the need for emergency repairs. Swift believes the communications system improves fleet control, the quality of customer service and driver retention. Swift intends to continue to install the communication system in substantially all tractors acquired in the future. In 1998, Swift adopted a speed limit of 60 miles per hour for Company tractors (62 miles per hour for team drivers) and 65 miles per hour for owner-operator tractors to reduce accidents, enhance fuel mileage and minimize maintenance expense. Substantially all of Swift's Company tractors are equipped with electronically controlled engines that are set to limit the speed of the vehicle. MARKETING AND CUSTOMERS Swift has targeted the service-sensitive segment of the truckload market, both common and contract, rather than that segment that uses price as its primary consideration. The Company has chosen to provide premium service with commensurate rates rather than compete primarily on the basis of price. The principal elements of Swift's premium service include: regional terminals to facilitate single and multiple pick-ups and deliveries and to maintain local contact with customers; a fully-integrated computer system to monitor shipment location and variations from schedule; an onboard communication system that enables the Company to reroute traffic; well-maintained, late model equipment; timely deliveries; extra equipment for the convenience of customers, which enables Swift to respond promptly to customers' varying requirements; assistance in loading and unloading; and Company control of revenue equipment. By concentrating on expanding its services to its existing customers, the Company's revenues from its top 25 customers of 1996 increased 50% from 1996 to 1998. Swift maintains a strong commitment to marketing. Swift has assigned a member of senior management to each of its largest customers to ensure a high level of customer support. Swift solicits new customers from its Phoenix, Arizona headquarters and each of its regional terminals through a marketing staff of approximately 30 persons. Once a customer relationship has been established, regional customer service representatives maintain contact and solicit additional business. Swift concentrates on attracting non-cyclical customers that regularly ship multiple loads from locations that complement existing traffic flows. Customer shipping point locations are regularly monitored and, as shipping patterns of existing customers expand or change, Swift attempts to obtain additional customers that will complement the new traffic flow. This strategy enables Swift to maximize equipment utilization. The largest 25, ten and five customers accounted for approximately 46%, 33% and 22% respectively, of Swift's revenues during 1998, 47%, 33% and 23%, respectively, of Swift's revenues during 1997 and 44%, 33% and 23%, respectively, of Swift's revenues during 1996. No customer accounted for more than 7% of Swift's gross revenues during any of the three most recent fiscal years. Swift's largest customers include retail and discount department store 7 chains, manufacturers, non-perishable food companies, beverage and beverage container producers and building materials companies. DRIVERS AND EMPLOYEES All Swift drivers must meet or exceed specific guidelines relating primarily to safety records, driving experience and personal evaluations, including a physical examination and mandatory drug testing. Upon being hired, a driver is trained in all phases of Swift's policies and operations, safety techniques, and fuel efficient operation of the equipment. All new drivers must pass a safety test and have a current Commercial Drivers License. In addition, Swift has ongoing driver efficiency and safety programs to ensure that its drivers comply with its safety procedures. Senior management is actively involved with the development and retention of drivers. Recognizing the need for qualified drivers, Swift established its own driver-training school in Phoenix, Arizona in 1987, which is certified by the Arizona Department of Transportation. Swift also has contracted with driver-training schools which are managed by outside organizations as well as local community colleges throughout the country. Candidates for the schools must be at least 23 years old (21 years old with military service), with a high school education or equivalent, pass a basic skills test and pass the U.S. Department of Transportation ("DOT") physical examination, which includes drug and alcohol screening. Students are required to complete three weeks of classroom study and driving range time and a six to eight week, on-the-road training program. Swift bases its drivers at the regional terminals and monitors each driver's location on its computer system. Swift uses this information to schedule the routing for its drivers so that they can return home frequently. In order to attract and retain highly qualified drivers and promote safe operations, the Company purchases premium quality tractors equipped with optional comfort and safety features, such as air ride suspension, air conditioning, high quality interiors, power steering, engine brakes and raised roof double sleeper cabs. Company drivers are compensated on the basis of miles driven, loading/unloading and number of stops or deliveries, plus bonuses. Base pay for miles driven increases with a driver's length of service. The Company maintains a bonus system for its drivers based upon safety and driving performance. Drivers employed by Swift participate in company-sponsored health, life and dental insurance plans and are eligible to participate in a 401(k) Profit Sharing Plan and an Employee Stock Purchase Plan. Swift believes its innovative driver-training programs, driver compensation, regionalized operations, driver tracking and late-model equipment provide important incentives to attract and retain qualified drivers. Although Swift has had no significant downtime due to inability to secure qualified drivers, no assurance can be given that a shortage of qualified drivers will not adversely affect the Company in the future. As of December 31, 1998, Swift employed approximately 9,600 full-time persons, of whom approximately 7,300 were drivers (including driver trainees), 900 were mechanics and other equipment maintenance personnel and the balance were support personnel, such as sales personnel, corporate managers and administration. None of Swift's drivers or other employees is represented by a collective bargaining unit. In the opinion of management, Swift's relationship with its drivers and employees is good. SAFETY The Company has an active safety and loss prevention program at each of its terminals. Safety supervisors engage in ongoing training of drivers regarding safe vehicle operations and loading procedures. The Company has adopted maximum speed limits and rewards drivers with bonuses for complying with the Company's safety policies. The Company believes that its insurance and claims expense as a percentage of operating revenue is one of the best in the industry and attributable to its overall strong safety program. In December 1997, the Company received the highest safety rating given to motor carriers by the United States Department of Transportation. 8 FUEL In order to reduce fuel costs, the Company purchases approximately 71% of its fuel in bulk at 23 of its 30 terminals. Swift stores fuel in underground storage tanks at two of its bulk fueling terminals and in above ground storage tanks at its other bulk fueling terminals. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. Shortages of fuel, increases in fuel prices or rationing of petroleum products could have a material adverse effect on the operations and profitability of the Company. From time to time, the Company, in response to increases in fuel costs, has implemented fuel surcharges to pass on to its customers all or substantially all of such costs. However, there can be no assurance that such fuel surcharges could be used to offset future increases in fuel prices. The Company believes that its most effective protection against fuel cost increases is to maintain a fuel efficient fleet and to implement fuel surcharges when such option is necessary and available. The Company has not used derivative-type products as a hedge against higher fuel costs in the past but continues to evaluate this possibility. COMPETITION The trucking industry is extremely competitive and fragmented. The Company competes primarily with regional, medium-haul truckload carriers. Management believes, because of its cost efficiencies, productive equipment utilization and financial resources, that the Company has a competitive advantage over most regional truckload carriers. The Company believes that competition for the freight transported by the Company is based, in the long term, as much upon service and efficiency as on freight rates. There are some trucking companies with which the Company competes that have greater financial resources, own more revenue equipment and carry a larger volume of freight than the Company. Long-haul truckload carriers and railroads also provide competition, but to a lesser degree. The Company also competes with other motor carriers for the services of drivers. REGULATION Prior to December 29, 1995 the Company was regulated by the Interstate Commerce Commission ("ICC"). On December 29, 1995, the ICC ceased operations. However, substantially all of the jurisdiction over motor carriers was transferred to the United States Department of Transportation, and most of the regulatory requirements remain essentially unchanged. This regulatory authority has broad powers, generally governing matters such as authority to engage in motor carrier operations, certain mergers, consolidations and acquisitions and periodic financial reporting. The trucking industry is subject to regulatory and legislative changes which can affect the economics of the industry. The Company is also regulated by various state agencies. The Company's operations also are subject to various federal, state and local environmental laws and regulations dealing with transportation, storage, presence, use, disposal and handling of hazardous materials, discharge of stormwater and underground fuel storage tanks. The Company believes that its operations are in substantial compliance with current laws and regulations and does not know of any existing condition that would cause compliance with applicable environmental regulations to have a material adverse effect on the Company's business or operating results. SEASONALITY In the transportation industry, results of operations generally show a seasonal pattern as customers reduce shipments after the winter holiday season. The Company's operating expenses also tend to be higher in the winter months primarily due to colder weather which causes higher fuel consumption from increased idle time. 9 ITEM 2. PROPERTIES The following table provides information regarding the Company's regional terminals and/or offices: COMPANY OWNED LOCATION OR LEASED -------- --------- Albany, Georgia.................................... Leased Atlanta, Georgia................................... Leased Auburn, New York................................... Owned Carlisle, Pennsylvania............................. Leased Columbus, Ohio..................................... Leased Corsicana, Texas................................... Leased Denver, Colorado................................... Leased Eden, North Carolina............................... Owned Edwardsville, Kansas............................... Owned Fontana, California................................ Owned Gary, Indiana...................................... Owned Greer, South Carolina.............................. Owned Irving, Texas...................................... Leased Laredo, Texas...................................... Leased Lewiston, Idaho.................................... Leased Memphis, Tennessee................................. Owned Monroe, Ohio....................................... Leased Ocala, Florida..................................... Leased Oklahoma City, Oklahoma............................ Owned Phoenix, Arizona................................... Owned Plymouth, Michigan................................. Leased Pueblo, Colorado................................... Owned Richmond, Virginia................................. Owned Salt Lake City, Utah............................... Owned Shoals, Indiana.................................... Owned Sparks, Nevada..................................... Owned Stockton, California............................... Leased Troutdale, Oregon.................................. Owned Town of Menasha, Wisconsin......................... Owned Willows, California................................ Owned Wilmington, California............................. Leased Swift's headquarters is located on approximately 153 acres in Phoenix, Arizona and contains 83,000 square feet of office space, 106,000 square feet of shop and maintenance facilities, 27,000 square feet of a drivers' center, a recruiting and training center, a warehouse facility, a two-bay truck wash and an eight lane fueling center. The Company's prior headquarters is held for sale. As of December 31, 1998, the Company's aggregate monthly rent for all leased properties was $94,000. 10 ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incidental to its business, primarily involving claims for personal injury or property damage incurred in the transportation of freight. The Company's insurance program for liability, workers' compensation, physical damage and cargo damage involves self-insurance with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers to be adequate. The Company is not aware of any claims or threatened claims that might have a material adverse effect upon the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is publicly traded on the Nasdaq National Market ("Nasdaq") under the symbol "SWFT". The following table sets forth the high and low closing sales prices of the common stock reported by Nasdaq for the periods shown. COMMON STOCK ----------------- HIGH LOW ---- --- 1998 First Quarter.................... $17.83 $12.72 Second Quarter................... 17.17 12.00 Third Quarter.................... 15.33 10.59 Fourth Quarter................... 19.50 11.29 1997 First Quarter.................... $12.45 $10.78 Second Quarter................... 14.55 11.50 Third Quarter.................... 14.22 12.22 Fourth Quarter................... 14.78 12.22 On March 16, 1999, the last reported sales price of the Company's common stock was $19.42 per share. At that date, the number of stockholder accounts of record of the Company's common stock was 2,100. The Company estimates there are approximately 4,800 beneficial holders of the Company's common stock. The Company has not paid cash dividends on its common stock in either of the two preceding fiscal years and one of the Company's notes payable includes limitations on the payment of cash dividends. It is the current intention of management to retain earnings to finance the growth of the Company's business. Future payment of cash dividends will depend upon the financial condition, results of operations, and capital requirements of the Company, as well as other factors deemed relevant by the Board of Directors. On March 15, 1999, the Company's Board of Directors approved a 3-for-2 stock split effected in the form of a stock dividend and payable on April 10, 1999 to the stockholders of record at the close of business on March 31, 1999. All share amounts, share prices and earnings per share in this Annual Report on Form 10-K have been retroactively adjusted to reflect this 3-for-2 stock split. 11 FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE The performance of the Company's common stock is dependent upon several factors, including those set forth below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results and Financial Condition." INFLUENCE BY PRINCIPAL STOCKHOLDER. Trusts established for the benefit of Jerry C. Moyes and his family beneficially own approximately 44% of the Company's common stock. Accordingly, Mr. Moyes will have a significant influence upon the activities of the Company, as well as on all matters requiring approval of the stockholders, including electing members of the Company's Board of Directors and causing or restricting the sale or merger of the Company. This concentration of ownership, as well as the ability of the Board to establish the terms of and issue preferred stock of the Company without stockholder approval, may have the effect of delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over their current market prices. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's common stock could be subject to significant fluctuations in response to certain factors, such as, among others, variations in the anticipated or actual results of operations of the Company or other companies in the transportation industry, changes in conditions affecting the economy generally, analysts' reports or general trends in the industry, as well as other factors unrelated to the Company's operating results. 12 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1998 is derived from the Company's Consolidated Financial Statements. The Consolidated Financial Statements as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998 and the independent auditors' report thereon, are included in Item 8 of this Form 10-K. This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K.
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1997(1) 1996(2) 1995 1994(3) ---- ------- ------- ---- ------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER MILE AMOUNTS) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Operating revenue .................... $873,433 $713,638 $562,259 $458,165 $365,889 Earnings before income taxes ......... $ 93,306 $ 69,994 $ 47,212 $ 40,070 $ 39,309 Net earnings ......................... $ 55,511 $ 41,644 $ 27,422 $ 23,040 $ 22,629 Diluted earnings per share(5)......... $ .85 $ .64 $ .47 $ .41 $ .40 CONSOLIDATED BALANCE SHEET DATA (AT END OF YEAR): Working capital ...................... $ 81,048 $ 64,168 $ 36,938 $ 6,735 $ 14,012 Total assets ......................... $636,283 $471,134 $380,605 $311,308 $275,991 Long-term obligations, less current portion ..................... $143,208 $ 73,420 $ 40,284 $ 68,954 $ 77,715 Stockholders' equity ................. $327,353 $274,175 $226,666 $134,835 $111,342 OPERATING STATISTICS (AT END OF YEAR): Operating ratio ...................... 88.7% 89.6% 90.5% 89.9% 88.8% Pre-tax margin (4) ................... 10.7% 9.8% 8.4% 8.7% 10.7% Average line haul revenue per mile ... $ 1.14 $ 1.13 $ 1.11 $ 1.11 $ 1.12 Empty mile percentage ................ 13.5% 13.7% 14.0% 13.9% 13.2% Average length of haul (in miles) .... 567 571 576 591 590 Total tractors at end of period: Company-operated.................... 5,573 4,968 4,166 3,472 3,286 Owner-operator...................... 1,225 910 665 477 188 Trailers at end of period ............ 18,348 15,499 12,151 8,788 8,957
- ---------- (1) Includes the results of operations from the acquisition of certain assets of DTI beginning April 8, 1997. (2) Includes the results of operations from the asset acquisition of the dry freight van division of Navajo Shippers, Inc., Digby Leasing, Inc. and Digby-Ringsby Truck Line, Inc. beginning on September 12, 1996. (3) Includes the results of operations from the asset acquisitions of East-West Transportation, Inc. beginning on July 1, 1994 and Missouri-Nebraska Express, Inc. beginning October 2, 1994. (4) Pre-tax margin represents earnings before income taxes as a percentage of operating revenue. Because of the impact that equipment financing methods can have on the operating ratio (operating expenses as a percentage of operating revenue), the Company believes that the most meaningful comparative measure of its operating efficiency is its pre-tax margin, which takes into consideration both the Company's total operating expenses and net interest expense as a percentage of operating revenue. (5) As adjusted to reflect the 3-for-2 stock split effected in the form of a stock dividend and payable on April 10, 1999 to the stockholders of record at the close of business on March 31, 1999. All share amounts, share prices and earnings per share in this Annual Report on Form 10-K have been retroactively adjusted to reflect this 3-for-2 stock split. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Swift's fleet has been predominantly comprised of Company-owned and leased tractors. The Company's decisions whether to buy or lease new and replacement revenue equipment is based upon the overall economic impact of the alternative financing methods, including market prices available and income tax considerations. Depending on whether revenue equipment is purchased or leased, several categories of the Company's operating expenses have varied, and will continue to vary, as a percentage of the Company's revenues. Because of the impact that equipment financing methods can have on the operating ratio (operating expenses as a percentage of operating revenue), the Company believes that the most meaningful comparative measure of its operating efficiency is its pre-tax margin (earnings before income taxes as a percentage of operating revenue), which takes into consideration both the Company's total operating expenses and net interest expense as a percentage of operating revenue. Accordingly, in the discussion and analysis below, the Company has focused on the factors contributing to operating revenue increases and to the increase or decrease in its pre-tax margin during the periods presented. In the "forward-looking statements" that may be included herein, important factors such as the financial position of the Company, its customers needs, the cost of new equipment and new construction, the availability of buyers in the marketplace, fuel costs and other factors may cause actual results to vary. Although the trend of shippers in the truckload segment of the motor carrier industry over the past several years has been towards consolidation, the truckload industry remains highly fragmented. Management believes the industry trend towards financially stable "core carriers" will continue and result in continued industry consolidation. In response to this trend, the Company continues to expand its fleet with 5,573 tractors as of December 31, 1998 compared to 3,472 tractors as of December 31, 1995. This fleet growth was accomplished through a combination of internal growth and through strategic acquisitions. See "Business -- General." During this same period, the Company's owner operator fleet has expanded to 1,225 as of December 31, 1998 from 477 as of December 31, 1995. YEAR 2000 ISSUE The Company has completed its comprehensive review of its Year 2000 issues and internal systems (information technology ("IT") and non-IT). The majority of the Company's application software programs are purchased from and maintained by vendors. Therefore, the Company is working with these software vendors to verify these applications become Year 2000 compliant. The Company estimates the status of progress of these internal systems as follows: VENDOR MODIFICATIONS BEING PERFORMED TESTING COMMENCED --------------- ----------------- IT Systems 98% 90% Non-IT Systems 90% 30% The Company presently believes that with modifications and updates to existing software, the cost of which is not expected to be material, the Year 2000 problem will not pose significant operational problems for the Company's internal systems. The Company's contingency plan in the event of a Year 2000 problem is to perform tasks through telephonic communication, which the Company believes will allow it to operate in the short term assuming power and telephone services are functioning. 14 As part of the Company's comprehensive review, it is continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Company has material relationships. At present, the Company believes its material vendors and customers will be Year 2000 compliant and the effect on the Company's results of operations, liquidity, and financial condition will not be material. The Company will continue to monitor the progress of its material vendors and customers and formulate a contingency plan at that point in time when the Company does not believe a material vendor or customer will be compliant. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain statement of earnings data as a percentage of operating revenue: DECEMBER 31, ---------------------- 1998 1997 1996 ----- ----- ----- Operating revenue .............................. 100.0% 100.0% 100.0% Operating expenses: Salaries, wages and employee benefits ........ 36.5 34.5 34.2 Operating supplies and expenses .............. 9.1 8.9 9.3 Fuel ......................................... 10.7 12.8 13.8 Purchased transportation ..................... 15.5 13.5 12.8 Rental expense ............................... 4.7 6.5 5.8 Insurance and claims ......................... 2.8 3.2 3.6 Depreciation and amortization ................ 5.3 5.3 6.0 Communications and utilities ................. 1.3 1.5 1.5 Operating taxes and licenses ................. 2.8 3.4 3.5 ----- ----- ----- Total operating expenses ..................... 88.7 89.6 90.5 ----- ----- ----- Operating income ............................... 11.3 10.4 9.5 Net interest expense ........................... .7 .7 1.2 Other (income) expense, net .................... (0.1) (0.1) (0.1) ----- ----- ----- Earnings before income taxes ................... 10.7 9.8 8.4 Income taxes ................................... 4.3 4.0 3.5 ----- ----- ----- Net earnings ................................... 6.4% 5.8% 4.9% ===== ===== ===== YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Operating revenue increased $159.8 million, or 22.4%, to $873.4 million for the year ended December 31, 1998 from $713.6 million for the previous year. The increase in operating revenue is due primarily to the expansion of the Company's total fleet to 6,798 tractors at December 31, 1998 from 5,878 at December 31, 1997, an increase of 920 tractors. The Company's operating ratio was 88.7% and 89.6% in 1998 and 1997, respectively. The Company's operating revenue and operating ratio for 1998 improved as a result of strong shipper demand which caused an increase in operating revenue and the favorable impact in components of operating expenses explained below. The Company's empty mile factor was 13.5% and 13.7% and the average rate per mile was $1.143 and $1.118 (excluding fuel surcharge) for the years ended December 31, 1998 and 1997, respectively. Salaries, wages and employee benefits represented 36.5% of operating revenue for the year ended December 31, 1998 compared with 34.5% for 1997. The increase is due primarily to an increase in the accrual for the Company's 401(k) profit sharing contribution and normal wage increases with associated benefits and taxes. 15 From time to time the industry has experienced shortages of qualified drivers. If such a shortage were to occur over a prolonged period and increases in driver pay rates were to occur in order to attract and retain drivers, the Company's results of operations would be negatively impacted to the extent that corresponding rate increases were not obtained. Fuel expenses represented 10.7% and 12.8% of operating revenue in 1998 and 1997, respectively. The decrease in fuel as a percentage of revenue is due primarily to decreased fuel prices and an increase in the owner operator fleet. Actual fuel cost per gallon decreased by approximately 16 cents per gallon in 1998 versus 1997. Increases in fuel costs (including fuel taxes), to the extent not offset by rate increases or fuel surcharges, could have an adverse effect on the operations and profitability of the Company. Management believes that the most effective protection against fuel cost increases is to maintain a fuel efficient fleet and to implement fuel surcharges when such an option is necessary and available. The Company currently does not use derivative-type hedging products but is currently evaluating the possible use of these products. Purchased transportation represented 15.5% and 13.5% of operating revenue for the years ended December 31, 1998 and 1997, respectively. This increase is primarily the result of the growth of the Company's owner operator fleet from 910 at December 31, 1997 to 1,225 at December 31, 1998. Rental expense as a percentage of operating revenue was 4.7% and 6.5% for the years ended December 31, 1998 and 1997, respectively. During 1998 and 1997, leased tractors represented approximately 54% and 61%, respectively of the fleet (exclusive of owner operators). In addition to the reduction in the percentage of tractors which were leased, rental expense was positively impacted by a reduction in the number of leased trailers as well as a slight reduction in the average lease rate for tractors in 1998 versus 1997. When it is economically feasible to do so, the Company will purchase then sell tractors it leases by exercising the purchase option contained in the lease. Gains on these activities are recorded as a reduction of rent expense. During the year ended December 31,1998 and 1997, respectively, the Company recorded gains of approximately $3.8 million and $770,000 from the sale of leased tractors. Depreciation and amortization expense was 5.3% of operating revenue for the years ended December 31, 1998 and 1997. During the year ended December 31, 1998 the Company recorded gains on the sale of revenue equipment of approximately $6.1 million compared with approximately $3.6 million in 1997. Exclusive of gains, which reduced depreciation and amortization expense, the percentage of depreciation and amortization to operating revenue in 1998 and 1997 was 6.0% and 5.8%, respectively. Insurance and claims expense represented 2.8% and 3.2% of operating revenue in the years ended December 31,1998 and 1997, respectively. The Company's insurance program for liability, physical damage and cargo damage involves self-insurance with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers adequate. The Company accrues the estimated cost of the uninsured portion of pending claims. These accruals are estimated based on management's evaluation of the nature and severity of individual claims and an estimate of future claims development based on historical claims development trends. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Interest expense increased to $6.3 million in 1998 from $4.6 million in 1997. This increase was due to increased borrowings under the Company's line of credit. 16 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Operating revenue increased $151.3 million, or 26.9%, to $713.6 million for the year ended December 31, 1997 from $562.3 million for the previous year. The increase in operating revenue is due primarily to the expansion of the Company's total fleet to 5,878 tractors at December 31, 1997 from 4,831 at December 31, 1996, an increase of 1,047 tractors. The acquisition of tractors from certain lessors of DTI in April 1997 accounted for 565 of this increase in tractors. The Company's freight rates increased by approximately 1% in 1997. The Company's operating ratio was 89.6% and 90.5% in 1997 and 1996, respectively. The Company's operating revenue and operating ratio for 1997 improved as a result of strong shipper demand which caused an increase in operating revenue and the favorable impact in components of operating expenses explained below. The Company's empty mile factor was 13.7% and 14.0% and the average rate per mile was $1.118 and $1.103 (excluding fuel surcharge) for the years ended December 31, 1997 and 1996, respectively. Salaries, wages and employee benefits represented 34.5% of operating revenue for the year ended December 31, 1997 compared with 34.2% for 1996. The increase is due primarily to driver pay including retention bonuses offset in part by expansion of the Company's owner operator fleet. Effective January 1, 1997, the Company began paying its drivers a bonus of two cents per mile. For the first three quarters this bonus was payable quarterly, provided the driver was still employed at the end of the quarter. Fuel expenses represented 12.8% and 13.8% of operating revenue in 1997 and 1996, respectively. The decrease in fuel as a percentage of revenue is due primarily to decreased fuel prices and an increase in the owner operator fleet. Purchased transportation represented 13.5% and 12.8% of operating revenue for the years ended December 31, 1997 and 1996, respectively. This increase is the result of the growth of the Company's owner operator fleet from 665 at December 31, 1996 to 910 at December 31, 1997. Rental expense as a percentage of operating revenue was 6.5% and 5.8% for the years ended December 31, 1997 and 1996, respectively. This increase is partially due to an increase in trailers under lease. When it is economically feasible to do so, the Company will purchase then sell tractors it leases by exercising the purchase option contained in the lease. Gains on these activities are recorded as a reduction of rent expense. During the year ended December 31,1997 and 1996, respectively, the Company recorded gains of approximately $770,000 and $3.3 million from the sale of leased tractors. During 1997 and 1996, leased tractors represented approximately 61% and 55%, respectively of the fleet (exclusive of owner operators). Depreciation and amortization expense was 5.3% of operating revenue for the year ended December 31, 1997 versus 6.0% for 1996. This decrease is primarily due to expansion of the owner operator fleet. During the year ended December 31, 1997 the Company recorded gains on the sale of revenue equipment of approximately $3.6 million compared with approximately $2.2 million in 1996. Exclusive of gains, which reduced depreciation and amortization expense, the percentage of depreciation and amortization to operating revenue in 1997 and 1996 was 5.8% and 6.4%, respectively. Insurance and claims expense represented 3.2% and 3.6% of operating revenue in the year ended December 31, 1997 and 1996, respectively. The Company's insurance program for liability, physical damage and cargo damage involves self-insurance with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers adequate. The Company accrues the estimated cost of the uninsured portion of pending claims. These accruals are estimated based on management's evaluation of the nature and severity of individual claims and an estimate of future claims development based on historical claims development trends. Insurance and claims expense will vary as a percentage of operating revenue from 17 period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Interest expense decreased to $4.6 million in 1997 from $7.1 million in 1996. This decline is due to a lower effective borrowing rate and a lower debt level throughout most of the year which resulted from utilizing the proceeds of the December 1996 common stock offering to reduce outstanding debt. LIQUIDITY AND CAPITAL RESOURCES The continued growth in the Company's business requires significant investment in new revenue equipment, upgraded and expanded facilities, and enhanced computer hardware and software. The funding for this expansion has been from cash provided by operating activities, proceeds from the sale of revenue equipment, long-term debt, borrowings on the Company's revolving line of credit, the use of operating leases to finance the acquisition of revenue equipment and from public offerings of common stock. Net cash provided by operating activities was $114.9 million for the year ended December 31, 1998 compared to $75.9 million for 1997. The increase is primarily attributable to an increase in net earnings and an increase in accounts payable, accrued liabilities and claims accruals offset by an increase in accounts receivable. Prepaid expenses increased by $10.1 million from December 31, 1997 to December 31, 1998. The increase is primarily due to the payment of 1999 license fees in December 1998. Net cash used in investing activities increased to $171.4 million for the year ended December 31, 1998 from $104.0 million for 1997. The increase is due primarily to an increase in capital expenditures offset by increased proceeds from the sale of property and equipment. Cash expended for investment activities also includes $3.7 million expended for the purchase of certain assets of DTI in 1997. As of December 31, 1998, the Company had commitments outstanding to acquire replacement and additional revenue equipment for approximately $247 million. The Company has the option to cancel such commitments upon 60 days notice. The Company believes it has the ability to obtain debt and lease financing and generate sufficient cash flows from operating activities to support these acquisitions of revenue equipment. During the year ended December 31, 1998, the Company incurred approximately $29 million of non-revenue equipment capital expenditures. These expenditures were primarily for facilities and equipment. The Company anticipates that it will expend approximately $51 million in 1999 for various facilities upgrades and acquisition and development of terminal facilities. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures. The funding for capital expenditures has been and will be from a combination of cash provided by operating activities, amounts available under the Company's $170 million line of credit, lease and debt financing and equity offerings. The availability of capital for revenue equipment and other capital expenditures will be affected by prevailing market conditions and the Company's financial condition and results of operations. Net cash provided by financing activities was $57.3 million in 1998 compared to $32.6 million in 1997. The increase in cash provided by financing activities is primarily due to an increase in borrowings under the line of credit offset by treasury stock purchases. Management believes that it will be able to finance its needs for working capital, facilities improvements and expansion, as well as anticipated fleet growth through a combination of revenue equipment purchases and strategic acquisitions, as opportunities become available, with cash flows from operations, borrowings available under the line of credit and with long-term 18 debt and operating lease financing believed to be available to finance revenue equipment purchases. Over the long term, the Company will continue to have significant capital requirements, which may require the Company to seek additional borrowings or equity capital. The availability of debt financing or equity capital will depend upon the Company's financial condition and results of operations as well as prevailing market conditions, the market price of the Company's common stock and other factors over which the Company has little or no control. INFLATION Inflation can be expected to have an impact on the Company's operating costs. A prolonged period of inflation would cause interest rates, fuel, wages and other costs to increase and would adversely affect the Company's results of operations unless freight rates could be increased correspondingly. However, the effect of inflation has been minimal over the past three years. SEASONALITY In the transportation industry, results of operations generally show a seasonal pattern as customers reduce shipments after the winter holiday season. The Company's operating expenses also tend to be higher in the winter months primarily due to increased operating costs in colder weather and higher fuel consumption due to increased idle time. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION The Company's future operating results and financial condition are dependent on the Company's ability to successfully provide truckload carrier services to meet dynamic customer demand patterns. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and financial condition. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, without limitation, the factors discussed below. GENERAL ECONOMIC AND BUSINESS FACTORS. The Company's business is dependent upon a number of factors that may have a material adverse effect on its results of operations, many of which are beyond the Company's control. These factors include excess capacity in the trucking industry, significant increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees and insurance and claims costs, to the extent not offset by increases in freight rates or fuel surcharges, and difficulty in attracting and retaining qualified drivers and owner operators. The Company's results of operations also are affected by recessionary economic cycles and downturns in customers' business cycles, particularly in market segments and industries (such as retail and paper products) in which the Company has a concentration of customers. In addition, the Company's results of operations are affected by seasonal factors. Customers tend to reduce shipments after the winter holiday season and the Company's operating expenses tend to be higher in the winter months primarily due to colder weather which causes higher fuel consumption from increased idle time. COMPETITION. The trucking industry is extremely competitive and fragmented. The Company competes with many other truckload carriers of varying sizes and, to a lesser extent, with railroads. Competition has created downward pressure on the truckload industry's pricing structure. There are some trucking companies with which the Company competes that have greater financial resources than the Company, own more revenue equipment and carry a larger volume of freight than the Company. CAPITAL REQUIREMENTS. The trucking industry is very capital intensive. The Company depends on cash from operations, operating leases and debt financing for funds to expand the size of its fleet and maintain modern revenue equipment. If the Company were unable in the future to enter into acceptable financing arrangements, it would have to limit its growth and might be required to operate its revenue equipment for longer periods, which could have a material adverse effect on the Company's operating results. 19 ACQUISITIONS. The growth of the Company has been, and will continue to be, dependent in part upon the acquisition of trucking companies throughout the United States. To date, the Company has been successful in identifying trucking companies to acquire and in integrating such companies' operations into the Company's operations. The Company may face competition from transportation companies or other third parties for acquisition opportunities that become available. There can be no assurance that the Company will identify acquisition candidates that will result in successful combinations in the future. Any future acquisitions by the Company may result in the incurrence of additional debt and amortization of expenses related to goodwill and intangible assets, which could adversely affect the Company's profitability, or could involve the potentially dilutive issuance of additional equity securities. In addition, acquisitions involve numerous risks, including difficulties in assimilation of the acquired company's operations particularly in the period immediately following the consummation of such transactions, the diversion of the attention of the Company's management from other business, and the potential loss of customers, key employees and drivers of the acquired company, all of which could have a material adverse effect on the Company's business and operating results. DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the services of Mr. Jerry Moyes, Chairman of the Board, President and Chief Executive Officer, Mr. William F. Riley, III, Executive Vice President and Chief Financial Officer, Mr. Rodney K. Sartor, Executive Vice President, Mr. Patrick J. Farley, Executive Vice President, and Mr. Kevin H. Jensen, Executive Vice President. Although the Company believes it has an experienced and talented management group, the loss of the services of Mr. Moyes, Mr. Riley, Mr. Sartor, Mr. Farley or Mr. Jensen could have a material adverse effect on the Company's operations and future profitability. The Company does not have employment agreements with nor does it maintain key man life insurance on Messrs. Moyes, Riley, Sartor, Farley or Jensen. REGULATION. The Company is regulated by the United States Department of Transportation. This regulatory authority exercises broad powers, generally governing activities such as authorization to engage in motor carrier operations, safety, financial reporting, and certain mergers, consolidations and acquisitions. In addition, the Company's operations are subject to various environmental laws and regulations dealing with the transportation, storage, presence, use, disposal and handling of hazardous materials, discharge of stormwater and underground fuel storage tanks. If the Company should be involved in a spill or other accident involving hazardous substances or if the Company were found to be in violation of applicable laws or regulations, it could have a material adverse effect on the Company's business and operating results. CLAIMS EXPOSURE; INSURANCE. The Company currently self-insures for liability resulting from cargo loss, personal injury and property damage and for workers' compensation, and maintains insurance with licensed insurance companies above its limits on self-insurance. To the extent the Company were to experience an increase in the number of claims for which it is self-insured, the Company's operating results would be materially adversely affected. In addition, significant increases in insurance costs, to the extent not offset by freight rate increases, would reduce the Company's profitability. DEPENDENCE ON KEY CUSTOMERS. A significant portion of the Company's revenue is generated from key customers. During 1998, the Company's top 25, 10 and 5 customers accounted for 46%, 33% and 22% of revenues, respectively. The Company does not have long-term contractual relationships with many of its key customers, and there can be no assurance that the Company's relationships with its key customers will continue as presently in effect. A reduction in or termination of the Company's services by a key customer could have a material adverse effect on the Company's business and operating results. 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has interest rate exposure arising from the Company's line of credit which has a variable interest rate. This variable interest rate is impacted by changes in short-term interest rates. The Company manages interest rate exposure through its conservative debt ratio target and its mix of fixed and variable rate debt and lease financing. At December 31, 1998, the fair value of the Company's long-term debt approximated carrying value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements of the Company as of December 31, 1998 and for each of the years in the three-year period ended December 31, 1998, together with related notes and the report of KPMG LLP, independent auditors, are set forth on the following pages. Other required financial information set forth herein is more fully described in Item 14 of this Form 10-K. 21 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS SWIFT TRANSPORTATION CO., INC.: We have audited the accompanying consolidated balance sheets of Swift Transportation Co., Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Swift Transportation Co., Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Phoenix, Arizona February 12, 1999, except as to Note 18 which is as of March 15, 1999 22 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, --------------------- ASSETS 1998 1997 ---- ---- Current assets: Cash ............................................... $ 6,530 $ 5,726 Accounts receivable, net ........................... 118,555 92,587 Equipment sales receivables ........................ 5,262 3,284 Inventories and supplies ........................... 4,866 4,509 Prepaid taxes, licenses and insurance .............. 15,228 5,090 Assets held for sale ............................... 5,468 5,468 Deferred income taxes .............................. 4,010 5,280 -------- -------- Total current assets ............................ 159,919 121,944 -------- -------- Property and equipment, at cost: Revenue and service equipment ...................... 487,928 366,223 Land ............................................... 8,409 7,520 Facilities and improvements ........................ 85,919 62,760 Furniture and office equipment ..................... 15,566 13,949 -------- -------- Total property and equipment .................... 597,822 450,452 Less accumulated depreciation and amortization ....... 131,045 111,917 -------- -------- Net property and equipment ....................... 466,777 338,535 Other assets ......................................... 1,770 1,976 Goodwill ............................................. 7,817 8,679 -------- -------- $636,283 $471,134 ======== ======== See accompanying notes to consolidated financial statements. 23 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, --------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ---- ---- Current liabilities: Accounts payable .................................... $ 27,100 $ 14,469 Accrued liabilities ................................. 27,273 20,177 Current portion of claims accruals .................. 23,788 16,281 Current portion of long-term debt ................... 710 6,849 -------- -------- Total current liabilities ...................... 78,871 57,776 -------- -------- Borrowings under revolving line of credit ............ 128,000 56,500 Long-term debt, less current portion ................. 15,208 16,920 Claims accruals, less current portion ................ 28,091 21,343 Deferred income taxes ................................ 58,760 44,420 Stockholders' equity: Preferred stock, par value $.001 per share Authorized 1,000,000 shares; none issued Common stock, par value $.001 per share Authorized 75,000,000 shares; issued 65,044,275 and 64,190,335 shares in 1998 and 1997, respectively .............................. 65 64 Additional paid-in capital .......................... 123,386 116,120 Retained earnings ................................... 216,918 161,407 -------- -------- 340,369 277,591 Less treasury stock, at cost (1,323,075 and 496,575 shares at December 31, 1998 and 1997, respectively) ............................... 13,016 3,416 -------- -------- Total stockholders' equity ..................... 327,353 274,175 -------- -------- Commitments, contingencies and subsequent events $636,283 $471,134 ======== ======== See accompanying notes to consolidated financial statements. 24 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---- ---- ---- Operating revenue .......................... $873,433 $713,638 $562,259 -------- -------- -------- Operating expenses: Salaries, wages and employee benefits...... 318,992 246,231 192,572 Operating supplies and expenses ........... 79,556 63,622 52,362 Fuel ...................................... 93,023 91,257 77,063 Purchased transportation .................. 135,453 96,107 72,040 Rental expense ............................ 41,447 46,545 32,599 Insurance and claims ...................... 24,094 23,161 20,358 Depreciation and amortization ............. 46,033 37,849 33,883 Communications and utilities .............. 11,433 10,695 8,219 Operating taxes and licenses .............. 24,710 24,132 19,584 -------- -------- -------- Total operating expenses .............. 774,741 639,599 508,680 -------- -------- -------- Operating income ...................... 98,692 74,039 53,579 -------- -------- -------- Other (income) expenses: Interest expense .......................... 6,277 4,647 7,106 Interest income ........................... (269) (183) (107) Other ..................................... (622) (419) (632) -------- -------- -------- Other (income) expenses, net .......... 5,386 4,045 6,367 -------- -------- -------- Earnings before income taxes .......... 93,306 69,994 47,212 Income taxes .............................. 37,795 28,350 19,790 -------- -------- -------- Net earnings .......................... $ 55,511 $ 41,644 $ 27,422 ======== ======== ======== Basic earnings per share ................... $ .87 $ .66 $ .49 ======== ======== ======== Diluted earnings per share ................. $ .85 $ .64 $ .47 ======== ======== ======== See accompanying notes to consolidated financial statements. 25 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL ------------------ PAID-IN RETAINED TREASURY STOCKHOLDERS' SHARES PAR VALUE CAPITAL EARNINGS STOCK EQUITY ------ --------- ------- -------- ----- ------ Balance, January 1, 1996 ............... 55,974,451 $ 56 $ 45,854 $ 92,341 $ (3,416) $134,835 Issuance of common stock under stock option and employee stock purchase plans ........................ 657,338 1,676 1,676 Issuance of common stock upon public offering, net of issuance costs of $300 ......................... 6,468,750 7 59,407 59,414 Issuance of common stock for Navajo Shippers acquisition ........... 202,500 1,918 1,918 Income tax benefit arising from the exercise of stock options ......... 1,330 1,330 Amortization of deferred compensation ......................... 71 71 Net earnings ........................... 27,422 27,422 ---------- ---- -------- -------- -------- -------- Balance, December 31, 1996 ............. 63,303,039 63 110,256 119,763 (3,416) 226,666 Issuance of common stock under stock option and employee stock purchase plans ........................ 887,296 1 2,963 2,964 Income tax benefit arising from the exercise of stock options ............ 2,765 2,765 Amortization of deferred compensation ......................... 136 136 Net earnings ........................... 41,644 41,644 ---------- ---- -------- -------- -------- -------- Balance, December 31, 1997 ............. 64,190,335 64 116,120 161,407 (3,416) 274,175 Issuance of common stock under stock option and employee stock purchase plans ........................ 853,940 1 3,726 3,727 Income tax benefit arising from the exercise of stock options ......... 3,349 3,349 Amortization of deferred compensation ......................... 212 212 Payment of stock split fractional share ................................ (21) (21) Purchase of 826,500 shares of treasury stock ........................ (9,600) (9,600) Net earnings ........................... 55,511 55,511 ---------- ---- -------- -------- -------- -------- Balance, December 31, 1998 ............. 65,044,275 $ 65 $123,386 $216,918 $(13,016) $327,353 ========== ==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 26 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net earnings ............................... $ 55,511 $ 41,644 $ 27,422 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ............. 42,568 37,104 33,883 Deferred income taxes ..................... 15,610 4,830 3,510 Income tax benefit arising from the exercise of stock options ................ 3,349 2,765 1,330 Provision for losses on accounts receivable................................ 1,110 240 616 Amortization of deferred compensation ..... 212 136 71 Change in assets and liabilities (net of effects of acquisitions in 1997 and 1996): Increase in accounts receivable .......... (27,056) (14,890) (22,637) Increase in inventories and supplies ..... (357) (512) (774) Decrease (increase) in prepaid expenses and other current assets ................ (10,138) (1,636) 1,912 Decrease (increase) in other assets ...... 78 (720) 416 Increase in accounts payable, accrued liabilities and claims accruals ......... 33,982 6,932 13,035 --------- --------- --------- Net cash provided by operating activities ........................... 114,869 75,893 58,784 --------- --------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment ................................. 63,233 30,680 36,692 Capital expenditures ....................... (238,002) (131,310) (111,820) Payments received on equipment sales receivables................................ 3,407 389 106 Business acquisitions ...................... (3,749) (5,148) --------- --------- --------- Net cash used in investing activities ........................... (171,362) (103,990) (80,170) --------- --------- --------- Cash flows from financing activities: Repayments of long-term debt ............... (8,287) (10,332) (60,897) Proceeds from issuance of long-term debt ... 15,026 Increase in borrowings under revolving line of credit ................ 71,500 40,000 4,750 Payment of stock split fractional shares ... (21) Proceeds from sale of common stock, net of issuance costs ................... 3,705 2,945 61,090 Purchase of treasury stock ................. (9,600) --------- --------- --------- Net cash provided by financing activities ........................... 57,297 32,613 19,969 --------- --------- --------- Net increase (decrease) in cash ............. 804 4,516 (1,417) Cash at beginning of year ................... 5,726 1,210 2,627 --------- --------- --------- Cash at end of year ......................... $ 6,530 $ 5,726 $ 1,210 ========= ========= ========= See accompanying notes to consolidated financial statements. 27 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS) YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ---- ---- ---- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ..................................... $ 5,842 $ 4,568 $ 7,112 ======= ======= ======= Income taxes ................................. $27,404 $23,059 $14,163 ======= ======= ======= Supplemental schedule of noncash investing and financing activities: Equipment sales receivables .................. $ 5,385 $ 3,284 $ 362 ======= ======= ======= Direct financing for purchase of equipment ... $ 436 ======= During 1997 and 1996, in connection with business acquisitions, assets were acquired and liabilities were incurred as follows: Current assets ............................... $ 180 $ 222 Property and equipment ....................... 2,554 5,644 Intangibles .................................. 1,015 1,200 Issuance of common stock ..................... (1,918) ------- ------- Cash paid .................................... $ 3,749 $ 5,148 ======= ======= See accompanying notes to consolidated financial statements. 28 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Swift Transportation Co., Inc., a Nevada holding company, and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. INVENTORIES AND SUPPLIES Inventories and supplies consist primarily of spare parts, tires, fuel and supplies and are stated at cost. Cost is determined using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Gains and losses from the sale of revenue equipment are included as a component of depreciation expense. Net gains in 1998, 1997 and 1996 were $6,105,000, $3,626,000 and $2,185,000, respectively. To obtain certain tax incentives, the Company financed the construction of its Edwardsville, Kansas terminal with municipal bonds issued by the city. Subsequently, the Company purchased 100% of the bonds and intends to hold them to maturity, effectively financing the construction with internal cash flow. The Company has offset the investment in the bonds against the related liability and neither is reflected on the consolidated balance sheet. For the years ended December 31, 1998, 1997 and 1996, the Company capitalized interest related to self-constructed assets totaling $894,000, $586,000 and $428,000, respectively. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of 10 to 40 years for facilities and improvements, 5 to 12 years for revenue and service equipment and 3 to 5 years for furniture and office equipment. Tires on revenue equipment purchased are capitalized as a component of the related equipment cost when the vehicle is placed in service and depreciated over the life of the vehicle. Replacement tires are expensed when placed in service. 29 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED GOODWILL Goodwill represents the excess of purchase price over fair value of net assets acquired. Such goodwill is being amortized on the straight-line method over periods ranging from 15 to 20 years. Accumulated amortization was $3,762,000 and $2,901,000 at December 31, 1998 and 1997, respectively. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill and other long lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in determining whether the asset is impaired. REVENUE RECOGNITION Operating revenues and related direct costs are recognized as of the date the freight is picked up for shipment. INCOME TAXES The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of common shares outstanding during each period (64,005,000, 63,363,000 and 56,151,000 for 1998, 1997, and 1996, respectively). Diluted earnings per common share includes the impact of stock options assumed to be exercised using the treasury stock method. The denominator for diluted earnings per share is greater than the denominator used in the basic earnings per share by 1,245,000, 1,413,000, and 1,603,000 shares in 1998, 1997, and 1996, respectively. The numerator is the same for both basic and diluted earnings per share. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY The Financial Accounting Standards Board has issued Statements of Financial Accounting Standards for which the required implementation date has not yet become effective. None of these accounting standards are expected to have a material impact on the Company's consolidated financial statements. 30 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (2) ACCOUNTS RECEIVABLE Accounts receivable consists of: DECEMBER 31, ------------------- 1998 1997 ---- ---- (IN THOUSANDS) Trade customers ........................ $112,290 $ 88,373 Equipment manufacturers ................ 1,050 2,657 Income tax receivable .................. 3,645 Other .................................. 2,686 1,848 -------- -------- 119,671 92,878 Less allowance for doubtful accounts ... 1,116 291 -------- -------- $118,555 $ 92,587 ======== ======== The schedule of allowance for doubtful accounts is as follows: BEGINNING ENDING BALANCE ADDITIONS DEDUCTIONS BALANCE ------- --------- ---------- ------- (IN THOUSANDS) Year ended December 31: 1998 ................... $ 291 $1,110 $ (285) $1,116 ====== ====== ====== ====== 1997 ................... $ 553 $ 240 $ (502) $ 291 ====== ====== ====== ====== 1996 ................... $ 927 $ 616 $ (990) $ 553 ====== ====== ====== ====== (3) ASSETS HELD FOR SALE Assets held for sale consist of land, land improvements, building and equipment related to the Company's former corporate headquarters and terminal located in Phoenix, Arizona and is stated at the lower of depreciated cost or fair value less costs to sell. (4) ACCRUED LIABILITIES Accrued liabilities consists of: DECEMBER 31, --------------------- 1998 1997 ---- ---- (IN THOUSANDS) Employee compensation ............ $16,741 $12,400 Fuel and mileage taxes ........... 3,789 2,662 Income taxes payable ............. 1,575 Other ............................ 6,743 3,540 ------- ------- $27,273 $20,177 ======= ======= 31 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (5) BORROWINGS UNDER REVOLVING LINE OF CREDIT The Company has a $170 million unsecured revolving line of credit (the line of credit) under an agreement with six major banks (the Credit Agreement) which matures on January 16, 2003. Interest on outstanding borrowings is based upon one of two options which the Company selects at the time of borrowing: the bank's prime rate or the London Interbank Offered Rate (LIBOR) plus applicable margins, as defined in the Credit Agreement. The unused portion of the line of credit is subject to a commitment fee. The Credit Agreement requires the Company to meet certain covenants with respect to debt to equity and debt coverage ratios. The Credit Agreement also requires the Company to maintain unencumbered assets of not less than 120% of unsecured indebtedness (as defined). The Credit Agreement includes financing for letters of credit. The Company has outstanding letters of credit primarily for workers' compensation and liability self-insurance purposes totaling $14 million at December 31, 1998. (6) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ----------------- 1998 1997 ---- ---- (IN THOUSANDS) Notes payable to commercial lending institutions with varying payments through the year 2001: Fixed interest rates ranging from 2.8% to 7.3% .......... $ 918 $ 2,206 Floating interest rate based on LIBOR plus .45% to .625% (effective rates ranging from 6.2% to 6.32% at December 31, 1997) ............................ 6,563 Note payable to insurance company bearing interest at 6.78% payable monthly with principal payments of $3,000,000 due in 2002 through 2006 secured by deed of trust on Phoenix facilities. Covenant requirements include minimum debt to equity and debt coverage ratios and tangible net worth. The covenants include limitations on dividends and treasury stock purchases ................................ 15,000 15,000 ------- ------- Total long-term debt ............................ 15,918 23,769 Less current portion ...................................... 710 6,849 ------- ------- Long-term debt, less current portion ...................... $15,208 $16,920 ======= ======= 32 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The aggregate annual maturities of long-term debt exclusive of amounts due under the revolving line of credit (see note 5) as of December 31, 1998 are as follows: YEAR ENDING DECEMBER 31 (IN THOUSANDS) ----------- ------------ 1999........................................... $ 710 2000........................................... 150 2001........................................... 58 2002........................................... 3,000 2003........................................... 3,000 Thereafter..................................... 9,000 ---------- $ 15,918 ========== (7) COMMITMENTS LEASES The Company leases various revenue equipment and terminal facilities under operating leases. At December 31, 1998, the future minimum lease payments under noncancelable operating leases are as follows: YEAR ENDING REVENUE DECEMBER 31, EQUIPMENT FACILITIES TOTAL ------------ --------- ---------- ----- (IN THOUSANDS) 1999 ........................... $33,574 $ 848 $34,422 2000 ........................... 19,933 484 20,417 2001 ........................... 11,557 266 11,823 2002 ........................... 1,324 163 1,487 2003 ........................... 18 18 Thereafter ..................... 296 296 ------- ------- ------- Total minimum lease payments ... $66,388 $ 2,075 $68,463 ======= ======= ======= The revenue equipment leases generally include purchase options exercisable at the completion of the lease. The Company recorded gains of approximately $3.8 million, $770,000, and $3.3 million from the sale of leased tractors in 1998, 1997, and 1996, respectively. PURCHASE COMMITMENTS The Company had commitments outstanding to acquire revenue equipment for approximately $247 million at December 31, 1998. These purchases are expected to be financed by operating leases, debt, proceeds from sales of existing equipment and cash flows from operations. The Company has the option to cancel such commitments with 60 days notice. 33 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (8) STOCKHOLDERS' EQUITY On March 12,1998, the Company completed a three-for-two stock split effected in the form of a dividend of one share of common stock for every two shares of common stock outstanding. All share and per share amounts retroactively reflect the effect of this split for all periods presented in the consolidated financial statements. The Company purchased 826,500 shares of its common stock during 1998 for a total cost of $9.6 million. These shares are being held as treasury stock and may be used for issuances under the Company's employee stock option and purchase plans or for other general corporate purposes. STOCK COMPENSATION PLANS At December 31, 1998, the Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its Employee Stock Purchase Plan. The compensation cost that has been charged against income for its Fixed Stock Option Plans was $212,000, $136,000 and $71,000 for 1998, 1997 and 1996, respectively. Had compensation cost for the Company's three stock-based compensation plans been determined consistent with FASB Statement No. 123 ("SFAS No. 123"), the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ---- ---- ---- Net earnings ................... As Reported $55,511 $41,644 $27,422 ======= ======= ======= Pro forma $54,755 $41,147 $27,154 ======= ======= ======= Basic earnings per share ....... As Reported $ .87 $ .66 $ .49 ======= ======= ======= Pro forma $ .86 $ .65 $ .48 ======= ======= ======= Diluted earnings per share ..... As Reported $ .85 $ .64 $ .47 ======= ======= ======= Pro forma $ .84 $ .64 $ .47 ======= ======= ======= Pro forma net earnings reflect only options granted in 1995 through 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of 9 years and compensation cost for options granted prior to January 1, 1995 is not considered under SFAS No. 123. FIXED STOCK OPTION PLANS The Company has two fixed stock option plans. Under the 1990 Employee Stock Option Plan, the Company may grant options to employees for up to 6.3 million shares of common stock. Under the 1994 Non-Employee Directors Plan, the Company may grant options to non-employee directors for up to 135,000 shares of common stock. Under both plans, the exercise price of each option equals 85 percent of the market price of the Company's stock on the date of the grant, and an option's maximum term is ten years. Options under the Employee Stock Option Plan generally vest 20 percent after five years and 20 percent each succeeding year. Options under the Non-Employee Directors Plan vest on the grant date. 34 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 through 1998: 1998 1997 1996 ---- ---- ---- Dividend yield ............................ 0% 0% 0% Expected volatility ....................... 45% 35% 46.5% Risk free interest rate ................... 5% 6% 6.5% Expected lives (days after vesting date)... 51 36 42 A summary of the status of the Company's two fixed stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years then ended on those dates is presented below:
1998 1997 1996 --------------------- ------------------ ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Outstanding at beginning of year ... 3,681,360 $ 5.27 3,673,800 $ 2.91 4,169,362 $ 2.67 Granted ............................ 812,400 $10.15 1,006,312 $10.19 112,500 $ 7.35 Exercised .......................... (615,262) $ 1.55 (691,852) $ 1.37 (501,075) $ 1.41 Forfeited .......................... (52,673) $ 9.82 (306,900) $ 1.93 (106,987) $ 5.32 ---------- ---------- ---------- Outstanding at end of year ......... 3,825,825 $ 6.84 3,681,360 $ 5.27 3,673,800 $ 2.91 ========== ========== ========== Options exercisable at year-end .... 164,025 177,075 182,925 ========== ========== ========== Weighted-average fair value of options granted during the year ... $ 7.71 $ 7.24 $ 8.41 ========== ========== ==========
The following table summarizes information about fixed stock options outstanding at December 31, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------ ---------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT CONTRACTUAL EXERCISE AT EXERCISE 12/31/98 LIFE PRICE 12/31/98 PRICE -------- ---- ----- -------- ----- $1.24 to $3.15 ...... 976,537 2.69 $ 1.87 152,025 $ 2.20 $4.87 to $5.62 ...... 771,413 5.87 $ 5.19 $6.28 to $10.01 ..... 1,074,600 7.73 $ 9.37 4,500 $ 6.63 $10.02 .............. 765,900 9.75 $10.02 $10.39 to $12.61 .... 237,375 8.65 $10.96 7,500 $12.35 --------- ------- 3,825,825 6.53 $ 6.84 164,025 $ 2.79 ========= ======= 35 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED EMPLOYEE STOCK PURCHASE PLAN Under the 1994 Employee Stock Purchase Plan, the Company is authorized to issue up to 4.5 million shares of common stock to full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose each year to have up to 15 percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85 percent of the lower of the beginning-of-period or end-of-period (each period being the first and second six calendar months) market price. Each employee is restricted to purchasing during each period a maximum of $12,500 of stock determined by using the beginning-of-period price. Under the Plan, the Company issued 240,135, 195,750 and 153,411 shares to 1,351, 1,143 and 482 employees in 1998, 1997 and 1996, respectively. Compensation cost is calculated as the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions: 1998 1997 1996 ---- ---- ---- Dividend yield ............ 0% 0% 0% Expected volatility ....... 45% 35% 46.5% Risk free interest rate.... 4.5% 5% 5% The weighted-average fair value of those purchase rights granted in 1998, 1997 and 1996 was $3.98, $3.09 and $2.53 respectively. (9) INCOME TAXES Income tax expense consists of: 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current expense: Federal ........ $20,445 $19,395 $13,610 State .......... 3,494 4,125 2,670 ------- ------- ------- 23,939 23,520 16,280 ------- ------- ------- Deferred expense: Federal ........ 11,435 4,242 2,980 State .......... 2,421 588 530 ------- ------- ------- 13,856 4,830 3,510 ------- ------- ------- $37,795 $28,350 $19,790 ======= ======= ======= 36 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company's effective tax rate was 40.5%, 40.5% and 42% in 1998, 1997 and 1996, respectively. The actual tax expense differs from the "expected" tax expense (computed by applying the U.S. Federal corporate income tax rate of 35% to earnings before income taxes) as follows: YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Computed "expected" tax expense .............. $32,657 $24,498 $16,524 Increase in income taxes resulting from: State income taxes, net of federal income tax benefit ......................... 4,185 3,002 2,080 Other, net .................................. 953 850 1,186 ------- ------- ------- $37,795 $28,350 $19,790 ======= ======= ======= The net effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: DECEMBER 31, ------------------- 1998 1997 ---- ---- (IN THOUSANDS) Deferred tax assets: Claims accruals .................................. $ 20,480 $ 14,790 Accounts receivable due to allowance for doubtful accounts................................ 440 110 Other ............................................ 160 100 -------- -------- Total deferred tax assets .................... 21,080 15,000 -------- -------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation ..................... (70,010) (52,140) Prepaid taxes, licenses and permits deducted for tax purposes ................................ (5,820) (2,000) -------- -------- Total deferred tax liabilities ............... (75,830) (54,140) -------- -------- Net deferred tax liability ................... $(54,750) $(39,140) ======== ======== 37 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED These amounts are presented in the accompanying consolidated balance sheets as follows: DECEMBER 31, --------------------- 1998 1997 ---- ---- (IN THOUSANDS) Current deferred tax asset .......... $ 4,010 $ 5,280 Noncurrent deferred tax liability.... (58,760) (44,420) -------- -------- Net deferred tax liability .......... $(54,750) $(39,140) ======== ======== (10) CLAIMS ACCRUALS The Company's insurance program for liability, workers' compensation, physical damage and cargo damage involves self-insurance, with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers adequate. Claims accruals represent accruals for the uninsured portion of pending claims at December 31, 1998 and 1997. The current portion reflects the amounts of claims expected to be paid in the following year. These accruals are estimated based on management's evaluation of the nature and severity of individual claims and an estimate of future claims development based on the Company's past claims experience. Claims accruals also include accrued medical expenses under the Company's group medical insurance program. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts. CASH The carrying amount is assumed to be the fair value because of the liquidity of these instruments. ACCOUNTS RECEIVABLES AND PAYABLES Fair value is considered to be equal to the carrying value of the accounts receivable and accounts payable and accrued liabilities, as they are generally short-term in nature and the related amounts approximate fair value or are receivable or payable on demand. LONG-TERM DEBT AND BORROWINGS UNDER REVOLVING LINE OF CREDIT The fair value of all of these instruments is assumed to approximate their respective carrying values given the duration of the notes, their interest rates and underlying collateral. 38 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED LIMITATIONS Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Since the fair value is estimated as of December 31, 1998, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. (12) EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) profit sharing plan for all employees who are 19 years of age or older and have completed one year of service. The Plan provides for a mandatory matching contribution equal to the amount of the employee's salary reduction, but not to exceed 1% of the employee's compensation. Also, the plan provides for a discretionary contribution not to exceed 4% of the employee's compensation, limited to the amount permitted under the Internal Revenue Code as deductible expenses. The Company may also make voluntary profit sharing contributions. Employees' rights to employer contributions vest after five years from their date of employment. The Company's contribution totaled approximately $7.1 million, $4.2 million and $2.9 million for 1998, 1997 and 1996, respectively. (13) RELATED PARTY TRANSACTIONS The Company leases various properties from entities owned by the principal stockholder. Rents paid under these leases totaled $135,000, $700,000 and $1.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. The Company provided transportation services to entities owned by its principal stockholder. For the years ended December 31, 1998, 1997 and 1996, the Company recognized $831,000, $318,000 and $213,000, respectively, in operating revenue from these entities. At December 31, 1998, $341,000 was owed to the Company for these services. A company owned by the Company's principal stockholder leases tractors to some of the Company's owner operators. In connection with this program in 1998, 1997 and 1996, the Company acquired new tractors and sold them to this entity for $22.1 million, $22.8 million and $13.2 million, respectively, and recognized fee income of $1.3 million, $1.4 million and $855,000, respectively. During 1998, 1997, and 1996, the Company also sold used revenue equipment to this entity totaling $320,000, $238,000 and $700,000 respectively, and recognized gains of $69,000 in 1998, $36,000 in 1997 and $114,000 in 1996. A Company owned by the principal stockholder provides aircraft services to the Company. Payments for such services totaled $429,000, $590,000 and $450,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, $141,000 was owed to this entity for such services. 39 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED During 1997 and 1996, the Company purchased parts and maintenance services from an entity owned by one of the Company's outside directors totaling $3,217,000 and $2,379,000, respectively. This entity was sold to an unrelated party on January 1, 1998. The Company's principal stockholder acquired a significant ownership interest in a less than truckload carrier during 1997. The Company provides transportation services to this carrier and recognized $5.3 million and $1.5 million in operating revenue in 1998 and 1997, respectively. At December 31, 1998, $401,000 was owed to the Company for these services. In addition, the Company sold used equipment to the carrier for $261,000 in 1998 and paid $227,000 and $80,000 to the carrier for facilities rental in 1998 and 1997, respectively. The Company's principal stockholder owns an entity with a fleet of approximately 200 tractors which operates as a fleet operator for the Company. During 1998 and 1997, the Company paid $17.2 million and $5.3 million to this fleet operator for purchased transportation services. At December 31, 1998, $326,000 was owed for these purchased transportation services. Also, the Company was paid $267,000 and $264,000 by this fleet operator and paid $450,000 and $117,000 to this fleet operator for various services including training and repairs in 1998 and 1997, respectively. At December 31, 1998, $32,000 was owed to the Company and nothing was owed by the Company for these services. All of the above related party arrangements were approved by the independent members of the Company's Board of Directors. (14) ACQUISITIONS On April 8, 1997, the Company completed its acquisition of certain assets of Direct Transit, Inc. ("DTI"), a Debtor-In-Possession in United States Bankruptcy Court. DTI was a dry van carrier based in North Sioux City, South Dakota and operated predominantly in the eastern two-thirds of the United States. The Company acquired inventory, furniture and office equipment, computer equipment and miscellaneous assets from DTI for $2.7 million. Also, the Company paid $1 million to the principal shareholder of DTI in exchange for a covenant not to compete. Separately, the Company acquired 565 tractors and 1,622 trailers from various lessors. Certain of the revenue equipment was purchased for $31 million and new lease agreements were negotiated on $11 million of revenue equipment. The Company used working capital and borrowings under its existing line of credit to acquire the assets described above and for payments under the covenant not to compete. On September 12, 1996, the Company acquired substantially all of the operating assets utilized in the dry freight van division of Navajo Shippers, Inc. and two of its wholly-owned subsidiaries, Digby Leasing and Digby-Ringsby Truck Lines, Inc. (collectively, "Navajo Shippers"). The acquisition was accounted for as a purchase and the results of operations of Navajo Shippers have been included in the consolidated financial statements beginning on September 12, 1996. The Company acquired 287 tractors and 417 trailers and related on-board communication equipment. The Company assumed Navajo Shipper's position on operating leases for 257 tractors and acquired 30 owner operators. Total consideration for the assets purchased and goodwill was $7,066,000 consisting of cash of $5,148,000 and 202,500 shares of the Company's common stock valued at $1,918,000. The Company paid the sellers approximately $1.2 million for commissions on revenues generated by the Company in the 12 months following the date of acquisition. The excess of cost over net book value has been accounted for as goodwill. Goodwill is being amortized on a straight-line basis over 15 years. 40 SWIFT TRANSPORTATION CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (15) COMMITMENTS AND CONTINGENCIES The Company is involved in certain claims and pending litigation arising in the normal course of business. Based on the knowledge of the facts and, in certain cases, opinions of outside counsel, management believes the resolution of claims and pending litigation will not have a material adverse effect on the financial condition of the Company. (16) INDUSTRY SEGMENT INFORMATION The Company operates predominantly in one industry, road transportation, as a truckload motor carrier subject to regulation by the Department of Transportation and various state regulatory authorities. (17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) YEAR ENDED DECEMBER 31, 1998 Operating revenue .............. $191,608 $215,832 $227,184 $238,809 Operating income ............... 16,936 25,086 27,309 29,361 Net earnings ................... 9,412 14,036 15,644 16,419 Basic earnings per share ....... .15 .22 .24 .26 Diluted earnings per share ..... .14 .21 .24 .25 YEAR ENDED DECEMBER 31, 1997 Operating revenue .............. $156,074 $180,855 $188,071 $188,640 Operating income ............... 11,123 18,979 22,829 21,138 Net earnings ................... 6,231 10,556 12,882 12,005 Basic earnings per share ....... .10 .17 .20 .19 Diluted earnings per share ..... .10 .16 .20 .18 (18) SUBSEQUENT EVENT On March 15, 1999, the Company's Board of Directors approved a 3-for-2 stock split effected in the form of a stock dividend and payable on April 10, 1999 to the stockholders of record at the close of business on March 31, 1999. All share amounts, share prices and earnings per share have been retroactively adjusted to reflect this 3-for-2 stock split. 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has never filed a Form 8-K to report a change in accountants because of a disagreement over accounting principles or procedures, financial statement disclosure, or otherwise. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to continuing directors and nominees of the Company is set forth under the captions "Information Concerning Directors, Nominees and Officers," "Meetings of the Board of Directors and its Committees," and "Director Compensation" in the Registrant's Notice and Proxy Statement relating to its 1999 Annual Meeting of Stockholders ("the 1999 Notice and Proxy Statement") to be held on May 20, 1999 incorporated by reference into this Form 10-K Report. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K Report, the Registrant's 1999 Notice and Proxy Statement is not being filed as a part hereof. ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is set forth under the captions "Executive Compensation," "Compensation Committee Interlocks and Insider Participation," "Meetings and Compensation" and "Employment Agreements" in the 1999 Notice and Proxy Statement and is incorporated herein by reference; provided, however, that the information set forth under the captions "Compensation Committee Report on Executive Compensation" and "Stock Price Performance Graph" contained in the 1999 Notice and Proxy Statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is included under the caption "Security Ownership of Principal Stockholders and Management" in the 1999 Notice and Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and transactions of management is set forth under the caption "Certain Transactions and Relationships" and "Compensation Committee Interlocks and Insider Participation" in the 1999 Notice and Proxy Statement and is incorporated herein by reference. 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements and Schedules. (i) Financial Statements PAGE OR METHOD OF FILING ---------------- (1) Report of KPMG LLP Page 22 (2) Consolidated Financial Statements and Page 23 Notes to Consolidated Financial Statements of the Company, including Consolidated Balance Sheets as of December 31, 1998 and 1997 and related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1998 (ii) Financial Statement Schedules Schedules have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein. (b) Reports on Form 8-K None (c) Exhibits. EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 3.1 Articles of Incorporation of Incorporated by reference to Exhibit the Company 3.1 of the Company's Form S-3 Registration Statement No. 33-66034 ("S-3 #33-66034") 3.2 Bylaws of the Company Incorporated by reference to Exhibit 3.2 of S-3 #33-66034 4 Specimen of Common Stock Incorporated by reference to Exhibit Certificate 4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K") 10.1 Lease Agreement between Incorporated by reference to Exhibit Jerry and Vickie Moyes and 10-E(1) of the Company's Form S-1 the Company relating to Registration Statement No. #33-34983 Stockton, California ("S-1 #33-34983") property, dated April 10, 1990 43 EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 10.4.1 Asset Purchase Agreement Incorporated by reference to Exhibit dated June 17, 1994 by and 1 of the Company's Current Report on among Swift Transportation Form 8-K dated October 6, 1994 (the Co., Inc., a Nevada "10/6/94 8-K") corporation; Swift Transportation Co., Inc., an Arizona corporation; Mark VII, Inc., a Missouri corporation; MNX Carriers, Inc., a Delaware corporation; and Missouri-Nebraska Express, Inc., an Iowa corporation 10.4.2 Amendment No. 1, dated Incorporated by reference to Exhibit September 30, 1994, to the 2 of the 10/6/94 8-K Asset Purchase Agreement 10.5 Stock Option Plan, as Incorporated by Reference to Exhibit amended through November 18, 10.7 of the Company's Annual Report 1994* on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10- K") 10.6 Non-Employee Directors Stock Incorporated by reference to Exhibit Option Plan, as amended 10.8 of the 1994 Form 10-K through November 18, 1994* 10.7 Employee Stock Purchase Incorporated by reference to Exhibit Plan, as amended through 10.9 of the 1994 Form 10-K November 18, 1994* 10.8 Swift Transportation Co., Incorporated by reference to Exhibit Inc. Retirement (401(k)) 10.14 of the Company's Form S-1 Plan dated January 1, 1992* Registration Statement No. #33-52454 10.9 Note agreement dated Incorporated by reference to Exhibit February 26, 1996 by and 10.12 of the Company's Annual Report between Swift Transportation on Company Form 10-K for the year Co., Inc. and Great-West ended December 31,1995 (the "1995 Life & Annuity Insurance Form 10-K") Company 10.10 Construction Contract dated Incorporated by reference to Exhibit November 14, 1994 by and 10.13 of the 1995 Form 10-K between Swift Transportation Co., Inc. and Opus Southwest Corporation 10.11 Note agreement dated January Incorporated by reference to Exhibit 16, 1997 by and between 10.11 of the Company's Annual Report Swift Transportation Co., on Form 10-K for the year ended Inc. and Wells Fargo Bank, December 31,1996 (the "1996 Form N.A., ABN Amro Bank N.V., 10-K") The Chase Manhattan Bank and The First National Bank of Chicago. 10.12 Asset Purchase Agreement Incorporated by reference to Exhibit Dated as of February 20, 1 of the Company's Current Report on 1997 Among Swift Form 8-K dated April 8, 1997 (the Transportation Co., Inc. and "4/8/97 8-K") Direct Transit, Inc. and Charles G. Peterson 44 EXHIBIT PAGE OR NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 10.13 First Modification Agreement Incorporated by Reference to Exhibit to Note Agreement dated 10.13 of the Company's Quarterly January 16, 1997 by and Report on Form 10-Q for the quarter between Swift Transportation ended September 30, 1998 (the "1998 Co., Inc. and Wells Fargo Third Quarter Form 10-Q") Bank, N.A., ABN Amro Bank N.V., The Chase Manhattan Bank and The First National Bank of Chicago 10.14 Second Modification Incorporated by reference to Exhibit Agreement to Note Agreement 10.14 of the 1998 Third Quarter Form dated January 17, 1997 by 10-Q and between Swift Transportation Co., Inc. and Wells Fargo Bank, N.V., ABN Amro Bank N.V., The First National Bank of Chicago, Norwest Bank Arizona, N.A., Keybank National Association and Union Bank of California, N.A. 11 Schedule of computation of Filed herewith net earnings per share 22 Subsidiaries of Registrant Filed herewith 23 Consent of KPMG LLP Filed herewith 27 Financial Data Schedule for Filed herewith twelve months ended December 31, 1998 99 Private Securities Litiga- Filed herewith tion Reform Act of 1995 Safe Harbor Compliance Statement for Forward- Looking Statements - ---------- * Indicates a compensation plan 45 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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, this 16th day of March, 1999. SWIFT TRANSPORTATION CO., INC., a Nevada corporation By /s/ Jerry C. Moyes -------------------------------------- Jerry C. Moyes Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry C. Moyes and William F. Riley III, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE --------- ----- ---- /s/ Jerry C. Moyes Chairman of the Board, March 16, 1999 - -------------------------- President and Chief Executive Jerry C. Moyes Officer (Principal Executive Officer) /s/ William F. Riley III Executive Vice President, March 16, 1999 - -------------------------- Secretary, Chief Financial Officer William F. Riley III (Principal Accounting Officer) and Director S-1 /s/ Rodney K. Sartor Executive Vice President and March 16, 1999 - -------------------------- Director Rodney K. Sartor /s/ Lou A. Edwards Director March 16, 1999 - -------------------------- Lou A. Edwards /s/ Alphonse E. Frei Director March 16, 1999 - -------------------------- Alphonse E. Frei /s/ Earl H. Scudder, Jr. Director March 16, 1999 - -------------------------- Earl H. Scudder, Jr. S-2 EX-11 2 COMPUTATION OF NET EARNINGS PER SHARE EXHIBIT 11 SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ---- ---- ---- Net Earnings ...................................... $55,511 $41,644 $27,422 ======= ======= ======= Weighted average shares: Common shares outstanding ....................... 64,005 63,363 56,151 Common equivalent shares issuable upon exercise of employee stock options (1).......... 1,245 1,413 1,603 ------- ------- ------- Total weighted average shares -- diluted ...... 65,250 64,776 57,754 ======= ======= ======= Basic earnings per share .......................... $ .87 $ .66 $ .49 ======= ======= ======= Diluted earnings per share ........................ $ .85 $ .64 $ .47 ======= ======= ======= Notes: (1) Amount calculated using the treasury stock method and fair market values. (2) All share amounts and earnings per share have been retroactively adjusted to reflect the 3-for-2 stock split payable on April 10, 1999 to shareholders of record at the close of business on March 31, 1999. EX-22 3 SUBSIDIARIES EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT 1. Swift Transportation Co., Inc., an Arizona corporation 2. Swift Leasing Co., Inc., an Arizona corporation 3. Common Market Distributing Co., Inc., an Arizona corporation 4. Sparks Finance Co., Inc., a Nevada corporation 5. Cooper Motor Lines, Inc., a South Carolina corporation 6. Common Market Equipment Co., Inc., an Arizona corporation 7. Swift Transportation Co. of Virginia, Inc., a Virginia corporation 8. Swift of Texas Co., Inc., a Texas corporation 9. Swift Logistics Co., Inc., an Arizona corporation 10. Swift Transportation Corporation, a Nevada Corporation EX-23 4 CONSENT OF KPMG LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Swift Transportation Co., Inc.: We consent to incorporation by reference in the Registration Statements No. 33-66034 and 333-20651 on Form S-3 and in the Registration Statements No. 33-85940, 33-85942 and 33-85944 on Form S-8 of Swift Transportation Co., Inc. of our report dated February 12, 1999, except as to Note 18 which is as of March 15, 1999, relating to the consolidated balance sheets of Swift Transportation Co., Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Swift Transportation Co., Inc. KPMG LLP Phoenix, Arizona March 17, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS 863557 SWIFT TRANSPORTATION CO., INC. 1,000 U.S. DOLLAR 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 6,530 0 118,555 0 4,866 159,919 597,822 131,045 636,283 78,871 0 0 0 43 327,310 636,283 873,433 873,433 0 774,741 (891) 0 6,277 93,306 37,795 55,511 0 0 0 55,511 .87 .85 EPS-PRIMARY and EPS-DILUTED include the effect of a 3-for-2 stock split payable on April 10, 1999.
EX-99 6 SAFE HARBOR COMPLIANCE STATEMENT PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), Congress encouraged public companies to make "forward-looking statements"1 by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. Swift Transportation Co., Inc. ("Swift") intends to qualify both its written and oral forward-looking statements for protection under the PSLRA. To qualify oral forward-looking statements for protection under the PSLRA, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements. Swift provides the following information in connection with its continuing effort to qualify forward-looking statements for the safe harbor protection of the PSLRA. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the following: (i) excess capacity in the trucking industry; (ii) significant increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees and insurance premiums, to the extent not offset by increases in freight rates or fuel surcharges; (iii) difficulty in attracting and retaining qualified drivers and owner operators, especially in light of the current shortage of qualified drivers and owner operators; (iv) recessionary economic cycles and downturns in customers' business cycles, particularly in market segments and industries (such as retail and manufacturing) in which the Company has a concentration of customers; (v) seasonal factors such as harsh weather conditions that increase operating costs; (vi) increases in driver compensation to the extent not offset by increases in freight rates; (vii) the inability of the Company to continue to secure acceptable financing arrangements; (viii) the ability of the Company to continue to identify acquisition candidates that will result in successful combinations; (ix) an unanticipated increase in the number of claims for which the Company is self insured; and (x) a significant reduction in or termination of the Company's trucking services by a key customer. Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, Swift undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time. - ---------- (1) "Forward-looking statements" can be identified by use of words such as "expect," "believe," "estimate," "project," "forecast," "anticipate," "plan," and similar expressions. -----END PRIVACY-ENHANCED MESSAGE-----