ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. WORDS SUCH AS "BELIEVE," "MAY," "COULD," "EXPECTS" AND "LIKELY" VARIATIONS OF THESE WORDS, AND SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED IN THIS PART AND ELSEWHERE IN THIS ANNUAL REPORT.
GENERAL
Knight Transportation, Inc. ("Knight" or the "Company") is a short-to-medium haul, dry van truckload carrier headquartered in Phoenix, Arizona. The Company transports general commodities, including consumer goods, packaged foodstuffs, paper products, beverage containers and imported and exported commodities. The Company provides truckload carrier service to the Western United States out of its Phoenix, Arizona headquarters, in the Texas and Louisiana region through its facility in Katy, Texas, and in the Midwest and on the East Coast through its facility in Indianapolis, Indiana.
The Company's stock has been publicly traded since October 1994. From 1992 to 1998, Knight's revenue has grown to $125.0 million from $19.6 million, and net income has increased to $13.3 million from $1.9 million. This growth resulted from expansion of the Company's customer base and increased volume from existing customers, and was facilitated by the continued expansion of the Company's fleet, including an increase in the Company's independent contractor fleet.
OPERATIONS
Knight's operating strategy focuses on four key elements: growth, regional operations, customer service, and operating efficiencies.
o GROWTH. Knight's objective is to achieve significant growth through the controlled growth of high quality service to existing customers and the development of new customers in its expanded market areas. The Company has developed an independent contractor program to increase its tractor fleet and provide additional service to customers, while minimizing capital investment by the Company. The Company believes that there are significant opportunities to continue to increase its business in the short-to-medium haul market by pursuing existing strategies and expanding its dedicated services.
o REGIONAL OPERATIONS. The Company's headquarters and facilities in Phoenix, Arizona allow it to serve the Western region of the United States. The Company has also established operations near Houston, Texas to serve customers in the Louisiana and Texas region. In March 1999, the Company leased a facility in Corsicana, Texas, in order to expand its operations in the Texas and Louisiana region. The Company's operations in Corsicana are supervised through its regional headquarters near Houston. The Company has also established operations in Indianapolis, Indiana, from which it provides regional and dedicated service in the Mid-West and on the East Coast. Knight expects that its three regional operating bases will provide a platform for future growth, and intends to expand its regional operations from those bases.
o CUSTOMER SERVICE. Knight's operating strategy is to provide a high level of service to customers, establishing the Company as a preferred or "core carrier" for customers who have time sensitive, high volume or high weight requirements. The Company's services include multiple pick-ups and deliveries, dedicated equipment and personnel, on-time pickups and deliveries within narrow time frames, specialized driver training, and other services tailored to meet its customers' needs. The Company has adopted an equipment configuration that meets a wide variety of customer needs and facilitates customer shipping flexibility. The Company uses light weight tractors and high cube trailers capable of handling both high volume and high weight shipments.
o OPERATING EFFICIENCIES. The Company employs a number of strategies that it believes are instrumental to its efforts to achieve and maintain operating efficiencies. Knight seeks to maintain a simplified operation that focuses on operating dry vans in particular geographical and shipping markets. This approach allows the Company to concentrate its marketing efforts to achieve higher penetration of its targeted service areas. The Company seeks operating economies by maintaining a generally compatible fleet of tractors and trailers that facilitates Knight's ability to serve a broad range of customer needs and thereby maximizes equipment utilization and efficiencies in equipment maintenance and positioning.
MARKETING AND CUSTOMERS
The Company's sales and marketing function is led by its senior management, who are assisted by other sales professionals. The Company's marketing team emphasizes the Company's high level of service and ability to accommodate a variety of customer needs. The Company's marketing efforts are designed to take advantage of the trend among shippers toward private fleet conversions, outsourcing transportation requirements, and the use of core carriers to meet shippers' needs.
Knight has a diversified customer base. For the year ended December 31, 1998, the Company's 25 largest customers represented 51.4% of operating revenue; its ten largest customers represented 34.5% of operating revenue; and its five largest customers represented 22.0% of the Company's operating revenue. The Company believes that a substantial majority of the Company's 25 largest customers regard Knight as a preferred or "core carrier." Most of the Company's truckload carriage contracts are cancelable on 30 days notice. The loss of one or more large customers could have a materially adverse effect on the Company's operating results.
Knight seeks to provide consistent, timely, flexible and cost efficient service to shippers. The Company's objective is to develop and service specified traffic lanes for customers who ship on a consistent basis, thereby providing a sustained, predictable traffic flow and ensuring high equipment utilization. The short-to-medium haul segment of the truckload carrier market demands timely pickup and delivery and, in some cases, response on short notice. The Company seeks to obtain a competitive advantage by providing high quality service to customers at competitive prices. To be responsive to customers' and drivers' needs, the Company often assigns particular drivers and equipment to prescribed routes, providing better service to customers, while obtaining higher equipment utilization.
Knight's standard dedicated fleet services also involve management of a significant part of a customer's transportation operations. Under a dedicated carriage service agreement, the Company provides drivers, equipment and maintenance, and, in some instances, transportation management services that supplement the customer's in-house transportation department. The Company's primary arrangements for dedicated services in the Houston area obligate the Company to provide a portion of its customer's transportation needs from one of the customer's distribution centers. The Company furnishes these services through Company provided revenue equipment and drivers.
Each of the Company's two regional operations centers is linked to the Company's Phoenix headquarters by an IBM AS/400 computer system. The capabilities of this system enhance the Company's operating efficiency by providing cost effective access to detailed information concerning equipment and shipment status and specific customer requirements, and also permit the Company to respond promptly and accurately to customer requests. The system also assists the Company in matching available equipment and loads. The Company provides electronic data interchange ("EDI") services to shippers requiring such service.
The Company has made an investment in a communications company that provides two-way digital wireless communication services which enables customers such as the Company to communicate with manned and unmanned transportation assets via the Internet and through ground based wide-area networks. The Company's investment is intended to assure access to low cost communication services for the future which are capable of meeting the needs of the Company and its customers.
DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS
As of December 31, 1998, Knight employed 1,145 persons, including 933 drivers and 31 maintenance personnel. None of the Company's employees is represented by a labor union.
The recruitment, training and retention of qualified drivers is essential to support the Company's continued growth and to meet the service requirements of the Company's customers. Drivers are selected in accordance with specific objective Company quality guidelines relating primarily to safety history, driving experience, road test evaluations, and other personal evaluations, including physical examinations and mandatory drug and alcohol testing.
The Company seeks to maintain a qualified driver force by providing attractive and comfortable equipment, direct communication with senior management, competitive wages and benefits, and other incentives designed to encourage driver retention and long-term employment. Many drivers are assigned to dedicated or semi-dedicated fleet operations, enhancing job predictability. Drivers are recognized for providing superior service and developing good safety records.
Knight's drivers are compensated on the basis of miles driven and length of haul. Drivers also are compensated for additional flexible services provided to the Company's customers. Drivers participate in Knight's 401(k) program and in Company-sponsored health, life and dental plans. Knight's drivers and other employees who meet eligibility criteria also participate in a stock option plan and a cash employee incentive program.
The Company also maintains an independent contractor program. Because independent contractors provide their own tractors, the independent contractor program provides the Company an alternate method of obtaining additional revenue equipment. The Company intends to continue its use of independent contractors. As of December 31, 1998, the Company had 231 tractors owned and operated by independent contractors. Each independent contractor enters into a contract with the Company pursuant to which it is required to furnish a tractor and a driver exclusively to transport, load and unload goods carried by the Company. Independent contractors are paid a fixed level of compensation based on total of trip-loaded and empty miles and are obligated to maintain their own tractors and pay for their own fuel. The Company provides trailers for each independent contractor. The Company also provides maintenance services for its independent contractors for a charge. The Company also offers financing at market interest rates to independent contractors to assist them in acquiring revenue equipment.
Company loans are secured by a lien on the independent contractor's revenue equipment. As of December 31, 1998, the Company had outstanding loans of approximately $3.4 million to independent contractors.
REVENUE EQUIPMENT
The Company operates a fleet of 53-foot long, high cube trailers, including 50 refrigerated trailers and 24 flatbed trailers in its fleet as of March 4, 1999. The efficiency and flexibility provided by its fleet configurations permit the Company to handle both high volume and high weight shipments. Knight's fleet configuration also allows the Company to move freight on a "drop-and-hook" basis, increasing asset utilization and providing better service to customers. Knight maintains a high trailer to tractor ratio, targeting a ratio of 2.7 to 1. Management believes maintaining this ratio promotes efficiency and allows it to serve a large variety of customers' needs without significantly changing or modifying equipment.
Growth of the Company's tractor and trailer fleets is determined by market conditions, and the Company's experience and expectations regarding equipment utilization. In acquiring revenue equipment, the Company considers a number of factors, including economy, price, technology, warranty terms, manufacturer support, driver comfort and resale value. As of December 31, 1998, the Company operated 702 company tractors with an average age of 1.5 years and 2,809 trailers with an average age of 2.2 years. The Company also had under contract, as of December 31, 1998, 231 tractors, operated by independent contractors.
The Company seeks to minimize the operating costs of its tractors and trailers by maintaining a relatively new fleet featuring cost saving technologies. The Company's current policy is to replace most of its tractors within 42 months after the date of purchase and to replace its trailers over a five to seven year period. Actual replacement depends upon the condition of particular equipment, its resale value and other factors. The Company employs a continuous preventive maintenance program designed to minimize equipment down time, facilitate customer service, and enhance trade value when equipment is replaced. The Company believes that its equipment acquisition program allows it to meet the needs of a wide range of customers in the dry van truckload market while, at the same time, controlling costs relating to maintenance, driver training and operations. As of December 31, 1998, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price of approximately $41 million for delivery throughout 1999.
SAFETY AND RISK MANAGEMENT
The Company is committed to ensuring the safety of its operations. The Company regularly communicates with drivers to promote safety and instill safe work habits through Company media and safety review sessions. The Company conducts quarterly safety training meetings for its drivers and independent contractors. In addition, the Company has an innovative recognition program for driver safety performance, and emphasizes safety through its equipment specifications and maintenance programs. The Company's Safety Director is involved in the review of all accidents.
The Company requires prospective drivers to meet higher qualification standards than those required by the United States Department of Transportation ("DOT"). The DOT requires the Company's drivers to obtain national commercial drivers' licenses pursuant to regulations promulgated by the DOT. The DOT also requires that the Company implement a drug and alcohol testing program in accordance with DOT regulations. The Company's program includes pre-employment, random, and post-accident drug testing.
The Company's Chief Financial Officer and Vice President of Human Resources and Administration are responsible for securing appropriate insurance coverages at cost effective rates. The primary claims arising in the Company's
business consist of cargo loss and damage and auto liability (personal injury and property damage). The Company is self-insured for personal injury and property damage up to a maximum limit of $100,000 per occurrence, for collision, comprehensive, and cargo liability up to a combined limit of $12,500 per occurrence, and for workers' compensation up to $250,000 per occurrence. The Company maintains insurance to cover liabilities in excess of these amounts. The Company's insurance policies provide for general liability coverage up to $1,000,000 per occurrence and $2,000,000 in the aggregate; automobile liability coverage up to $1,000,000 per occurrence; cargo insurance up to $2,500,000 per occurrence; and additional umbrella liability coverage up to $25,000,000. The Company also maintains primary and excess coverage for employee medical expenses and hospitalization, and damage to physical properties. The Company carefully monitors claims and participates actively in claims estimates and adjustments. The estimated costs of the Company's self-insured claims, which include estimates for incurred but unreported claims, are accrued as liabilities on the Company's balance sheet. Management believes that the Company's insurance coverages are adequate to protect the Company from any significant losses.
COMPETITION
The entire trucking industry is highly competitive and fragmented. The Company competes primarily with other regional short-to-medium haul truckload carriers, logistics providers and national carriers. Railroads and air freight also provide competition, but to a lesser degree. Competition for the freight transported by the Company is based on freight rates, service, and efficiency. The Company also competes with other motor carriers for the services of drivers and independent contractors. A number of the Company's competitors have greater financial resources, own more equipment, and carry a larger volume of freight than the Company. The Company believes that the principal competitive factors in its business are service, pricing (rates), and the availability and configuration of equipment that meets a variety of customers' needs. Knight, in addressing its markets, believes that its principal competitive strength is its ability to provide timely, flexible and cost-efficient service to shippers. In general, increased competition has created downward pressure on rates and increased the need to provide higher levels of service to customers.
REGULATION
Generally, the trucking industry is subject to regulatory and legislative changes that can have a materially adverse effect on operations. Historically, the Interstate Commerce Commission ("ICC") and various state agencies regulated truckload carriers' operating rights, accounting systems, rates and charges, safety, mergers and acquisitions, periodic financial reporting and other matters. In 1995, federal legislation was passed that preempted state regulation of prices, rates, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the Department of Transportation ("DOT"), but a lack of regulations implementing such transfers currently prevents the Company from assessing the full impact of this action.
Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Matters such as weight and dimensions of equipment are also subject to federal and state regulation. In 1988, the DOT began requiring national commercial drivers' licenses for interstate truck drivers.
The Company's motor carrier operations are also subject to environmental laws and regulations, including laws and regulations dealing with underground fuel storage tanks, the transportation of hazardous materials and other environmental matters. The Company has initiated programs to comply with all applicable environmental regulations. As part of its safety and risk management program, the Company periodically performs an internal environmental
review so that the Company can achieve environmental compliance and avoid environmental risk. The Company's Phoenix and Indianapolis facility was designed, after consultation with environmental advisors, to contain and properly dispose of hazardous substances and petroleum products used in connection with the Company's business. The Company transports a minimum amount of environmentally hazardous substances and, to date, has experienced no significant claims for hazardous substance shipments. If the Company should fail to comply with applicable regulations, the Company could be subject to substantial fines or penalties and to civil and criminal liability.
The Company's operations involve certain inherent environmental risks. The Company's Phoenix facility is located on land identified as potentially having groundwater contamination beneath it allegedly resulting from the release of hazardous substances by persons who have operated in the general vicinity. The area has been classified as a state superfund site. The Company has been located at its present Phoenix facility since 1990 and, during such time, has not been identified as a potentially responsible party with regard to the groundwater contamination. The Company has installed a fuel island at its Phoenix, Arizona headquarters and maintains above-ground bulk fuel storage to provide fuel for this facility. The Company's Phoenix bulk fuel storage facility has been designed to minimize environmental risk. There are two underground storage tanks located on the Company's Indianapolis property. The tanks are subject to regulation under both federal and state law and are currently being leased to and operated by an independent, third party fuel distributor. The Company assumed the lessor's interest in the lease, in connection with its purchase of the property. The lessee has agreed to carry environmental impairment liability insurance, naming the Company, as lessor, as an insured, covering the spillage, seepage or other loss of petroleum products, hazardous wastes, or similar materials onto the leased premises and has agreed to indemnify the Company, as lessor, against damage from such occurrences. The Indianapolis property is located approximately 0.1 mile east of Reilly Tar and Chemical Corporation ("Reilly"), a federal superfund site listed on the National Priorities List for clean-up. The Reilly site has known soil and groundwater contamination. There are also other sites in the general vicinity of the Company's Indianapolis property that have known contamination. Environmental reports obtained by the Company have disclosed no evidence that activities on the Company's Indianapolis property have caused or contributed to the area's contamination.
The Company believes it is currently in material compliance with applicable laws and regulations and that the cost of compliance has not materially affected results of operations. See "Legal Proceedings" for additional information regarding certain regulatory matters.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters and principal place of business is located at 5601 West Buckeye Road, Phoenix, Arizona on approximately 43 acres. The Company owns approximately 35 acres and the remaining 8 acres are leased from Mr. L. Randy Knight, an officer and director of the Company and one of its principal shareholders. See "Certain Relationships and Related Transactions," below, for additional information. In October 1997, the Company completed construction of a bulk fuel storage facility and fueling islands at its Phoenix headquarters to obtain greater operating efficiencies. In June of 1998, the Company completed expansion of its headquarters facilities.
The Company owns and operates a 9.5 acre regional facility in Indianapolis, Indiana. The facility includes a truck terminal, administrative offices, and dispatching and maintenance services, as well as room for future expansion, and will serve as a base for the Company's operations in the Midwest. The Company completed its initial expansion of this facility in October, 1998.
The Company's operations near Houston are currently located on the premises of one of the Company's significant customers, for whom it provides dedicated services. These facilities also support the Company's non-dedicated
operations in the Texas and Louisiana region. The Company has acquired property in Katy, Texas for its regional headquarters and construction of the Company's new facility is expected to be completed by January, 2000.
In March 1999, the Company entered into a lease for terminal facilities in Corsicana, Texas, from which the Company will operate in order to provide dedicated services to one of its larger customers. The Company's operations in Corsicana, Texas will be coordinated through the Company's regional headquarters located in Katy, Texas.
The Company leases office facilities in California, Oklahoma and Utah, which it uses for fleet maintenance, record keeping and general operations. The Company purchased property during 1998 in Fontana, California to serve as a trailer drop and dispatching facility to support the Company's operations in California. The Company also leases space in various locations for temporary trailer storage. Management believes that replacement space comparable to these facilities is readily obtainable, if necessary.
As of December 31, 1998, the Company's aggregate monthly rent for all leased properties was approximately $35,000.
The Company believes that its current facilities and those under expansion are suitable and adequate for its present needs. The Company periodically seeks to improve its facilities or identify new favorable locations. The Company has not encountered any significant impediments to the location or addition of new facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary, routine litigation and administrative proceedings incidental to its business. These proceedings primarily involve personnel matters, including equal employment opportunity claims, and claims for personal injury or property damage incurred in the transportation of freight. The Company maintains insurance to cover liabilities arising from the transportation of freight in amounts in excess of self-insured retentions. See "Business -- Safety and Risk Management." It is the Company's policy to comply with applicable equal employment opportunity laws and the Company periodically reviews its policies and practices for equal employment opportunity compliance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders during the fourth quarter of 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol KNGT. The following table sets forth, for the period indicated, the high and low bid information per share of the Company's common stock as quoted through the NASDAQ-NMS. Such quotations reflect inter-dealer prices, without retail markups, markdowns or commissions and, therefore, may not necessarily represent actual transactions.
HIGH LOW ---- --- First Quarter $ 16.83 $ 12.50 Second Quarter $ 19.00 $ 13.67 Third Quarter $ 19.17 $ 14.33 Fourth Quarter $ 21.33 $ 15.17
First Quarter $ 21.33 $ 16.33 Second Quarter $ 21.92 $ 15.00 Third Quarter $ 19.88 $ 12.88 Fourth Quarter $ 28.50 $ 14.75
As of March 4, 1999, the Company had 70 shareholders of record and approximately 1,550 beneficial owners in security position listings of its common stock.
The Company has never paid cash dividends on its common stock, and 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 financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL 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, are derived from the Company's Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," below, and the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K.
- ---------- (1) Net income per share for all periods presented has been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". (2) Operating expenses as a percentage of operating revenue. (3) Includes 231 independent contractor operated vehicles at December 31, 1998; includes 192 independent contractor operated vehicles at December 31, 1997; 158 independent contractor operated vehicles at December 31, 1996; 115 independent contractor operated vehicles at December 31, 1995; and 29 independent contractor operated vehicles at December 31, 1994.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. WORDS SUCH AS "BELIEVE," "MAY," "COULD," "EXPECTS," "LIKELY" AND VARIATIONS OF THESE WORDS, AND SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS," AS WELL AS THOSE DISCUSSED IN THIS ITEM AND ELSEWHERE IN THIS ANNUAL REPORT.
GENERAL
The following discussion of the Company's financial condition and results of operations for the three-year period ended December 31, 1998, should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto contained elsewhere in this report.
Knight was incorporated in 1989 and commenced operations in July 1990. For the five-year period ended December 31, 1998, the Company's operating revenue grew at a 36.5% compounded annual rate, while net income increased at a 40.4% compounded annual rate.
The Company has established regional operations in Phoenix, Arizona; Indianapolis, Indiana; and Katy, Texas. The Company's headquarters facilities in Phoenix, Arizona, serve the Western United States. The Company's operations in Indianapolis allow the Company to serve customers in the Midwest and on the East Coast and provide a platform for the expansion of the Company's operations in those regions. The Company's operations in Katy, Texas were undertaken to provide dedicated service to a large customer and to provide a base for the expansion of operations in the Texas and Louisiana regions.
To support its growth, the Company initiated an independent contractor program in 1994. The Company's decision to utilize independent contractors as part of the Company's fleet expansion was based on several factors, including reduced Company capital requirements, since independent contractors provide their own tractors. Use of independent contractors also resulted in a lower turnover rate. Due to the use of independent contractors, the Company originally experienced a decrease in salaries, wages and benefits, fuel and maintenance, and other expenses, as a percentage of operating revenue, and a corresponding increase in purchased transportation as a percentage of operating revenue. As of December 31, 1998, the Company had 231 tractors owned and operated by independent contractors. The Company expanded its Company-owed fleet during 1998. As the Company-owed fleet has expanded, purchased transportation has decreased slightly as a percentage of operating revenue. Purchased transportation represents the amount an independent contractor is paid to haul freight for the Company on a mutually agreed per-mile basis.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of the Company's expense items to operating revenue for the three-year period indicated below:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- Operating revenue 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses: Salaries, wages and benefits 28.7 28.2 28.7 Fuel 9.7 10.2 10.2 Operations and maintenance 5.9 5.6 5.2 Insurance and claims 2.5 2.5 3.6 Operating taxes and licenses 4.2 4.1 3.9 Communications .8 .6 .6 Depreciation and amortization 10.0 9.6 9.7 Purchased transportation 17.4 19.2 18.6 Miscellaneous operating expenses 2.4 2.4 2.5 ----- ----- ----- Total operating expenses 81.6 82.4 83.0 ----- ----- ----- Income from operations 18.4 17.6 17.0 Net interest expense .2 -- .5 ----- ----- ----- Income before income taxes 18.2 17.6 16.5 Income taxes 7.5 7.3 6.8 ----- ----- ----- Net Income 10.7% 10.3% 9.7% ===== ===== =====
FISCAL 1998 COMPARED TO FISCAL 1997
Operating revenue increased by 25.7% to $125.0 million in 1998 from $99.4 million in 1997. This increase resulted from expansion of the Company's customer base and increased volume from existing customers and was facilitated by a substantial increase in the Company's tractor and trailer fleet, including an increase in the Company's independent contractor fleet, during 1998 compared to 1997. The Company's fleet increased by 20.9% to 933 tractors (including 231 owned by independent contractors) as of December 31, 1998, from 772 tractors (including 192 owned by independent contractors) as of December 31, 1997. Average revenue per mile increased to $1.24 per mile for the year ended December 31, 1998, from $1.22 per mile for the same period in 1997, reflecting higher demand for the Company's services resulting in continued upward pressure on rates in all of the Company's operating regions. Equipment utilization averaged 120,500 miles per tractor in 1998, down slightly when compared to an average of 121,459 miles per tractor in 1997. This change reflects increased competition in the short-to-medium truckload carrier business.
Salaries, wages and benefits expense increased as a percentage of operating revenue to 28.7% for 1998 from 28.2% for 1997 primarily as the result of the expansion of the Company-owned tractor/trailer fleet. For its drivers, the Company records accruals for workers' compensation benefits as a component of its claim accrual, and the related expense is reflected in salaries, wages and benefits expenses in its consolidated statements of income.
Fuel expense decreased as a percentage of operating revenue to 9.7% for 1998 from 10.2% in 1997 due mainly to lower average fuel prices during 1998 compared to 1997. The Company cannot predict whether higher prices will return
or the extent to which fuel surcharges could be collected from customers to offset such increases if they occur.
Operations and maintenance expense increased as a percentage of operating revenue to 5.9% for 1998 from 5.6% in 1997. This increase was the result of the decrease in the number of independent contractors as a percentage of the Company's entire fleet to 24.8 in 1998, compared to 24.9% in 1997, and a decrease in equipment utilization during 1998.
Insurance and claims expense remained constant as a percentage of operating revenue at 2.5% for both 1998 and 1997.
Operating taxes and license expense increased slightly as a percentage of operating revenue to 4.2% for 1998 from 4.1% for 1997. The increase resulted primarily from the decrease in the number of independent contractors as a percentage of the Company's entire fleet during 1998 as independent contractors are responsible for paying their own mileage taxes, the increased cost associated with the licensing of trailers for use in states with higher licensing fees, and a decrease in equipment utilization during 1998.
Communications expenses increased as a percentage of operating revenue to 0.8% in 1998 compared to 0.6% in 1997. The increase resulted primarily from an increase in the Company's overall business volume, and a decrease in equipment utilization during 1998.
Depreciation and amortization expense increased to 10.0% for 1998 from 9.6% in 1997. The increase resulted from the decrease in the number of independent contractors as a percentage at the Company's entire fleet during 1998, and a decrease in equipment utilization during 1998.
Purchased transportation expense decreased to 17.5% in 1998 from 19.2% in 1997 due to a combination of the increase in the Company's revenue per mile and the decrease in the number of independent contractors as a percentage of the Company's entire fleet during 1998.
Miscellaneous operating expenses remained steady, with no significant change taking place in 1998.
As a result of the above factors, the Company's operating ratio (operating expenses expressed as a percentage of operating revenue) was 81.6% for 1998, compared to 82.4% for 1997.
Net interest expense increased as a percentage of operating revenue to 0.2% for 1998 from less than 0.1% in 1997 as a result of the purchase during 1998 of debt financed revenue equipment to expand the Company's fleet.
Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense increased as a percentage of revenue to 7.5% for the year ended December 31, 1998 from 7.3% for the year ended December 31, 1997 primarily due to the decrease in the Company's operating ratio.
As a result of the preceding changes, the Company's net income as a percentage of operating revenue increased to 10.7% in 1998, from 10.3% in 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Operating revenue increased by 28.3% to $99.4 million in 1997 from $77.5 million in 1996. This increase resulted from expansion of the Company's customer base and increased volume from existing customers and was facilitated by a substantial increase in the Company's tractor and trailer fleet, including
an increase in the Company's independent contractor fleet, during 1997 compared to 1996. The Company's fleet increased by 34.3% to 772 tractors (including 192 owned by independent contractors) as of December 31, 1997 from 575 tractors (including 158 owned by independent contractors) as of December 31, 1996. Average revenue per mile declined to $1.22 per mile for the year ended December 31, 1997 from $1.24 per mile for the same period in 1996, reflecting continued pressure on rates and increased competition in all of the Company's operating regions. Equipment utilization averaged 121,459 miles per tractor in 1997, down slightly when compared to an average of 121,960 miles per tractor in 1996. This change reflects increased competition in the short-to-medium truckload carrier business.
Salaries, wages and benefits expense decreased as a percentage of operating revenue to 28.2% for 1997 from 28.7% for 1996, primarily the result of the increase in the ratio of tractors to non-driving employees. This ratio measures productivity and efficiency of non-driving personnel. The Company records accruals for workers' compensation as a component of its claim accrual, and the related expense is reflected in salaries, wages and benefits expenses in its consolidated statements of income.
Fuel expense remained constant as a percentage of operating revenue at 10.2% for both 1997 and 1996. Operations and maintenance expense increased as a percentage of operating revenue to 5.6% for 1997 from 5.2% in 1996. This increase was the result of lower revenue per mile and the decrease in the number of independent contractors as a percentage of the Company's entire fleet to 24.8% in 1997, compared to 27.5% in 1996.
Insurance and claims expense decreased as a percentage of operating revenue to 2.5% for 1997 compared to 3.6% for 1996. This decrease resulted from lower insurance premiums and a decrease in the Company's accident rate.
Operating taxes and license expense increased as a percentage of operating revenue to 4.1% for 1997 from 3.9% for 1996. The increase resulted primarily from the increased cost associated with the licensing of trailers for use in states with higher licensing fees.
Communications expenses remained constant, with no significant change taking place in 1997 compared to 1996.
Depreciation and amortization expense decreased to 9.6% for 1997 from 9.7% in 1996. The small decrease resulted from an increase in revenue being generated at each of the Company's facilities and the absence of large expenditures for any additional facilities.
Purchased transportation expense increased to 19.2% in 1997 from 18.6% in 1996 due to the decrease in the Company's revenue per mile. Independent contractors are compensated at a fixed rate per mile.
Miscellaneous operating expenses remained steady, with no significant change taking place in 1997.
As a result of the above factors, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 82.4% for 1997, compared to 83.0% for 1996.
Net interest expense decreased as a percentage of operating revenue to less than 0.1% for 1997 from 0.5% in 1996 as a result of the application of the proceeds from the Company's secondary stock offering in July 1996, which were used to reduce debt and to purchase revenue equipment.
Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense increased as a percentage of revenue to 7.3% for the year ended December 31, 1997 from 6.8% for the year ended December 31, 1996 primarily due to the lower revenue per mile.
As a result of the preceding changes, the Company's net income as a percentage of operating revenue was 10.3% in 1997, compared to 9.7% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required a significant investment in new revenue equipment. The Company's primary source of capital has been funds provided by operations, term borrowings to finance equipment purchases, the Company's line of credit, and the Company's initial and secondary public offerings in 1994 and 1996, respectively. Net cash provided by operating activities totaled approximately $29.3 million, $23.6 million and $14.3 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Capital expenditures for the purchase of revenue equipment, office equipment and leasehold improvements totaled approximately $31.5 million, $26.3 million and $24.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The Company anticipates that capital expenditures, net of trade-ins, will be approximately $41 million for 1999, to be used primarily to acquire new revenue equipment to expand the Company's fleet, to upgrade existing facilities, and to acquire additional facilities.
Net cash provided by financing activities and net direct equipment financing was approximately $8.9 million for the year ended December 31, 1998. Net cash used in financing activities and net direct equipment financing was $0.8 million for the year ended December 31, 1997. Net cash provided by financing activities and net direct equipment financing was approximately $8.3 million for the year ended December 31, 1996. The change between 1998 and 1997 was due to the Company borrowing approximately $11.5 million during 1998. The change between 1997 and 1996 was due to the Company's ability to offset the cost of purchasing revenue equipment with the proceeds of the Company's secondary stock offering during 1996.
The Company maintains a $10 million revolving line of credit with its lender and uses that line to finance the acquisition of revenue equipment and other corporate purposes to the extent the Company's need for capital is not provided by funds from operations. Under the Company's line of credit, the Company is obligated to comply with certain financial covenants. The rate of interest on borrowings against the line of credit will vary depending upon the interest rate election made by the Company, based on either the London Interbank Offered Rate (LIBOR plus .625%), or the prime rate. At December 31, 1998, and March 4, 1999, the Company had $3,500,000 in borrowings under its revolving line of credit. The line of credit expires in May 1999. Management believes the Company will be able to renew or renegotiate its line of credit on terms at least as favorable as the current terms of the line of credit.
The Company borrowed $10 million during 1998 under a long-term Promissory Note with its lender. The Note is unsecured and bears interest at a fixed rate of 5.75% per annum. As of December 31, 1998, $9,711,628 was currently owed under the Note, with monthly payments of $193,558 payable through October 2003.
Management believes that the cash flow from operating activities and the availability of borrowings will be sufficient to meet the Company's capital needs through the next 18 months. The Company will continue to have significant capital requirements over the long term, which may require the Company to
incur additional debt or seek additional equity capital in the future. The availability of this capital will depend upon prevailing market conditions, the market price of the Company's Common Stock and other factors over which the Company has no control, as well as the Company's financial condition and results of operations.
SEASONALITY
To date, the Company's revenue has not shown any significant seasonal pattern. Because the Company operates primarily in Arizona, California and the Western United States, winter weather generally has not adversely affected the Company's business. Expansion of the Company's operations in the Midwest, on the East Coast, and in the Texas and Louisiana regions, could expose the Company to greater operating variances due to seasonal weather in these regions.
INFLATION
Many of the Company's operating expenses, including fuel costs and fuel taxes, are sensitive to the effects of inflation and changing prices, which could result in higher operating costs and lower income from operations. The effects of inflation on the Company's business during 1998, 1997 and 1996 generally was not significant. During 1998, the Company experienced historically low fuel prices, as a result of conditions in the petroleum industry. The conditions that created these historic low price conditions may not persist.
YEAR 2000 CAPABILITIES.
The "Year 2000 Issue" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results.
The Company has implemented or is in the process of reviewing, testing, and implementing various modifications to ensure that its computer equipment and software will function properly in the Year 2000 and beyond. For this purpose, the term "computer equipment and software" includes systems commonly referred to as information technology systems ("IT systems"), such as data processing, dispatch, accounting, telephone, and other miscellaneous systems as well as systems that are not commonly referred to as IT systems, such as fax machines, heating and air conditioning systems, and other miscellaneous systems. The Company has been and will be in contact with its significant vendors, service providers, and customers, particularly those with whom electronic data information ("EDI") transactions are exchanged, to determine and resolve any Year 2000 issues. The Company currently anticipates that all necessary Year 2000 modifications will be completed in the next six months, and that such efforts will be completed prior to any anticipated impact on its computer equipment and software.
All internal and external costs associated with the Company's Year 2000 compliance activities are expensed as incurred. The Company believes that the costs of addressing the Year 2000 issue will not have a material impact on its financial position.
Since all major computerized systems and applications will have been reviewed and tested as part of the Year 2000 project, the Company feels that it has reasonably addressed all material risks that may effect its operations. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all year 2000 issues are not properly identified and corrected, there can be no assurance that the Year 2000 issue will not materially effect the Company's relationships with vendors,
customers, and others. Also, there can be no assurance that the Year 2000 issues of other entities with whom the Company deals will not have a material adverse impact on the Company's operations.
The Company is in the process of evaluating and developing a contingency plan to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. The contingency plan is expected to be completed in 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, gains and losses) in a full set for general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures About Segments of an Enterprise and Related Information, which supersedes Statement of Financial Accounting Standards No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of factors over which the Company has little or no control may affect the Company's future results. Fuel prices, insurance costs, liability claims, interest rates, the availability of qualified drivers, fluctuations in the resale value of revenue equipment, and customers' business cycles and shipping demands are economic factors over which the Company has little or no control. Significant increases or rapid fluctuations in fuel prices, interest rates or increases in insurance costs or liability claims, to the extent not offset by increases in freight rates, would reduce the Company's profitability. Although the Company's independent contractors are responsible for paying for their own equipment, fuel and other operating costs, significant increases in these costs could cause them to seek higher compensation from the Company or other contractual opportunities. Difficulty in attracting or retaining qualified drivers, including independent contractors, or a downturn in customers' business cycles or shipping demands also could have a material adverse effect on the growth and profitability of the Company. If a shortage of drivers should occur in the future or if the Company were unable to continue to attract and contract with independent contractors, the Company could be required to adjust its driver compensation package, which could adversely affect the Company's profitability if not offset by a corresponding increase in rates.
The Company's growth has been made possible through the addition of new revenue equipment. Difficulty in financing or obtaining new revenue equipment (for example, delivery delays from manufacturers or the unavailability of independent contractors) could restrict future growth. If the resale value of the Company's revenue equipment were to decline, the Company could be forced to retain some of its equipment longer, with a resulting increase in operating expenses for maintenance and repairs.
The Company has experienced significant and rapid growth in revenue and profits since the inception of its business in 1990. There can be no assurance that the Company's business will continue to grow in a similar fashion in the future or that the Company can effectively adapt its management, administrative and operational systems to respond to any future growth. Further, there can be no assurance that the Company's operating margins will not be adversely affected by future changes in and expansion of the Company's business or by changes in economic conditions.
Currently, a significant portion of the Company's business is concentrated in the Arizona and California markets and a general economic decline or a natural disaster in either of these markets could have a material adverse effect on the growth and profitability of the Company. If the Company is successful in deriving a more significant portion of its revenues from markets in the Texas and Louisiana regions and the Midwest and on the East Coast in the near future, its growth and profitability could be materially adversely affected by general economic declines or natural disasters in those markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations"; and "Business -- Operations and Marketing and Customers."
The Company has established operations near Houston, Texas to provide dedicated services to one of its larger customers and to commence regional service in the Texas and Louisiana regions and initiated operations in Indianapolis, Indiana, in order to access markets in the Midwest and on the East Coast. These operations will require the commitment of additional revenue equipment and personnel, as well as management resources, for future development. These initiatives represent the first established operations of the Company in markets outside of its primary regional operations in the Western United States. Should the growth in the Company's operations near Houston, Texas or in Indianapolis, Indiana slow or stagnate, the results of Company operations could be adversely affected. The Company may encounter operating conditions in these new markets that differ substantially from those previously experienced in its Western United States markets. There can be no assurance that the Company's regional operating strategy, as employed in the Western United States, can be duplicated successfully or that it will not take longer than expected or require a more substantial financial commitment than anticipated in order for the Company to generate positive operating results in these new markets.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Under Financial Accounting Reporting Release Number 48 issued by the Securities and Exchange Commission in January 1997, the Company is required to disclose information concerning market risk with respect to foreign exchange rates, interest rates, and commodity prices. The Company has elected to make such disclosures, to the extent applicable, using a sensitivity analysis approach, based on hypothetical changes in interest rates and commodity prices.
The Company has not had occasion to use derivative financial instruments for risk management purposes and does not use them for either speculation or trading. Because the Company's operations are confined to the United States, the Company is not subject to foreign currency risk.
The Company is subject to interest rate risk, to the extent it borrows against its line of credit or incurs additional debt in the acquisition of revenue equipment. The Company attempts to manage its interest rate risk by carrying as little debt as possible. The Company has not entered into interest rate swaps or other strategies designed to protect it against interest rate risk. In the opinion of management, an increase in short-term interest rates would not have a material adverse effect on the Company's financial condition, based on the level of debt carried by the Company as of December 31, 1998. Management does not foresee or expect any significant changes in exposure to
interest rate fluctuations or in how that exposure is managed by the Company in the near future. The Company has not issued corporate debt instruments.
The Company is subject to commodity price risk with respect to purchases of fuel and tires. The Company has not used derivative financial instruments to manage these risks. The Company has installed fuel islands at its Phoenix, Arizona and Indianapolis facilities which enable it to purchase fuel at "rack" prices, saving pumping charges. Where possible, the Company seeks to participate in tire testing programs to reduce the cost of tires. It is the Company's policy to pass on price increases in fuel, tires, or other commodities through rate increases or surcharges, to the extent the existing market will permit such costs to be passed through to the customer. If the Company were unable to pass increased costs on to customers through rate increases, such increases could adversely affect the Company's results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of Knight Transportation, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 1998, together with the related notes and report of Arthur Andersen LLP, independent public accountants, are set forth at pages 23 through 36, below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company hereby incorporates by reference the information contained under the heading "Election of Directors" from its definitive Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information contained under the heading "Executive Compensation" from its definitive Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" from its definitive Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information contained under the heading "Certain Relationships and Related Transactions" from its definitive Information Statement to be delivered to shareholders of the Company in
connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K at pages 23 through 36, below.
1. Consolidated Financial Statements:
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Report of Arthur Andersen LLP, Independent Public Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules required to be filed by Item 8 and Paragraph (d) of Item 14:
Schedules not listed 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.
3. Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed at paragraph (c), below, and at the Exhibit Index beginning at page 38.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period covered by this report on Form 10-K.
(c) Exhibits:
The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below:
EXHIBIT NUMBER DESCRIPTION - ------ -----------
3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the period ending December 31, 1996).
4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.)
4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.)
10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March 1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight Transportation, Inc. and certain other parties dated March 11, 1994 (assigning the lessor's interest to the R. K. Trust).
10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight Transportation, Inc., dated as of September 1, 1997.
10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of October 1994, between the Company and Knight Deer Valley, L.L.C., an Arizona limited liability company. (Incorporated by reference to Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.4 Loan Agreement and Revolving Promissory Note each dated March, 1996 between First Interstate Bank of Arizona, N.A. and Knight Transportation, Inc. and Quad K Leasing, Inc. (superseding prior credit facilities) (Incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-K for the period ending December 31, 1996).
EXHIBIT NUMBER DESCRIPTION - ------ -----------
10.4.1 Modification Agreement between Wells Fargo Bank, N.A., as successor by merger to First Interstate Bank of Arizona, N.A., and the Company and Quad-K Leasing, Inc. dated as of May 15, 1997. (Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-K for the period ending December 31, 1997.)
10.4.2* Loan Agreement and Revolving Line of Credit Note each dated July 14, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facilities)
10.4.3* Term Note dated October 1, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc.
10.5 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the Company's Notice and Information Statement on Schedule 14(c) for the period ending December 31, 1997.)
10.6 Amended Indemnification Agreements between the Company, Don Bliss, Clark A. Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D. Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997 (Incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the period ending December 31, 1996).
10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the Company, Swift Transportation Co., Inc. and United Title Agency of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight Transportation, Inc., Knight Acquisition Corporation, Action Delivery Service, Inc. Action Warehouse Services, Inc. and Bobby R. Ellis, (Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on March 25, 1999.)
21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to the Company's report on Form 10-K for the period ending December 31, 1995.)
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
- --------------- * Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Knight Transportation, Inc. has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
By /s/ Kevin P. Knight, --------------------------------- Kevin P. Knight, Date: March 30, 1999. Chief Executive Officer
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 Company and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
/s/ Randy Knight March 30, 1999 - -------------------------------------------- Randy Knight Chairman of the Board, Director
/s/ Kevin P. Knight March 30, 1999 - -------------------------------------------- Kevin P. Knight Chief Executive Officer, Director
/s/ Gary J. Knight March 30, 1999 - -------------------------------------------- Gary J. Knight President, Director
/s/ Keith T. Knight March 30, 1999 - -------------------------------------------- Keith T. Knight Executive Vice President, Director
/s/ Clark A. Jenkins March 30, 1999 - -------------------------------------------- Clark A. Jenkins Chief Financial Officer, Secretary, Director Executive Vice President, Finance
/s/ Keith L. Turley March 30, 1999 - -------------------------------------------- Keith L. Turley Director
/s/ Donald A. Bliss March 30, 1999 - -------------------------------------------- Donald A. Bliss Director
/s/ G.D. Madden March 30, 1999 - -------------------------------------------- G.D. Madden Director
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Knight Transportation, Inc.:
We have audited the accompanying consolidated balance sheets of KNIGHT TRANSPORTATION, INC. (an Arizona corporation) and subsidiaries (collectively, the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona, January 19, 1999.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 124,188 $ 512,339 Trade receivables, net of allowance for doubtful accounts of approximately $662,700 and $457,600, respectively 18,248,984 11,934,364 Notes receivable 561,608 -- Inventories and supplies 1,329,329 402,076 Prepaid expenses 1,617,900 694,434 Deferred tax assets (Note 2) 2,740,200 1,907,800 ------------ ----------- Total current assets 24,622,209 15,451,013 ------------ ----------- PROPERTY AND EQUIPMENT: Land and improvements 6,037,741 4,322,837 Buildings and improvements 5,970,919 1,855,092 Furniture and fixtures 3,169,514 2,146,637 Shop and service equipment 1,217,370 1,018,636 Revenue equipment 93,672,070 75,695,123 Leasehold improvements 469,037 432,467 ------------ ----------- 110,536,651 85,470,792 Less: accumulated depreciation (25,964,744) 20,025,293) ------------ -----------
PROPERTY AND EQUIPMENT, net 84,571,907 65,445,499 ------------ -----------
NOTES RECEIVABLE 2,846,008 --
OTHER ASSETS (Note 6) 4,918,096 1,793,284 ------------ ----------- $116,958,220 $82,689,796 ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $ 7,143,476 $ 4,847,070 Accrued liabilities 5,220,372 3,082,413 Current portion of long-term debt (Note 3) 1,791,981 14,171 Line of credit (Note 3) 3,500,000 2,000,000 Claims accrual (Note 5) 3,724,385 3,463,322 ------------ ----------- Total current liabilities 21,380,214 13,406,976
LONG-TERM DEBT, less current portion (Note 3) 7,919,647 --
DEFERRED INCOME TAXES (Note 2) 17,012,285 12,485,085 ------------ ----------- 46,312,146 25,892,061 ------------ ----------- COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 6 and 8)
SHAREHOLDERS' EQUITY (Notes 7 and 8): Preferred stock -- -- Common stock 149,814 149,243 Additional paid-in capital 24,509,012 24,007,386 Retained earnings 45,987,248 32,641,106 ------------ ----------- Total shareholders' equity 70,646,074 56,797,735 ------------ -----------
$116,958,220 $82,689,796 ============ ===========
The accompanying notes are an integral part of these consolidated balance sheets.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ OPERATING REVENUE $125,030,245 $ 99,428,693 $ 77,503,786 ------------ ------------ ------------ OPERATING EXPENSES: Salaries, wages and benefits 35,890,806 27,990,073 22,217,900 Fuel 12,156,740 10,182,487 7,890,607 Operations and maintenance 7,438,511 5,584,178 4,017,698 Insurance and claims 3,092,169 2,524,823 2,820,086 Operating taxes and licenses 5,236,401 4,114,145 3,018,999 Communications 965,019 597,728 509,411 Depreciation and amortization 12,446,438 9,560,569 7,520,905 Purchased transportation 21,771,073 19,038,834 14,378,518 Miscellaneous operating expenses 3,051,911 2,355,504 1,973,131 ------------ ------------ ------------ 102,049,068 81,948,341 64,347,255 ------------ ------------ ------------ Income from operations 22,981,177 17,480,352 13,156,531 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income 160,228 49,747 51,730 Interest expense (419,263) (67,576) (398,204) ------------ ------------ ------------ (259,035) (17,829) (346,474) ------------ ------------ ------------ Income before income taxes 22,722,142 17,462,523 12,810,057
INCOME TAXES (9,376,000) (7,211,000) (5,300,000) ------------ ------------ ------------
Net income $ 13,346,142 $ 10,251,523 $ 7,510,057 ============ ============ ============
BASIC EARNINGS PER SHARE $ .89 $ .69 $ .53 ============ ============ ============
DILUTED EARNINGS PER SHARE $ .87 $ .68 $ .52 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 14,968,967 14,875,746 14,197,968 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 15,262,865 15,150,510 14,377,747 ============ ============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The accompanying notes are an integral part of these consolidated balance sheets.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The accompanying notes are an integral part of these consolidated balance sheets.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Knight Transportation, Inc. and subsidiaries (the Company) is a short to medium-haul, truckload carrier of general commodities. The operations are based in Phoenix, Arizona, where the Company has its corporate offices, fuel island, truck terminal, dispatching and maintenance services. During 1996, the Company expanded its operations by opening new facilities in Katy, Texas and Indianapolis, Indiana. The Company operates in one industry, road transportation, which is subject to regulation by the Department of Transportation and various state regulatory authorities.
The Company continues to develop its owner-operator program. Owner-operators are independent contractors who provide their own tractors. The Company views owner-operators as an alternative method of obtaining additional revenue equipment. The Company had 231 and 192 owner-operators at December 31, 1998 and 1997, respectively. This represents approximately 25% of the Company's tractor fleet at December 31, 1998 and 1997.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the parent company Knight Transportation, Inc., and its wholly owned subsidiaries, Knight Administrative Services, Inc., Quad-K Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc., Knight Management Services, Inc., Knight Transportation Midwest, Inc., KTeCom, L.L.C., and Knight Transportation South Central Ltd. Partnership. All material intercompany items and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.
INVENTORIES AND SUPPLIES - Inventories and supplies consist of tires and spare parts which are stated at the lower of cost, using the first-in, first-out (FIFO) method, or net realizable value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation on property and equipment is calculated by the straight-line method over the following estimated useful lives:
YEARS ----- Land improvements 5 Buildings and improvements 20-30 Furniture and fixtures 5 Shop and service equipment 5-10 Revenue equipment 5-7 Leasehold improvements 10
The Company expenses repairs and maintenance as incurred. For the years ended December 31, 1998, 1997 and 1996, repairs and maintenance expense totaled approximately $3,446,000, $2,442,000 and $1,883,000, respectively and is included in operations and maintenance expense in the accompanying consolidated statements of income.
Revenue equipment is depreciated to a salvage value of 15% for all tractors. Trailers are depreciated to salvage values of 10% to 40%. The Company periodically reviews its estimates related to useful lives and salvage values for revenue equipment.
TIRES - Tires on revenue equipment purchased are capitalized as a part of the equipment cost and depreciated over the life of the vehicle. Replacement tires and recapping costs are expensed when placed in service.
OTHER ASSETS - Included in other assets for 1998 is an investment in a company with advanced communications technology which the Company anticipates utilizing in 1999. This investment has been recorded at a cost of $4,000,000 and represents approximately a 4.6% ownership interest at December 31, 1998. There were no material intercompany transactions between this communications company and Knight during 1998.
REVENUE RECOGNITION - The Company's typical customer delivery is completed one day after pickup. The Company recognizes operating revenues when the freight is picked up for delivery and accrues the estimated direct costs to complete the delivery. This method of revenue recognition is not materially different from recognizing revenue based on completion of delivery as the hauls are primarily short-term.
INCOME TAXES - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES, 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. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company's three largest customers for each of the years 1998, 1997 and 1996, represent 15%, 17% and 17% of operating revenues, respectively. The single largest customer's revenues represent 6%, 8% and 9% of operating revenues for the years 1998, 1997 and 1996, respectively.
Notes receivable represent amounts due from independent contractors under a program whereby the Company finances tractor purchases for its independent contractors. These notes receivable are collateralized by revenue
equipment and are due in monthly installments, including principal and interest, over periods generally ranging from three to five years.
RECAPITALIZATION AND STOCK SPLIT
On April 22, 1998, the Company's Board of Directors approved a three for two stock split, effected in the form of a 50 percent stock dividend. The stock dividend was paid on May 18, 1998, to stockholders of record as of the close of business on May 1, 1998.
This stock split has been given retroactive recognition for all periods presented in the accompanying consolidated financial statements. All share amounts and earnings per share have been retroactively adjusted to reflect the stock split.
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes Accounting Principles Board (APB) Opinion No. 15, the previous authoritative guidance. SFAS No. 128 modifies the calculation of primary and fully diluted earnings per share (EPS) and replaces them with basic and diluted EPS. SFAS No. 128 is effective for financial statements for both interim and annual periods presented after December 15, 1997, and as a result, all prior period EPS data presented has been restated.
A reconciliation of the numerators (net income) and denominators (weighted average number of shares outstanding) of the basic and diluted EPS computations for 1998, 1997 and 1996, is as follows:
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT - Effective January 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS No. 131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which established revised standards for the reporting of financial and descriptive information about operating segments in financial statements.
The Company has determined that it has one reportable operating segment. Although the Company has three operating segments which are managed based on the regions of the United States in which each operates; each segment has similar economic characteristics. Each regional operating segment provides short to medium haul truckload carrier services of general commodities to a similar class of customers. In addition, each segment exhibits similar financial performance, including average revenue per mile and operating ratio. As a result of the foregoing, the Company has determined that it is appropriate to aggregate its operating segments into one reportable segment consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its operating segments as the Company's consolidated financial statements present its one reportable segment.
(2) INCOME TAXES:
Income tax expense consists of the following:
1998 1997 1996 ---------- ---------- ---------- Current income taxes: Federal $4,464,200 $2,904,400 $2,429,100 State 1,217,000 836,473 658,900 ---------- ---------- ---------- 5,681,200 3,740,873 3,088,000 ---------- ---------- ---------- Deferred income taxes: Federal 3,040,700 2,840,200 1,805,300 State 654,100 629,927 406,700 ---------- ---------- ---------- 3,694,800 3,470,127 2,212,000 ---------- ---------- ---------- Total income tax expense $9,376,000 $7,211,000 $5,300,000 ========== ========== ==========
The effective income tax rate is different than the amount which would be computed by applying statutory corporate income tax rates to income before income taxes. The differences are summarized as follows:
1998 1997 1996 ---------- ---------- ---------- Tax at the statutory rate (34%) $7,725,500 $5,937,300 $4,355,400 State income taxes, net of federal benefit 1,234,900 967,800 703,300 Other 415,600 305,900 241,300 ---------- ---------- ----------
$9,376,000 $7,211,000 $5,300,000 ========== ========== ==========
The net effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997, are as follows:
1998 1997 ----------- ----------- Short-term deferred tax assets: Claims accrual $ 1,549,800 $ 1,383,400 Other 1,190,400 524,400 ----------- ----------- Total short-term deferred tax assets $ 2,740,200 $ 1,907,800 =========== ===========
Long-term deferred tax liabilities: Property and equipment depreciation $16,314,885 $11,904,300 Prepaid expenses deducted for tax purposes 697,400 580,785 ----------- ----------- Total long-term deferred tax liabilities $17,012,285 $12,485,085 =========== ===========
(3) LINE OF CREDIT AND LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1998 1997 ----------- ----------- Note payable to financial institution with monthly principal and interest payments of $192,558 through October 2003, the note is unsecured with interest at a fixed rate of 5.75% $ 9,711,628 $ --
Notes payable, paid in full in 1998 -- 14,171 ----------- ----------- 9,711,628 14,171 Less - current portion (1,791,981) (14,171) ----------- -----------
$ 7,919,647 $ -- =========== ===========
Long-term debt maturities are as follows:
1999 $ 1,791,981 2000 1,898,018 2001 2,012,945 2002 2,133,484 2003 1,875,200 ----------- $ 9,711,628 ===========
The Company has a $10,000,000 revolving line of credit (see Note 5) with principal due at maturity, July 2000, and interest payable monthly at two options (prime or LIBOR plus .625%). In management's opinion, the Company will have sufficient liquidity to pay off, or will be able to renew, its line of credit at maturity. Borrowings under the line of credit are limited to 80% of eligible accounts receivable, as defined, and 50% of net fixed assets, as defined and amounted to $3,500,000 at December 31, 1998.
Under the terms of the line of credit, the Company is required to maintain certain financial ratios. These ratios include; total liabilities to net worth ratio, current ratio, and certain debt service ratios. The Company is also required to maintain certain other covenants relating to corporate structure, ownership and management.
(4) COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENTS
As of December 31, 1998, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price, net of estimated trade-in values, of approximately $41 million for delivery throughout 1999.
Although the Company expects to take delivery of this revenue equipment, delays in the availability of equipment could occur due to factors beyond the Company's control. Any future delay or interruption in the availability of equipment could have a material adverse effect on the Company.
DISABILITY PLAN
The Company has a disability plan for certain of its key employees. The plan provides disability benefits of $75,000 annually for five years if a key employee terminates employment by reason of disability. The plan is subject to termination at any time by the Board of Directors.
OTHER
The Company is involved in certain legal proceedings arising in the normal course of business. In the opinion of management, the Company's potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements.
(5) CLAIMS ACCRUAL:
The Company acts as a self-insurer for bodily injury and property damage claims up to $100,000 per occurrence. The Company is self-insured for workers' compensation claims up to $250,000 per occurrence. The Company is also self-insured for loss of revenue equipment up to $12,500 per occurrence and cargo liability up to $12,500 per occurrence. Liability in excess of these amounts is covered by a third party underwriter up to $25 million.
The claims accrual represents accruals for the estimated uninsured portion of pending claims including adverse development of known claims and incurred but not reported claims. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near term. Liabilities in excess of the self insured amounts are collateralized by letters of credit totaling $992,000. These letters of credit reduce the available borrowings under the Company's line of credit (see Note 3).
(6) RELATED PARTY TRANSACTIONS:
The Company leases approximately eight acres and facilities from a shareholder and officer, (the Shareholder) under a five year lease, with an option to extend for two additional five-year terms. The lease terms include base rent of $4,828 per month for the initial three years of the lease, and increases of 3% on the third anniversary of the commencement date, the first day of each option term, and the third anniversary of the commencement date of each option term. In September 1997, the lease was amended to include additional acreage and the monthly payment was increased to approximately $5,923. In March 1999, the first renewal option will be exercised and the monthly payment will increase to $6,100. In addition to base rent, the lease requires the Company to pay its share of all expenses, utilities, taxes and other charges. Rent expense paid to the Shareholder was approximately $75,000, $60,200 and $59,000 during 1998, 1997 and 1996, respectively.
The Company paid approximately $90,000, $80,000 and $80,000 for certain of its key employees' life insurance premiums during 1998, 1997 and 1996, respectively. A portion of the premiums paid are included in other assets in the accompanying consolidated balance sheets. The life insurance policies provide for cash distributions to the beneficiaries of the policyholders upon death of the key employee. The Company is entitled to receive the total premiums paid on the policies at distribution prior to any beneficiary distributions.
The Company provided maintenance and shipping for Total Warehousing, Inc. (Total), a company owned by a shareholder of the Company, of approximately $16,000 for the year ended December 31, 1996. No services were provided during 1998 or 1997. Total provided general warehousing services to the Company in the amount of approximately $9,000, $11,000 and $14,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
(7) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 100,000,000 shares of $.01 par value common stock; 14,981,482 and 14,924,422 shares of common stock were issued and outstanding at December 31, 1998 and 1997, respectively. In addition, the Company has authorized 50,000,000 shares of $.01 par value preferred stock, none of which was outstanding at December 31, 1998 or 1997.
In July 1996, the Company issued 1,200,000 shares of common stock at $12.33 per share (the Offering). The Offering consisted of 2,400,000 shares of common stock comprised of 1,200,000 newly-issued Company shares and 1,200,000 shares from existing shareholders.
During 1997, all Board of Director members received their director fees of $2,500 through the issuance of common stock in equivalent shares to each board member. The Company issued a total of 594 shares of common stock during 1997 to certain directors.
During 1998, all Board of Director members received their director fees of $5,000 through the issuance of common stock in equivalent shares to each board member. The Company issued a total of 960 shares of common stock during 1998 to certain directors.
(8) EMPLOYEE BENEFIT PLANS:
1994 STOCK OPTION PLAN
The Company established the 1994 Stock Option Plan (1994 Plan) with 975,000 shares of common stock reserved for issuance thereunder. In February 1998, the 1994 Plan was amended and restated to increase the number of shares reserved for issuance to 1,500,000. The 1994 Plan will terminate on August 31, 2004. The Compensation Committee of the Board of Directors administers the 1994 Plan and has the discretion to determine the employees, officers and independent directors who receive awards, the type of awards to be granted (incentive stock options, nonqualified stock options and restricted stock grants) and the term, vesting and exercise price. Incentive stock options are designed to comply with the applicable provisions of the Internal Revenue Code (the Code) and are subject to restrictions contained in the Code, including a requirement that exercise prices are equal to at least 100% of the fair market value of the common shares on the grant date and a ten-year restriction on the option term.
Independent directors are not permitted to receive incentive stock options. Non-qualified stock options may be granted to directors, including independent directors, officers, and employees and provide for the right to purchase common stock at a specified price, which may not be less than 85% of the fair market value on the date of grant, and usually become exercisable in installments after the grant date. Non-qualified stock options may be granted for any reasonable term. The 1994 Plan provides that each independent director may receive, on the date of appointment to the Board of Directors, non-qualified stock options to purchase not less than 2,500 nor more than 5,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of the grant.
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS No. 123), ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to account for stock transactions with employees and directors pursuant to the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Had compensation cost for the 1994 Plan been recorded consistent with SFAS No. 123, the Company's net income and EPS amounts would have been reduced to the following pro forma amounts for the years ended December 31:
1998 1997 1996 ----------- ----------- ---------- Net income: As reported $13,346,142 $10,251,523 $7,510,057 Pro forma 13,060,131 10,052,945 7,338,132 Earnings per share: As reported - Diluted EPS $ .87 $ .68 $ .52 Pro forma - Diluted EPS .86 .66 .51
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; risk free interest rate of 6.73%, expected life of six years, expected volatility of 36%, expected dividend rate of zero, and expected forfeitures of 0%. The following weighted average assumptions were used for grants in 1997; risk free interest rate of 5.77%, expected life of six years, expected volatility of 42%, expected dividend rate of zero, and expected forfeitures of 15.68%. The following weighted average assumptions were used for grants in 1998; risk free interest rate of 5.75%, expected life of six years, expected volatility of 45%, expected dividend rate of zero, and expected forfeitures of 23.36%.
Because SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost disclosed above may not be representative of that had such options been considered.
Options outstanding at December 31, 1998, have exercise prices between $8.00 and $21.33. There are 345,050 options outstanding with exercise prices ranging from $8.00 to $9.25 with weighted average exercise prices of $8.43 and weighted average remaining contractual lives of 6.39 years. There are 359,100 options outstanding with exercise prices ranging from $9.26 to $21.33 with weighted average exercise prices of $14.80 and weighted average contractual lives of 8.92 years.
401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the Plan) for all employees who are 19 years of age or older and have completed one year of service with the Company. The Plan, as amended in 1995, provides for a mandatory matching contribution equal to 50% of the amount of the employee's salary deduction not to exceed $625 annually per employee. The Plan also provides for a discretionary matching contribution. In 1998, 1997 and 1996, there were no discretionary contributions. Employees' rights to employer contributions vest after five years from their date of employment. The Company's matching contribution, included in accrued liabilities in the accompanying consolidated balance sheets, was approximately $125,000, $93,000 and $69,000 for 1998, 1997 and 1996, respectively.
EXHIBITS TO
KNIGHT TRANSPORTATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
KNIGHT EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.)
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the period ending December 31, 1996).
4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.)
4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.)
10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March 1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight Transportation, Inc. and certain other parties dated March 11, 1994 (assigning the lessor's interest to the R. K. Trust).
10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight Transportation, Inc., dated as of September 1, 1997.
10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of October 1994, between the Company and Knight Deer Valley, L.L.C., an Arizona limited liability company. (Incorporated by reference to Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.4 Loan Agreement and Revolving Promissory Note each dated March, 1996 between First Interstate Bank of Arizona, N.A. and Knight Transportation, Inc. and Quad K Leasing, Inc. (superseding prior credit facilities) (Incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-K for the period ending December 31, 1996).
EXHIBIT NUMBER DESCRIPTION - ------ -----------
10.4.1 Modification Agreement between Wells Fargo Bank, N.A., as successor by merger to First Interstate Bank of Arizona, N.A., and the Company and Quad-K Leasing, Inc. dated as of May 15, 1997. (Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-K for the period ending December 31, 1997.)
10.4.2* Loan Agreement and Revolving Line of Credit Note each dated July 14, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facilities)
10.4.3* Term Note dated October 1, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc.
10.5 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the Company's Notice and Information Statement on Schedule 14(c) for the period ending December 31, 1997.)
10.6 Amended Indemnification Agreements between the Company, Don Bliss, Clark A. Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G.D. Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997 (Incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the period ending December 31, 1996).
10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the Company, Swift Transportation Co., Inc. and United Title Agency of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the period ended December 31, 1995.)
10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight Transportation, Inc., Knight Acquisition Corporation, Action Delivery Service, Inc. Action Warehouse Services, Inc. and Bobby R. Ellis, (Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on March 25, 1999.)
21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to the Company's report on Form 10-K for the period ending December 31, 1995.)
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
- ------------ * Filed herewith.