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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-24946
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Buckeye Road 85043
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
(602) 269-2000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $0.01 par value NASDAQ-NMS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 4, 1998, was $120,409,586 (based upon $28.25 per share
being the closing sale price on that date as reported by the National
Association of Securities Dealers Automated Quotation System-National Market
System ("NASDAQ-NMS")). In making this calculation, the issuer has assumed,
without admitting for any purpose, that all executive officers and directors of
the company, and no other persons, are affiliates.
The number of shares outstanding of the registrant's common stock as of March 4,
1998 was 9,951,809.
The Information Statement for the Annual Meeting of Shareholders to be held on
May 13, 1998 is incorporated into this Form 10-K Part III by reference.
TABLE OF CONTENTS
KNIGHT TRANSPORTATION, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997
Pages
-----
PART I.
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 6
Item 3. Legal Proceedings............................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.......................... 7
PART II.
Item 5. Market for Company's Common Equity and Related Shareholder Matters........... 8
Item 6. Selected Financial Data...................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 9
Item 7A Quantitative and Qualitative Disclosures About Market Risk................... 16
Item 8. Financial Statements and Supplementary Data.................................. 17
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.......... 17
PART III.
Item 10. Directors and Executive Officers of the Company.............................. 17
Item 11. Executive Compensation....................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 18
Item 13. Certain Relationships and Related Transactions............................... 18
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 18
SIGNATURES....................................................................................... 21
INDEX TO EXHIBITS
PART I
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" and "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 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 commenced operations in July 1990, when Kevin,
Gary and Keith Knight joined Randy Knight to establish a new short-to-medium
haul truckload carrier. The Company's stock has been publicly traded since
October 1994. From 1992 to 1997, Knight's revenue has grown to $99.4 million
from $19.6 million, and net income has increased to $10.3 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 expansion 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 facilities
in Phoenix, Arizona allow it to serve the Western region of the United States.
The Company has established operations near Houston, Texas to serve customers in
the Texas and Louisiana region and in Indianapolis, Indiana, from which it
provides regional and dedicated service in the Midwest and on the East Coast.
Knight anticipates that its three regional operating bases will provide a
platform for future growth.
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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 purchasing 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, 1997, the Company's 25 largest customers represented 51.1% of
operating revenue; its ten largest customers represented 32.9% of operating
revenue; and its five largest customers represented 23.0% 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.
Although price is a primary concern to all shippers, the Company seeks to obtain
a competitive advantage by providing high quality service to customers. 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
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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.
Drivers, Other Employees, and Independent Contractors
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, thereby 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.
As of December 31, 1997, Knight employed 906 persons,
including 736 drivers and 26 maintenance personnel. None of the Company's
employees is represented by a labor union.
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, 1997, the Company had 192 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.
-3-
Revenue Equipment
The Company operates a fleet of 53-foot long, high cube
trailers, including 50 refrigerated trailers and 15 flatbed trailers in its
fleet as of March 4, 1998. 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.
Levels of growth in the Company's tractor and trailer fleets
are based on 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,
1997, the Company operated 580 company tractors with an average age of 1.3 years
and 2,112 trailers with an average age of 2.2 years. The Company also had under
contract, as of December 31, 1997, 192 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 36 months after the date of purchase and 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.
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, pre- 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
-4-
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 $20,000,000. 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 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
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 implementing regulations
currently prevents the Company from assessing the full impact of this action.
Generally, the trucking industry is subject to regulatory and legislative
changes that can have a materially adverse effect on operations.
Interstate motor carrier operations are subject to safety
requirements prescribed by the DOT. Such matters 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
-5-
environmental compliance and avoid environmental risk. The Company's Phoenix
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 has rarely transported
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 or criminal liability.
The Company's operations involve certain inherent
environmental risks. 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 contamination.
The State of Arizona has enacted laws that provide for a water
quality assurance revolving fund ("WQARF"). The purpose of these laws is to
identify and remediate areas of groundwater contamination resulting from the
release of hazardous substances. Once an area of contamination is identified,
the Arizona Department of Environmental Quality ("ADEQ") designates the area as
a WQARF Study Area in order to determine the extent of contamination and to
identity potentially responsible parties. Responsible parties are liable for the
cost of remediating contamination. In December 1987, ADEQ designated a 25 square
mile area in West Phoenix, which includes the Company's Phoenix, Arizona
location, as a WQARF Study Area. To date, ADEQ has not identified the Company as
a potentially responsible party or the Company's facility as a facility
warranting further investigation with respect to the WQARF Study Area. The
Company has been located at its present Phoenix facility since 1990. Neither the
Company nor its predecessors maintained underground petroleum storage tanks at
the Company's Phoenix location. Prior to 1974, the property upon which the
Company's Phoenix, Arizona facilities are located was farm land.
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. Properties
The Company's headquarters and principal place of business is
located at 5601 West Buckeye Road, Phoenix, Arizona on approximately 45 acres.
The Company owns approximately 35 acres and the remaining 10 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.
-6-
In October 1997, the Company completed construction of a bulk
fuel storage facility and fueling islands based at its Phoenix headquarters to
obtain greater operating efficiencies. The Company also commenced expansion of
its headquarters facilities. The Company estimates the expansion of its
headquarters facilities will be completed by June 1998.
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 is presently planning the expansion of that facility.
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 is seeking a separate
location in the Houston area for its regional services headquarters.
The Company leases office facilities in California, Oklahoma
and Utah, which it uses for fleet maintenance, record keeping and general
operations. The Company is in the process of purchasing property 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, 1997, the Company's aggregate monthly rent
for all leased properties was approximately $28,000.
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. 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 EEO 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. 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 1997.
-7-
PART II
Item 5. Market For Company's Common Equity and Related Shareholder Matters
Since the initial public offering of the Company's common
stock in October 1994, the common stock has been 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
---- ---
1996
----
First Quarter $16.25 $13.13
Second Quarter $20.50 $15.00
Third Quarter $22.50 $18.25
Fourth Quarter $24.88 $18.63
1997
----
First Quarter $25.25 $18.75
Second Quarter $28.50 $20.50
Third Quarter $28.75 $21.50
Fourth Quarter $32.00 $22.75
As of March 4, 1998, the Company had 63 shareholders of record
and approximately 1,100 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. 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, 1997, 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.
-8-
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollar amounts in thousands, except per share amounts and
operating data)
Statements of Income Data:
- --------------------------
Operating revenue $ 99,428 $ 77,504 $ 56,170 $ 37,543 $ 26,381
Operating expenses 81,948 64,347 45,569 29,431 21,255
Income from operations 17,480 13,157 10,601 8,112 5,126
Net interest expense and other (18) (346) (196) (734) (844)
Income before income taxes 17,462 12,810 10,406 7,378 4,282
Net income 10,252 7,510 5,806 4,094 2,447
Diluted Net income per share (1) 1.01 .78 .64 .49 .30
Balance Sheet Data (at End of Period):
- --------------------------------------
Working capital (deficit) $ 2,044 $ 4,141 $ (293) $ 1,761 $ (787)
Total assets 82,690 64,118 43,099 32,588 24,651
Long-term obligations, net of current -- 53 981 2,117 9,208
Shareholders' equity 56,798 45,963 24,732 18,903 5,179
Operating Data (Unaudited):
- ---------------
Operating ratio(2) 82.4% 83.0% 81.1% 78.4% 80.6%
Average revenue per mile $ 1.22 $ 1.24 $ 1.26 $ 1.29 $ 1.22
Average length of haul (miles) 500 489 494 482 472
Empty mile factor 9.6% 9.6% 10.3% 10.1% 11.8%
Tractors operated at end of period(3) 772 575 425 291 199
Trailers operated at end of period 2,112 1,529 1,044 639 489
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" and "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
- --------
(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 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.
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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, 1997, 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, 1997, the Company's operating
revenue grew at a 38.4% compounded annual rate, while net income increased at a
48.9% 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.
The Company initiated an independent contractor program in 1994. As of
December 31, 1997, the Company had 192 tractors owned and operated by
independent contractors. As a result of the increase in the use of independent
contractors, the Company has 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. Purchased transportation represents the amount
an independent contractor is paid to haul freight for the Company on a mutually
agreed to per-mile basis. The Company's decision to focus fleet expansion on
independent contractors was based on such factors as the Company's reduced
capital requirements, since the independent contractors provide their own
tractors, the lower turnover rate that the Company has experienced with
independent contractors, and the Company's success in attracting qualified
independent contractors.
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:
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Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Operating revenue ................. 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries, wages and benefits ... 28.2 28.7 29.1
Fuel ........................... 10.2 10.2 10.9
Operations and maintenance ..... 5.6 5.2 6.6
Insurance and claims ........... 2.5 3.6 3.7
Operating taxes and licenses ... 4.1 3.9 3.8
Communications ................. .6 .6 .5
Depreciation and amortization .. 9.6 9.7 9.7
Purchased transportation ....... 19.2 18.6 14.0
Miscellaneous operating expenses 2.4 2.5 2.8
----- ----- -----
Total operating expenses . 82.4 83.0 81.1
----- ----- -----
Income from operations ............ 17.6 17.0 18.9
Net interest expense .............. -- .5 .4
----- ----- -----
Income before income taxes ........ 17.6 16.5 18.5
Income taxes ...................... 7.3 6.8 8.2
----- ----- -----
Net Income ........................ 10.3% 9.7% 10.3%
===== ===== =====
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 as 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.
-11-
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 slightly 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 slightly 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 1996.
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.
Fiscal 1996 Compared to Fiscal 1995
Operating revenue increased by 38.0% to $77.5 million in 1996 from
$56.2 million in 1995. 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 1996 compared
to 1995. The Company's fleet increased by 35.3% to 575 tractors (including 158
owned by independent contractors) as of December
-12-
31, 1996 from 425 tractors (including 115 owned by independent contractors) as
of December 31, 1995. Average revenue per mile declined to $1.24 per mile for
the year ended December 31, 1996 from $1.26 per mile for the same period in
1995. Equipment utilization averaged 121,960 miles per tractor in 1996, compared
to an average of 120,714 miles per tractor in 1995. The decrease in revenue per
mile was the result of increased competition in the Western United States,
coupled with increased competition in the Company's new operating regions in the
Midwest and in Texas and Louisiana.
Salaries, wages and benefits expense decreased as a percentage of
operating revenue to 28.7% for 1996 from 29.1% for 1995, primarily as the result
of the increase in the ratio of independent contractors to Company drivers. 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 decreased as a percentage of operating revenue to 10.2%
for 1996 from 10.9% in 1995. Although the Company's gross fuel costs increased
during 1996, the Company was able to recoup the majority of the incremental
increase with the implementation of a fuel surcharge. Additionally, an increase
in the Company's independent contractor fleet contributed to the decrease in the
Company's cost of fuel as a percentage of revenue. Independent contractors are
required to pay their own fuel costs.
Operations and maintenance expense decreased as a percentage of
operating revenue to 5.2% for 1996 from 6.6% in 1995. This decrease was the
result of eliminating the use of leased trailers through the purchase of new
trailers and from the rapid growth of the Company's independent contractor
program.
Insurance and claims expense remained relatively constant as a
percentage of operating revenue for the years ended December 31, 1996 and 1995
as the result of premium costs and claims remaining steady during the period.
Operating taxes and license expense increased slightly as a percentage
of operating revenue to 3.9% for the year ended December 31, 1996 from 3.8% for
the year ended December 31, 1995. The increase resulted primarily from the
increased cost associated with the licensing of new trailers, which was
partially offset by the growth in the Company's independent contractor program.
Independent contractors are required to pay for their own fuel and mileage
taxes.
Communications expenses remained constant, with no significant change
taking place in 1996 compared to 1995.
Depreciation and amortization expense increased slightly for the year
ended December 31, 1996, but remained constant as a percentage of operating
revenue at 9.7% compared to the same period in 1995. Although the Company added
a significant number of trailers to its fleet, the incremental cost was offset
by the growth in the Company's independent contractor program.
Purchased transportation expense increased to 18.6% in 1996 from 14.0%
in 1995 due to an increase in the Company's use of independent contractors to
158 as of December 31, 1996, from 115 as of December 31, 1995.
Miscellaneous operating expenses remained steady, with no significant
change taking place in 1996.
-13-
As a result of the above factors, the Company's operating ratio
(operating expenses as a percentage of operating revenue) for 1996 was 83.0% as
compared to 81.1% for 1995.
Net interest expense remained constant as a percentage of operating
revenue at 0.5% in 1996 compared to 0.4% in 1995 as a result of the application
of the proceeds from the Company's initial and secondary stock offerings,
respectively, 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 decreased as a percentage of revenue to 6.8% for the year
ending December 31, 1996, from 8.2% for the year ended December 31, 1995,
primarily due to the Company discontinuing reimbursements to drivers for
non-deductible meals and other expenses. The reduction in reimbursed expenses to
drivers was offset by an increase in driver compensation.
As a result of the preceding changes, the Company's net income as a
percentage of operating revenues was 9.7% in 1996 compared to 10.3% for 1995.
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 liquidity
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 $23.6 million, $14.3 million and $10.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Capital expenditures for the purchase of revenue equipment, office
equipment and leasehold improvements totaled approximately $26.3 million, $24.8
million and $13.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company anticipates that capital expenditures, net of
trade-ins, will be approximately $28 million for 1998, 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 used in financing activities and net direct equipment
financing was approximately $.8 million for the year ended December 31, 1997.
Net cash provided by financing activities and net direct equipment financing was
$8.3 million for the year ended December 31, 1996. Net cash used in financing
activities and net direct equipment financing was approximately $.7 million for
the year ended December 31, 1995. These changes were due to the Company's
ability to offset the cost of purchasing revenue equipment with the proceeds of
the Company's secondary stock offering.
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 cost of such acquisitions 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, 1997, and
March 10, 1998, the Company had $2,000,000 in borrowings under its revolving
line of credit.
Management believes that the cash flow from operating activities and
available borrowing will be sufficient to meet the Company's capital needs
through the next 18 months. The Company will continue to
-14-
have significant capital requirements over the long term, which may require the
Company to incur 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 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, which could result in higher
operating costs. The effects of inflation on the Company's business during 1997,
1996 and 1995 generally were not significant.
Year 2000 Capabilities.
The Company's computer systems are Year 2000 compliant, or will be made
Year 2000 compliant within the next 18 months. Neither the "Year 2000 issue" nor
the financial effects of any reviews, testing, or modifications the Company may
undertake in response to that issue are expected to have a material adverse
effect on the Company's business or its consolidated financial position, results
of operations or cash flows. At this time, the Company is unable to determine
whether the impact of the "Year 2000 issue" on its customers or suppliers will
affect the Company.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 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. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. In management's opinion, the adoption of SFAS
No. 130 will not have a material impact on the Company's financial position or
results of operations.
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
-15-
statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. In management's opinion, the adoption of
SFAS No. 131 will not have a material impact on the Company's reported financial
position or results of operations.
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 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 the Company could
be required to adjust its driver compensation package, which could affect the
Company's profitability if not offset by an 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 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 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
-16-
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. Quantitative and Qualitative Disclosures About Market Risk.
Pursuant to 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, 1997.
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. Financial Statements and Supplementary Data
The Consolidated Balance Sheets of Knight Transportation, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and the related Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 1997, together with the related notes and
report of Arthur Andersen LLP, independent public accountants, are set forth at
pages 25 through 39, below.
-17-
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
PART III
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
1998 Annual Meeting of Shareholders to be held May 13, 1998.
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 1998
Annual Meeting of Shareholders to be held May 13, 1998.
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 1998 Annual Meeting of Shareholders to be held
May 13, 1998.
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 1998 Annual Meeting of Shareholders to be held May 13, 1998.
PART IV
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 25 through 39, 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, 1997 and 1996
Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995
-18-
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
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 40.
(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.)
-19-
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).
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.
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.)
-20-
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.)
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.
-21-
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,
Chief Executive Officer
Date: March 30, 1998.
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, 1998
- ----------------------------------------------
Randy Knight
Chairman of the Board, Director
/s/ Kevin P. Knight March 30, 1998
- ----------------------------------------------
Kevin P. Knight
Chief Executive Officer, Director
/s/ Gary J. Knight March 30, 1998
- ----------------------------------------------
Gary J. Knight
President, Director
March , 1998
- ----------------------------------------------
Keith T. Knight
Executive Vice President, Director
-22-
/s/ Clark A. Jenkins March 30, 1998
- ----------------------------------------------
Clark A. Jenkins
Chief Financial Officer, Secretary, Director
/s/ Keith L. Turley March 30, 1998
- ----------------------------------------------
Keith L. Turley
Director
/s/ Donald A. Bliss March 30, 1998
- ----------------------------------------------
Donald A. Bliss
Director
/s/ G.D. Madden
- ---------------------------------------------- March 30, 1998
G.D. Madden
Director
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-24-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
-25-
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 audits 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 26, 1998.
-26-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 512,339 $ 1,244,745
Accounts receivable, net of allowance for doubtful accounts
of approximately $457,600 and $318,000, respectively 11,934,364 10,414,133
Inventories and supplies 402,076 328,825
Prepaid expenses 694,434 509,085
Deferred tax assets (Note 2) 1,907,800 1,319,400
------------ ------------
Total current assets 15,451,013 13,816,188
------------ ------------
PROPERTY AND EQUIPMENT:
Land and improvements 4,322,837 4,297,837
Buildings and improvements 1,855,092 970,963
Furniture and fixtures 2,146,637 1,837,844
Shop and service equipment 1,018,636 859,592
Revenue equipment 75,695,123 55,172,272
Leasehold improvements 432,467 575,015
------------ ------------
85,470,792 63,713,523
Less: accumulated depreciation (20,025,293) (14,186,781)
------------ ------------
PROPERTY AND EQUIPMENT, net 65,445,499 49,526,742
------------ ------------
OTHER ASSETS (Note 6) 1,793,284 775,526
------------ ------------
$ 82,689,796 $ 64,118,456
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,847,070 $ 3,954,286
Accrued liabilities (Note 8) 3,082,413 2,286,099
Current portion of long-term debt (Note 3) 14,171 394,191
Line of credit (Note 3) 2,000,000 --
Claims accrual (Note 5) 3,463,322 3,040,672
------------ ------------
Total current liabilities 13,406,976 9,675,248
LONG-TERM DEBT, less current portion (Note 3) -- 53,491
DEFERRED INCOME TAXES (Note 2) 12,485,085 8,426,558
------------ ------------
25,892,061 18,155,297
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 8)
SHAREHOLDERS' EQUITY (Notes 7 and 8):
Preferred stock -- --
Common stock 99,496 99,045
Additional paid-in capital 24,057,133 23,474,531
Retained earnings 32,641,106 22,389,583
------------ ------------
Total shareholders' equity 56,797,735 45,963,159
------------ ------------
$ 82,689,796 $ 64,118,456
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
-27-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
OPERATING REVENUE $ 99,428,693 $ 77,503,786 $ 56,170,279
------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 27,990,073 22,217,900 16,359,957
Fuel 10,182,487 7,890,607 6,101,460
Operations and maintenance 5,584,178 4,017,698 3,727,240
Insurance and claims 2,524,823 2,820,086 2,097,361
Operating taxes and licenses 4,114,145 3,018,999 2,154,739
Communications 597,728 509,411 286,469
Depreciation and amortization 9,560,569 7,520,905 5,416,390
Purchased transportation 19,038,834 14,378,518 7,831,506
Miscellaneous operating expenses 2,355,504 1,973,131 1,593,711
------------ ------------ ------------
81,948,341 64,347,255 45,568,833
------------ ------------ ------------
Income from operations 17,480,352 13,156,531 10,601,446
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 49,747 51,730 36,620
Interest expense (67,576) (398,204) (232,371)
------------ ------------ ------------
(17,829) (346,474) (195,751)
------------ ------------ ------------
Income before income taxes 17,462,523 12,810,057 10,405,695
INCOME TAXES (7,211,000) (5,300,000) (4,600,000)
------------ ------------ ------------
Net income $ 10,251,523 $ 7,510,057 $ 5,805,695
============ ============ ============
BASIC EARNINGS PER SHARE $ 1.03 $ .79 $ .64
============ ============ ============
DILUTED EARNINGS PER SHARE $ 1.01 $ .78 $ .64
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 9,917,164 9,465,312 9,100,700
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 10,100,340 9,585,165 9,141,176
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Additional
------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 9,100,000 $ 91,000 $ 9,737,767 $ 9,073,831 $18,902,598
Exercise of stock options 2,000 20 23,980 -- 24,000
Net income -- -- -- 5,805,695 5,805,695
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 9,102,000 91,020 9,761,747 14,879,526 24,732,293
Exercise of stock options 2,500 25 29,975 -- 30,000
Issuance of 800,000 shares of
common stock, net of offering
costs of $1,109,191 (Note 7) 800,000 8,000 13,682,809 -- 13,690,809
Net income -- -- -- 7,510,057 7,510,057
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 9,904,500 99,045 23,474,531 22,389,583 45,963,159
Exercise of stock options 44,719 447 572,556 -- 573,003
Issuance of 396 shares of
common stock (Note 7) 396 4 10,046 -- 10,050
Net income -- -- -- 10,251,523 10,251,523
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 9,949,615 $ 99,496 $24,057,133 $32,641,106 $56,797,735
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,251,523 $ 7,510,057 $ 5,805,695
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 9,560,569 7,520,905 5,416,390
Non-cash compensation expense for issuance of common
stock to certain members of board of directors 10,050 -- --
Provision for doubtful accounts 139,600 23,000 162,000
Deferred income taxes, net 3,470,127 2,211,958 1,403,200
Changes in assets and liabilities-
Increase in receivables (1,659,831) (3,062,094) (2,720,776)
(Increase) decrease in inventories and supplies (73,251) 93,764 (115,673)
(Increase) decrease in prepaid expenses (185,349) 428,219 (771,741)
Increase in other assets (195,811) (652,693) (370,499)
Increase (decrease) in accounts payable 1,069,469 (250,046) 479,426
Increase in accrued liabilities and claims accrual 1,218,964 459,965 1,364,536
------------ ------------ ------------
Net cash provided by operating activities 23,606,060 14,283,035 10,652,558
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (23,548,158) (21,919,774) (11,360,029)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (payments) on line of credit, net 2,000,000 (2,000,000) 2,000,000
Borrowing of debt -- 759,200 --
Payments of debt (433,511) (2,294,455) (1,311,348)
Payments of accounts payable - equipment (2,929,800) (1,927,726) (1,528,322)
Proceeds from sale of common stock -- 13,690,809 --
Proceeds from exercise of stock options 573,003 30,000 24,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (790,308) 8,257,828 (815,670)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (732,406) 621,089 (1,523,141)
CASH AND CASH EQUIVALENTS, beginning of year 1,244,745 623,656 2,146,797
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 512,339 $ 1,244,745 $ 623,656
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing transactions:
Equipment acquired by direct financing $ -- $ -- $ 127,115
Equipment acquired by accounts payable 2,753,115 2,929,800 1,927,726
Issuance of common stock to certain members of
board of directors 10,050 -- --
Cash Flow Information:
Income taxes paid $ 3,945,579 $ 2,459,144 $ 3,368,373
Interest paid 69,161 408,138 228,681
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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
centered in Phoenix, Arizona, where the Company has its corporate offices, fuel
island, truck terminal, and dispatching and maintenance services. During 1996,
the Company expanded its operations by opening new facilities in Katy, Texas and
Indianapolis, Indiana. The Company operates predominantly 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 192 and 158 owner-operators at December 31, 1997 and
1996, respectively. This represents approximately 25% and 27% of the Company's
tractor fleet at December 31, 1997 and 1996, respectively.
Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the parent company Knight Transportation, Inc., and its wholly owned
subsidiaries, Quad-K Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc.,
Knight Management Services, Inc. and Knight Dedicated Services 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.
-31-
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. For the years ended December 31,
1997, 1996 and 1995, repairs and maintenance expense totaled approximately
$2,442,000, $1,883,000 and $1,375,000, 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.
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.
-32-
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 1997, 1996 and 1995,
represent 17%, 17% and 11% of operating revenues, respectively. The single
largest customer's revenues represent 8%, 9% and 4% of operating revenues for
the years 1997, 1996 and 1995, respectively.
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 existing 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 the years December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
Net Income Shares Per Share Net Income Shares Per Share Net Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ----------- --------- ----------- ----------- --------- ----------- ----------- ---------
Basic EPS $10,251,523 9,917,164 $ 1.03 $ 7,510,057 9,465,312 $ .79 $ 5,805,695 9,100,700 $ .64
========= ========= =========
Effect of stock
options -- 183,176 -- 119,853 -- 40,476
----------- ----------- ----------- ----------- ----------- -----------
Diluted EPS $10,251,523 10,100,340 $ 1.01 $ 7,510,057 9,585,165 $ .78 $ 5,805,695 9,141,176 $ .64
=========== =========== ========= =========== =========== ========= =========== =========== =========
Fair Value of Financial Instruments - Cash, accounts receivable and payable,
accruals, long-term debt and line of credit borrowings approximate fair value
because of their short maturities.
Statements of Financial Accounting Standards Not Yet Adopted - In June 1997, the
FASB issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, gains, and
losses) in a full set of general-purpose financial statements. SFAS No. 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. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. In management's opinion, the
adoption of SFAS No. 130 will not have a material impact on the Company's
financial position or results of operations.
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
-33-
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. In the initial year of
application, comparative information for earlier years is to be restated. In
management's opinion, the adoption of SFAS No. 131 will not have a material
impact on the Company's reported financial position or results of operations.
(2) INCOME TAXES:
Income tax expense consists of the following:
1997 1996 1995
---------- ---------- ----------
Current income taxes:
Federal $2,904,400 $2,429,100 $2,500,500
State 836,473 658,900 696,300
---------- ---------- ----------
3,740,873 3,088,000 3,196,800
---------- ---------- ----------
Deferred income taxes:
Federal 2,840,200 1,805,300 1,173,300
State 629,927 406,700 229,900
---------- ---------- ----------
3,470,127 2,212,000 1,403,200
---------- ---------- ----------
Total income tax expense $7,211,000 $5,300,000 $4,600,000
========== ========== ==========
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:
1997 1996 1995
---------- ---------- ----------
Tax at the statutory rate (34%) $5,937,300 $4,355,400 $3,537,900
State income taxes, net of federal
benefit 967,800 703,300 611,300
Other 305,900 241,300 450,800
---------- ---------- ----------
$7,211,000 $5,300,000 $4,600,000
========== ========== ==========
-34-
The net effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996, are as follows:
1997 1996
----------- -----------
Short-term deferred tax assets:
Claims accrual $ 1,383,400 $ 1,216,300
Other 524,400 103,100
----------- -----------
Total short-term deferred tax assets $ 1,907,800 $ 1,319,400
=========== ===========
Long-term deferred tax liabilities:
Property and equipment depreciation $11,904,300 $ 8,218,200
Prepaid expenses deducted for tax purposes 580,785 208,358
----------- -----------
Total long-term deferred tax liabilities $12,485,085 $ 8,426,558
=========== ===========
(3) LINE OF CREDIT AND LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1997 1996
----------- -----------
Notes payable to a commercial lending institution
with varying monthly payments from approximately
$4,000 to $6,000 through 1998; collateralized by
tractors and trailers, fixed interest rates from 6.4%
to 7.0% $ 14,171 $ 385,549
Note payable to a financial institution; repaid
during 1997 -- 62,133
----------- -----------
14,171 447,682
Less- Current portion (14,171) (394,191)
----------- -----------
$ -- $ 53,491
=========== ===========
The Company has a $10,000,000 revolving line of credit (see Note 5) with
principal due at maturity, May 1998, 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 $2,000,000 at December 31, 1997. There were no outstanding
borrowings under the line of credit at December 31, 1996.
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.
The weighted average interest rate on these notes payable is 6.44% and 6.76% at
December 31, 1997 and 1996, respectively.
-35-
(4) COMMITMENTS AND CONTINGENCIES:
Purchase Commitments
As of December 31, 1997, the Company had purchase commitments for additional
tractors and trailers with an estimated purchase price of approximately $28.0
million.
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 the 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 $20 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. Liability in excess of the self insured amounts are collateralized by
letters of credit totaling $1,242,000. 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
-36-
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
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 $60,200, $59,000 and $54,800 during 1997, 1996 and
1995, respectively.
The Company paid approximately $80,000 each year for certain of its key
employees' life insurance premiums during 1997, 1996 and 1995. The total
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 and $62,000 for the years ended December 31, 1996 and 1995,
respectively. No services were provided during 1997. Total provided general
warehousing services to the Company in the amount of approximately $11,000,
$14,000 and $60,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(7) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 100,000,000 shares of $.01
par value common stock; 9,949,615 and 9,904,500 shares of common stock were
issued and outstanding at December 31, 1997 and 1996, 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, 1997 and 1996.
In July 1996, the Company issued 800,000 shares of common stock at $18.50 per
share (the Offering). The Offering consisted of 1,600,000 shares of common stock
comprised of 800,000 newly-issued Company shares and 800,000 shares from
existing shareholders.
During 1997, the Company determined that all Board of Director members would
receive their director fees by the issuance of common stock. The Company will
issue $2,500 of common stock in equivalent shares to each board member when
these fees are paid. During 1997, the Company issued 396 shares of common stock
to certain directors.
(8) EMPLOYEE BENEFIT PLANS:
1994 Stock Option Plan
The Company established the 1994 Stock Option Plan (1994 Plan) with 650,000
shares of common stock reserved for issuance thereunder. 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
-37-
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 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:
1997 1996 1995
-------------- -------------- --------------
Net income:
As reported $ 10,251,523 $ 7,510,057 $ 5,805,695
Pro forma 10,052,945 7,338,132 5,793,757
Earnings per share:
As reported - Diluted EPS $ 1.01 $ .78 $ .64
Pro forma - Diluted EPS 1.00 .77 .63
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 1995 and 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%.
-38-
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.
1997 1996 1995
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of year 360,000 $ 12.76 262,250 $ 12.06 251,250 $ 12.01
Granted 253,550 21.57 139,250 13.98 25,000 12.52
Exercised (45,719) 12.80 (2,500) 12.00 (2,000) 12.00
Forfeited (40,234) 14.14 (39,000) 12.48 (12,000) 12.00
--------- --------- --------- -------- --------- --------
Outstanding at end of year 527,597 360,000 262,250
========= ========= =========
Exercisable at end of year 47,889 $ 12.09 7,500 $ 12.57 5,000 $ 12.27
========= ========= ========= ======== ========= ========
Weighted average fair value of
options granted $ 10.62 $ 6.65 $ 5.96
========= ========= =========
Options outstanding at December 31, 1997, have exercise prices between $12.00
and $23.25. Options outstanding with exercise prices of $12.00 to $18.00, and
$18.00 to $23.25 have weighted average remaining contractual lives of 6.23 and
8.94 years, respectively.
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. 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
1997, 1996 and 1995, 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 $93,000,
$69,000 and $60,000 for 1997, 1996 and 1995, respectively.
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EXHIBITS TO
KNIGHT TRANSPORTATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
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.)
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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).
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.
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.)
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.
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