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, 2001
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, Phoenix, Arizona 85043
(Address of principal executive offices) (Zip Code)
(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, 2002, was $756,739,303 (based upon $20.49 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,
2002 was approximately 36,932,128.
The Proxy Statement for the Annual Meeting of Shareholders to be held on May 8,
2002 is incorporated into this Form 10-K Part III by reference.
PART I
ITEM 1. BUSINESS
EXCEPT FOR CERTAIN HISTORICAL INFORMATION CONTAINED HEREIN, THIS ANNUAL
REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS AND
UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, ARE STATEMENTS THAT COULD BE DEEMED
FORWARD-LOOKING STATEMENTS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR
OTHER FINANCIAL ITEMS; ANY STATEMENT OF PLANS, STRATEGIES, AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS; ANY STATEMENTS CONCERNING PROPOSED NEW
SERVICES OR DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR
PERFORMANCE; AND ANY STATEMENTS OF BELIEF AND ANY STATEMENT OF ASSUMPTIONS
UNDERLYING ANY OF THE FOREGOING. WORDS SUCH AS "BELIEVE," "MAY," "COULD,"
"EXPECTS," "HOPES," "ANTICIPATES," AND "LIKELY," AND VARIATIONS OF THESE WORDS,
OR SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS," SET FORTH BELOW. WE DO NOT ASSUME, AND SPECIFICALLY
DISCLAIM, ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS ANNUAL REPORT.
REFERENCES IN THIS ANNUAL REPORT TO "WE," "US," "OUR" OR THE "COMPANY" OR
SIMILAR TERMS REFER TO KNIGHT TRANSPORTATION, INC. AND ITS SUBSIDIARIES.
GENERAL
We are a short-to-medium haul, dry van truckload carrier based in Phoenix,
Arizona. We transport general commodities, including consumer goods, packaged
foodstuffs, paper products, beverage containers and imported and exported
commodities. We provide regional truckload carrier services from our facilities
located in Phoenix, Arizona; Katy, Texas; Indianapolis, Indiana; Charlotte,
North Carolina; Salt Lake City, Utah; Gulfport, Mississippi; and Kansas City,
Kansas.
Our stock has been publicly traded since October 1994. We have achieved
substantial growth in revenue and income over the past five years. We have
increased our operating revenue, before fuel surcharge, at a compounded annual
growth rate of approximately 25.7%, from $99.4 million in 1997 to $241.7 million
in 2001. During the same period, we have increased our net income at a
compounded annual growth rate of approximately 20.9%, from $10.3 million to
$19.0 million, including a one-time, pre-tax, write-off recorded during 2001 of
$5.7 million for an investment made in a communications technology company. Net
income, excluding this write-off, increased at a compounded annual growth rate
of 24.7% to $22.4 million. This growth resulted from expansion of our customer
base and increased volume from existing customers, and was facilitated by the
continued expansion of our fleet, including an increase in our independent
contractor fleet. SEE "GROWTH STRATEGY," below.
OPERATIONS
Our operating strategy is to achieve a high level of asset utilization
while maintaining strict controls over our cost structure. To achieve these
goals, we operate primarily in high-density, predictable traffic lanes in select
geographic regions, and attempt to develop and expand our customer base around
each of our terminal operations. This operating strategy allows us to take
advantage of the large amount of freight traffic transported in regional
markets, realize the operating efficiencies associated with regional hauls, and
offer more flexible service to our customers than rail, intermodal, and smaller
regional competitors. In addition, shorter hauls provide an attractive
alternative to drivers in the truckload sector by reducing the amount of time
spent away from home. We believe this improves driver retention, decreases
recruitment and training costs, and reduces insurance claims and other costs. We
operate a modern fleet that contributes to our operating efficiencies and driver
retention. We employ technology in a cost-effective manner where it assists us
in controlling operating costs and enhancing revenue. Our goal is to increase
our market presence significantly, both in existing operating regions and in
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other areas where we believe the freight environment meets our operating
strategy, while seeking to achieve industry-leading operating margins and
returns on investment.
Our operating strategy includes the following important elements:
REGIONAL OPERATIONS. We presently operate seven regional terminals which
are located in Phoenix, Arizona; Katy, Texas; Indianapolis, Indiana; Charlotte,
North Carolina; Gulfport, Mississippi; Salt Lake City, Utah; and Kansas City,
Kansas. We concentrate our freight operations in an approximately 750-mile
radius around each of our terminals, with an average length of haul of
approximately 500 miles. We believe that these regional operations offer several
advantages, including:
* obtaining greater freight volumes, because approximately 80% of all
truckload freight moves in short-to-medium lengths of haul;
* achieving higher revenue per mile by focusing on high density traffic
lanes to minimize non-revenue miles and offer our customers a high
level of service and consistent capacity; and
* enhancing safety and driver recruitment and retention, because our
drivers travel familiar routes and return home more frequently.
OPERATING EFFICIENCIES. Our company was founded on a philosophy of
maintaining operating efficiencies and controlling costs. We maintain a
simplified operation that focuses on operating dry-vans in particular
geographical and shipping markets. This approach allows us to concentrate our
marketing efforts to achieve higher penetration of our targeted service areas
and to achieve higher equipment utilization in dense traffic areas. We maintain
a modern tractor and trailer fleet in order to obtain fuel and other operating
efficiencies and attract and retain drivers. A generally compatible fleet of
tractors and trailers simplifies our maintenance procedures, reduces parts
supplies, and facilitates our ability to serve a broad range of customer needs,
thereby maximizing equipment utilization and available freight capacity. We also
regulate vehicle speed in order to maximize fuel efficiency, reduce wear and
tear, and minimize claims expenses.
CUSTOMER SERVICE. We offer a high level of service to customers in lanes
and regions that complement our other operations, and we seek to establish
ourselves as a preferred or "core carrier" for many of our customers. By
concentrating revenue equipment close to customers in high-density lanes and
regions, we can provide shippers with a consistent supply of capacity and are
better able to match our equipment to customer needs. Our 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 our customers' needs. We price our services
commensurately with the level of service our customers require. By providing
customers a high level of service, we believe we avoid competing solely on
price.
USING TECHNOLOGY THAT ENHANCES OUR BUSINESS. We purchase and deploy
technology when we believe that it will allow us to operate more efficiently and
the investment is cost-justified. We use a satellite-based tracking and
communication system to communicate with our drivers, to obtain load position
updates, and to provide our customers with freight visibility. The majority of
our trailers are equipped with Terion trailer-tacking technology, which allows
us to manage our trailers more effectively, reduce the number of trailers per
tractor in our fleet, enhance revenue through detention fees, and minimize cargo
loss. We have installed Qualcomm's satellite based tracking technology in
substantially all of our tractors, which allows us to rapidly respond to
customer needs and allows our drivers efficient communications with our regional
terminals. We have automated many of our back-office functions, and we continue
to invest in technology where it allows us to better serve our customers and
reduce our costs.
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GROWTH STRATEGY
We believe that industry trends, our strong operating results and financial
position, and the proven operating model replicated in our regional operations
offer us significant opportunities to grow. We intend to take advantage of these
growth opportunities by focusing on three key areas:
OPENING NEW REGIONS AND EXPANDING EXISTING REGIONAL OPERATIONS. We
currently operate in seven regions. We believe there are significant
opportunities to further increase our business in the short-to-medium haul
market by opening new regional operations, while expanding our existing regional
operations. To take advantage of these opportunities, we are developing
relationships with existing and new customers in each region that we believe
will permit us to develop transportation lanes within these regions that should
allow us to achieve high equipment utilization and resulting operating
efficiency.
STRENGTHENING OUR CUSTOMER AND CORE CARRIER RELATIONSHIPS. We market our
services to both existing and new customers in traffic lanes that complement our
existing operations and will support high equipment utilization. We seek
customers who will diversify our freight base and target financially-stable high
volume shippers for whom we are not currently providing services. We also offer
a high level of service to customers who use us as a core carrier.
OPPORTUNITIES TO MAKE SELECTED ACQUISITIONS. We are continuously evaluating
acquisition opportunities. Since 1998, we have acquired two short-to-medium haul
truckload carriers - John Fayard Fast Freight, Inc., renamed Knight
Transportation Gulf Coast, Inc., and Action Delivery Service, Inc. We believe
economic trends are driving further consolidation in our industry, and we will
consider additional acquisitions that meet our financial and operating criteria.
MARKETING AND CUSTOMERS
Our sales and marketing functions are led by members of our senior
management team, who are assisted by other sales professionals. Our marketing
team emphasizes our high level of service and ability to accommodate a variety
of customer needs. Our marketing efforts are designed to take advantage of the
trend among shippers to outsource transportation requirements, use core
carriers, and seek arrangements for dedicated equipment and drivers.
We have a diversified customer base. For the year ended December 31, 2001,
our top 25 customers represented 43.8% of operating revenue; our top 10
customers represented 27.8% of operating revenue; and our top 5 customers
represented 16.8% of our operating revenue. We believe that a substantial
majority of our top 25 customers regard us as a preferred or "core carrier."
Most of our truckload carriage contracts are cancelable on 30 days notice.
We seek to provide consistent, timely, flexible and cost efficient service
to shippers. Our 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. We seek to
obtain a competitive advantage by providing high quality service to customers at
competitive prices. To be responsive to customers' and drivers' needs, we often
assign particular drivers and equipment to prescribed routes, providing better
service to customers, while obtaining higher equipment utilization.
Our dedicated fleet services also provide a significant part of a
customer's transportation operations. Under a dedicated carriage service
agreement, we provide drivers, equipment and maintenance, and, in some
instances, transportation management services that supplement the customer's
in-house transportation department. We furnish these services through Company
provided revenue equipment and drivers, and independent contractors.
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Each of our seven regional operations centers is linked to our Phoenix
headquarters by an IBM AS/400 computer system. The capabilities of this system
enhance our operating efficiency by providing cost effective access to detailed
information concerning equipment and shipment status and specific customer
requirements, and also permit us to respond promptly and accurately to customer
requests. The system also assists us in matching available equipment and loads.
We also provide electronic data interchange ("EDI") services to shippers
requiring such service.
DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS
As of December 31, 2001, we employed 2,432 persons, including 2,088
drivers. None of our employees are represented by a labor union.
The recruitment, training and retention of qualified drivers are essential
to support our continued growth and to meet the service requirements of our
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.
We seek to maintain a qualified driver force by providing attractive and
comfortable equipment, direct communication with senior management, competitive
wages and benefits, and other incentives designed to encourage driver retention
and long-term employment. Many drivers are assigned to dedicated or
semi-dedicated fleet operations, enhancing job predictability. Drivers are
recognized for providing superior service and developing good safety records.
Our drivers are compensated on the basis of miles driven and length of
haul. Drivers also are compensated for additional flexible services provided to
our customers. Drivers participate in our 401(k) program and in
Company-sponsored health, life and dental plans. Our drivers and other employees
who meet eligibility criteria also participate in our Stock Option Plan.
We also maintain an independent contractor program. Because independent
contractors provide their own tractors, the independent contractor program
provides us an alternate method of obtaining additional revenue equipment. We
intend to continue our use of independent contractors. As of December 31, 2001,
we had agreements for 200 tractors owned and operated by independent
contractors. Each independent contractor enters into a contract with us pursuant
to which the independent contractor is required to furnish a tractor and a
driver exclusively to transport, load and unload goods we haul. Competition for
independent contractors among transportation companies is strong. Independent
contractors are paid a fixed level of compensation based on the total of
trip-loaded and empty miles and are obligated to maintain their own tractors and
pay for their own fuel. We provide trailers for each independent contractor. We
also provide maintenance services for our independent contractors for a charge.
We provide financing at market interest rates to independent contractors to
assist them in acquiring revenue equipment. Our loans are secured by a lien on
the independent contractor's revenue equipment. As of December 31, 2001, we had
outstanding loans of approximately $3.9 million to independent contractors.
During 2000, we sold approximately $10.1 million in loans made to independent
contractors to an unaffiliated lending institution, on a recourse basis, which
requires that we repurchase a loan if it should default. The remaining balance
for these recourse loans was approximately $2.9 million at December 31, 2001.
REVENUE EQUIPMENT
As of December 31, 2001, we operated a fleet of 4,898 53-foot long, high
cube trailers with an average age of 3.1 years. As of December 31, 2001, we
operated 1,697 Company tractors with an average age of 1.6 years. We also had
under contract, as of December 31, 2001, 200 tractors owned and operated by
independent contractors.
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The efficiency and flexibility provided by our fleet configurations permit
us to handle both high volume and high weight shipments. Our fleet configuration
also allows us to move freight on a "drop-and-hook" basis, increasing asset
utilization and providing better service to customers. We currently maintain a
trailer to tractor ratio of approximately 2.6 to 1. Management believes
maintaining this ratio promotes efficiency and allows us to serve a large
variety of customers' needs without significantly changing or modifying
equipment.
Growth of our tractor and trailer fleets is determined by market
conditions, and our experience and expectations regarding equipment utilization.
In acquiring revenue equipment, we consider a number of factors, including
economy, price, rate environment, technology, warranty terms, manufacturer
support, driver comfort and resale value.
We have predominantly acquired standardized tractors manufactured by
Freightliner and trailers manufactured by Wabash. We have adopted an equipment
configuration that meets a wide variety of customer needs and facilitates
customer shipping flexibility. We use light weight tractors and high cube
trailers to handle both high weight and high volume shipments. Standardization
of our fleet allows us to operate with a minimum spare parts inventory, enhances
our maintenance program and simplifies driver training. We adhere to a
comprehensive maintenance program that minimizes downtime and optimizes the
resale value of our equipment. We perform routine servicing and maintenance of
our equipment at most of our regional terminal facilities, thus avoiding costly
on-road repairs and out-of-route trips. We have been upgrading our trailer fleet
to use Wabash Duraplate(TM) trailers, which reduce wear and tear and increase
the estimated useful life of our trailers. Our current policy is to replace most
of our tractors within 38 to 44 months after purchase and to replace our
trailers over a six to ten year period. This replacement policy enhances our
ability to attract drivers, increases our fuel economy by capitalizing on
improvements in both engine efficiency and vehicle aerodynamics, stabilizes
maintenance expense, and maximizes equipment utilization. Changes in the current
market for used tractors, and difficult market conditions faced by tractor
manufacturers may result in price increases that would cause us to retain our
equipment for a longer period. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS,"
below.
We have installed Terion's trailer-tracking system in the majority of our
trailers. We believe that this technology has generated operating efficiencies
and allowed us to reduce the ratio of trailers to tractors in our fleet through
better awareness of each trailer's location. We also have increased our revenue
from customers by improving our ability to substantiate trailer detention
charges.
We have replaced our Terion in-cab communication units with Qualcomm's
satellite-based mobile communication and position-tracking system in
substantially all of our tractors. The Qualcomm in-cab communication system is a
proven system that links drivers to regional terminals and corporate
headquarters, allowing us to rapidly alter our routes in response to customer
requirements and to eliminate the need for driver stops to report problems or
delays. This system allows drivers to inform dispatchers and driver managers of
the status of routing, loading and unloading or the need for emergency repairs
and provides shippers with supply chain visibility. We believe the Qualcomm
communications system will allow us to improve fleet control and the quality of
customer service.
We have financed our equipment acquisition through operating cash, lines of
credit and leasing agreements. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," below.
TECHNOLOGY
During 1998 and 1999, through a limited liability company subsidiary, we
made a minority investment in Terion, Inc. ("Terion"), a communications company
that provides two-way digital wireless communication services which enabled us
to communicate with manned and unmanned transportation assets via the Internet.
Terion also manufactures and sells a trailer-tracking technology. While we have
installed Terion trailer tracking technology in the majority of our trailers, we
have replaced Terion technology with Qualcomm's satellite based
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tracking technology in substantially all of our tractors. SEE "REVENUE
EQUIPMENT," above. During the third quarter, we recorded a non-recurring charge
of $5.7 million to write-off our entire investment in Terion. We owned less than
four percent of Terion and did not derive any revenue from our investment. As a
result of Terion's decision to discontinue its in-cab communications business,
we replaced the Terion in-cab units with Qualcomm in-cab satellite-based
communications systems. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," below.
SAFETY AND RISK MANAGEMENT
We are committed to ensuring the safety of our operations. We regularly
communicate with drivers to promote safety and instill safe work habits through
Company media and safety review sessions. We conduct monthly safety training
meetings for our drivers and independent contractors. In addition, we have an
innovative recognition program for driver safety performance, and emphasize
safety through our equipment specifications and maintenance programs. Our Vice
President of Safety is involved in the review of all accidents.
We require prospective drivers to meet higher qualification standards than
those required by the United States Department of Transportation ("DOT"). The
DOT requires our drivers to obtain national commercial drivers' licenses
pursuant to regulations promulgated by the DOT. The DOT also requires that we
implement a drug and alcohol testing program in accordance with DOT regulations.
Our program includes pre-employment, random, and post-accident drug testing.
Our Chief Financial Officer and Vice President of Safety are responsible
for securing appropriate insurance coverages at cost effective rates. The
primary claims arising in our business consist of cargo loss and damage and auto
liability (personal injury and property damage). During 2001, we were
self-insured for personal injury and property damage liability, cargo liability,
collision and comprehensive, and for worker's compensation up to a maximum limit
of $500,000 per occurrence. We establish reserves to cover these self-insured
liabilities and maintain insurance to cover liabilities in excess of those
amounts. Subsequent to December 31, 2001, we increased our self-insurance levels
for personal injury and property damage liability, cargo liability, collision
and comprehensive from $500,000 to a maximum of $1,750,000 per occurrence. Our
worker's compensation self-insurance level remains at $500,000. Our insurance
policies provide for excess personal injury and property damage liability, cargo
liability, collision and comprehensive coverage up to a total of $30,000,000 per
occurrence. We also maintain primary and excess coverage for employee medical
expenses and hospitalization, and damage to physical properties. We carefully
monitor claims and participate actively in claims estimates and adjustments. The
estimated costs of our self-insured claims, which include estimates for incurred
but unreported claims, are accrued as liabilities on our balance sheet.
INDUSTRY
The U.S. Market for truck-based transportation services approximates $500
billion in annual revenue and is growing in line with the overall U.S. economy.
We believe truckload services, such as those we provide, approximate $65 billion
of for-hire revenue and approximately $80 billion of private fleet revenue. The
truckload industry is highly fragmented and the 10 largest dry van truckload
carriers, as measured by revenue, currently make up less than 20%, or
approximately $12.7 billion, in annual for-hire revenue. As the cost and
complexity of operating truck fleets increase, and as economic and competitive
pressure force smaller, lower-margin competitors and private fleets to
consolidate or exit the industry, we believe that better capitalized and
efficiently operating companies, like Knight Transportation, will have increased
opportunities to expand their business and make strategic acquisitions.
COMPETITION
We compete 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
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transported by us is based on freight rates, service, efficiency, size and
technology. We also compete with other motor carriers for the services of
drivers, independent contractors and management employees. A number of our
competitors have greater financial resources, own more equipment, and carry a
larger volume of freight than we do. We believe that the principal competitive
factors in our business are service, pricing (rates), and the availability and
configuration of equipment that meets a variety of customers' needs. In
addressing our markets, we believe that our principal competitive strength is
our ability to provide timely, flexible and cost-efficient service to shippers.
In general, increased competition has created downward pressure on rates and
increased the need to provide higher levels of service to customers.
REGULATION
Generally, the trucking industry is subject to regulatory and legislative
changes that can have a materially adverse effect on operations. Historically,
the Interstate Commerce Commission ("ICC") and various state agencies regulated
truckload carriers' operating rights, accounting systems, rates and charges,
safety, mergers and acquisitions, periodic financial reporting and other
matters. In 1995, federal legislation was passed that preempted state regulation
of prices, rates, and services of motor carriers and eliminated the ICC. Several
ICC functions were transferred to the DOT, but a lack of regulations
implementing such transfers currently prevents us from assessing the full impact
of this action.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. Matters such as weight and dimensions of equipment are
also subject to federal and state regulation. In 1988, the DOT began requiring
national commercial drivers' licenses for interstate truck drivers.
Our 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. We have established programs to comply with all applicable
environmental regulations. As part of our safety and risk management program, we
periodically perform internal environmental reviews so that we can achieve
environmental compliance and avoid environmental risk. Our Phoenix, Indianapolis
and Katy facilities were designed, after consultation with environmental
advisors, to contain and properly dispose of hazardous substances and petroleum
products used in connection with our business. We transport a minimum amount of
environmentally hazardous substances and, to date, have experienced no
significant claims for hazardous substance shipments. If we should fail to
comply with applicable regulations, we could be subject to substantial fines or
penalties and to civil and criminal liability.
Our operations involve certain inherent environmental risks. We maintain
bulk fuel storage and fuel islands at several of our facilities. Our operations
involve the risks of fuel spillage or seepage, environmental damage, and
hazardous waste disposal, among others. We have instituted programs to monitor
and control environmental risks and assure compliance with applicable
environmental laws.
Our Phoenix facility is located on land identified as potentially having
groundwater contamination resulting from the release of hazardous substances by
persons who have operated in the general vicinity. The area has been classified
as a state superfund site. We have been located at our Phoenix facility since
1990 and, during such time, have not been identified as a potentially
responsible party with regard to the groundwater contamination, and we do not
believe that our operations have been a source of groundwater contamination.
Our Indianapolis property is located approximately 0.1 of a 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
our Indianapolis property that have known contamination. Environmental reports
obtained by us have disclosed no evidence that activities on our Indianapolis
property have caused or contributed to the area's contamination.
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Company operations conducted in industrial areas, where truck terminals and
other industrial activities are conducted, and where groundwater or other forms
of environmental contamination have occurred, potentially expose us to claims
that we contributed to the environmental contamination.
We believe we are 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.
OTHER INFORMATION
We periodically examine investment opportunities in areas related to the
truckload carrier business. Our investment strategy is to add to shareholder
value by investing in industry related businesses that will assist us in
strengthening our overall position in the transportation industry, minimize our
exposure to start-up risk and provide us with an opportunity to realize a
substantial return on our investment. Our two investments to date have been in
Terion Inc. ("Terion") and Concentrek, Inc. Terion is currently in bankruptcy
reorganization and we have written off our entire investment. Terion's trailer
tracking technology, however, has assisted us in lowering our trailer to tractor
ratio and thus reduced our capital expenditures. In April 1999, we acquired a
17% interest in Concentrek, Inc. ("Concentrek"), formerly known as KNGT
Logistics, Inc., with the intent of investing in the non-asset transportation
business. Through a limited liability company, we have agreed to lend up to a
maximum of $2,335,000 to Concentrek on a secured basis. Of the total loan
amount, $935,000 is evidenced by a promissory note that is convertible into
Concentrek's Class A Preferred Stock and is secured by a lien on Concentrek's
assets, and $1,400,000 is evidenced by a promissory note that is secured by a
lien on Concentrek's assets. These loans are on a parity with respect to their
security. SEE our Proxy Statement issued in connection with the May 8, 2002,
Annual Meeting of Shareholders for additional information.
In November 2000, we acquired a 19% interest in Knight Flight Services, LLC
("Knight Flight") which acquired and operates a Cessna Citation 560 XL jet
aircraft. The aircraft is leased to Pinnacle Air Charter, L.L.C., an unrelated
entity, which operates the aircraft on behalf of Knight Flight. SEE our Proxy
Statement issued in connection with the May 8, 2002, Annual Meeting of
Shareholders for additional information.
ITEM 2. PROPERTIES
The following table provides information regarding the Company's terminals
and/or offices:
COMPANY LOCATION OWNED OR LEASED PROPERTIES
- ---------------- --------------------------
Charlotte, North Carolina Owned
Corsicana, Texas Leased
Fontana, California Owned
Gulfport, Mississippi Leased
Indianapolis, Indiana Owned
Kansas City, Kansas Leased
Katy, Texas Owned
Mobile, Alabama Leased
Phoenix, Arizona Owned
Salt Lake City, Utah Leased
Our headquarters and principal place of business is located at 5601 West
Buckeye Road, Phoenix, Arizona on approximately 65 acres. We own approximately
57 acres and approximately 8 acres are leased from Mr. Randy Knight, a director
of the Company and one of our principal shareholders. SEE our Proxy Statement
issued in connection with the May 8, 2002, Annual Meeting of Shareholders for
additional information. We have constructed a bulk fuel storage facility and
fueling islands based at our Phoenix headquarters to obtain greater operating
efficiencies.
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We own and operate 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 serves as a
base for our operations in the Midwest and the East Coast. We completed our
initial expansion of this facility in October 1998.
We own and operate a 12-acre regional terminal facility in Katy, Texas,
near Houston, which was completed in June 2000. This facility includes a truck
terminal, administrative offices, dispatching and maintenance services, a bulk
fuel storage facility and fuel island.
In March 1999, we entered into a lease for terminal facilities in
Corsicana, Texas, from which we provide dedicated services to one of our larger
customers. Our operations in Corsicana, Texas are coordinated through our
regional headquarters located in Katy, Texas.
We own and operate a 21-acre regional facility in Charlotte, North
Carolina, which serves the East Coast and Southeast regions. This facility was
acquired in February 2000, and includes an existing terminal facility.
In connection with our acquisition of John Fayard Fast Freight, Inc.,
renamed Knight Transportation Gulf Coast, Inc., we operate a regional facility
in Gulfport, Mississippi, under a long-term lease agreement. This facility
includes a truck terminal, administrative offices, dispatching and maintenance
services, a bulk fuel storage facility and fuel island, and supports our
operations in the South and Southeast regions.
In 1999, we opened a regional facility in Salt Lake City, Utah to serve the
western, central and Rocky Mountain regions. We currently lease our Salt Lake
City terminal facility. We also own approximately 14 acres of land that is
available for future expansion in this region.
We also lease office facilities in California and Oklahoma which we use for
fleet maintenance, record keeping, and general operations. We purchased 14 acres
of property in Fontana, California and in November 2000 completed construction
of a facility to serve as a trailer drop and dispatching facility to support our
operations in California. We also lease excess trailer drop space to other
carriers. We also lease space in various locations for temporary trailer
storage. Management believes that replacement space comparable to these
facilities is readily obtainable, if necessary.
In March 2001, we opened a regional facility in Kansas City, Kansas to
serve the central, Rocky Mountain and Midwest regions. We lease our Kansas City
terminal facility.
As of December 31, 2001, our aggregate monthly rent for these terminals
and/or offices was approximately $38,500.
We believe that our facilities are suitable and adequate for our present
needs. We periodically seek to improve our facilities or identify new favorable
locations. We have not encountered any significant impediments to the location
or addition of new facilities.
ITEM 3. LEGAL PROCEEDINGS
We are a party to ordinary, routine litigation and administrative
proceedings incidental to our business. These proceedings primarily involve
claims for personal injury or property damage incurred in the transportation of
freight and for personnel matters. We maintain 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 our policy to
comply with applicable equal employment opportunity laws and we periodically
review our policies and practices for equal employment opportunity compliance.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our security holders during the
fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market tier of The NASDAQ
Stock Market under the symbol KNGT. The following table sets forth, for the
periods indicated, the high and low bid information per share of our 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
------- -------
2000
First Quarter $ 8.444 $ 6.970
Second Quarter $ 8.750 $ 5.944
Third Quarter $ 8.500 $ 6.275
Fourth Quarter $ 9.000 $ 6.389
2001
First Quarter $11.306 $ 8.222
Second Quarter $14.053 $10.400
Third Quarter $16.390 $10.967
Fourth Quarter $20.733 $12.420
As of March 4, 2002, we had 70 shareholders of record and approximately
4,930 beneficial owners in security position listings of our common stock.
We have never paid cash dividends on our common stock, and it is the
current intention of management to retain earnings to finance the growth of our
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 our Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of the end of,
and for each of the years in the five-year period ended December 31, 2001, are
derived from our Consolidated Financial Statements, which have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports. 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. CERTAIN RISKS AND OTHER FACTORS THAT MAY
AFFECT OUR RESULTS OF OPERATIONS AND FUTURE PERFORMANCE RESULTS ARE SET FORTH
BELOW. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS."
11
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
STATEMENTS OF INCOME DATA:
Revenue, before fuel surcharge $ 241,679 $ 207,406 $ 151,490 $ 125,030 $ 99,428
Operating expenses 211,267 184,835 125,580 102,049 81,948
Income from operations 39,551 32,023 25,910 22,981 17,480
Net interest expense and other (7,485) (3,418) (296) (259) (18)
Income before income taxes 32,067 28,605 25,614 22,722 17,462
Net income 19,017 17,745 15,464 13,346 10,252
Diluted earnings per share(1) .54 .53 .45 .39 .30
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 51,729 $ 27,513 $ 15,887 $ 6,995 $ 4,044
Total assets 241,114 206,984 164,545 116,958 82,690
Long-term obligations, net of current 2,715 14,885 11,736 7,920 --
Shareholders' equity 167,696 105,121 82,814 70,899 56,798
OPERATING DATA (UNAUDITED):
Operating ratio(2) 83.6% 84.6% 82.9% 81.6% 82.4%
Average revenue per total mile(3) $ 1.28 $ 1.28 $ 1.23 $ 1.24 $ 1.22
Average length of haul (miles) 527 530 491 489 500
Empty mile factor 10.9% 10.5% 10.5% 10.0% 9.6%
Tractors at end of period(4) 1,897 1,694 1,212 933 772
Trailers at end of period 4,898 4,627 3,350 2,809 2,112
PRO FORMA DATA (UNAUDITED):
Income from operations $ 39,551 $ 32,023 $ 25,910 $ 22,981 $ 17,480
Net interest expense and other(5) (1,806) (3,418) (296) (259) (18)
Income before income taxes(5) 37,745 28,605 25,614 22,722 17,462
Net income (5) 22,400 17,745 15,464 13,346 10,252
Diluted earnings per share(1)(5) .64 .53 .45 .39 .30
- ----------
(1) Net income per share for all periods presented has been restated to reflect
the stock splits on December 28, 2001, June 1, 2001, and May 28, 1998.
(2) Operating expenses, net of fuel surcharge, as a percentage of revenue,
before fuel surcharge.
(3) Average transportation revenue per mile based upon total revenue, inclusive
of fuel surcharge.
(4) Includes 200 independent contractor operated vehicles at December 31, 2001;
includes 239 independent contractor operated vehicles at December 31, 2000;
includes 281 independent contractor operated vehicles at December 31, 1999;
includes 231 independent contractor operated vehicles at December 31, 1998;
includes 192 independent contractor operated vehicles at December 31, 1997.
(5) Excluding a one-time, pre-tax, non-cash write-off of $5,679,000 relating to
an investment in Terion, Inc.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
EXCEPT FOR CERTAIN HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS
AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, ARE STATEMENTS THAT COULD BE DEEMED
FORWARD-LOOKING STATEMENTS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR
OTHER FINANCIAL ITEMS, ANY STATEMENT OF PLANS, STRATEGIES, AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS; ANY STATEMENTS CONCERNING PROPOSED NEW
SERVICES OR DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR
PERFORMANCE; AND ANY STATEMENTS OF BELIEF AND ANY STATEMENT OF ASSUMPTIONS
UNDERLYING ANY OF THE FOREGOING. WORDS SUCH AS "BELIEVE," "MAY," "COULD,"
"EXPECTS," "HOPES," "ANTICIPATES," AND "LIKELY," AND VARIATIONS OF THESE WORDS,
OR SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS," SET FORTH BELOW. WE DO NOT ASSUME, AND SPECIFICALLY
DISCLAIM, ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS ANNUAL REPORT.
GENERAL
The following discussion of our financial condition and results of
operations for the three-year period ended December 31, 2001, should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
contained elsewhere in this report.
We were incorporated in 1989 and commenced operations in July 1990. For the
five-year period ended December 31, 2001, our operating revenue, before fuel
surcharge, grew at a 25.7% compounded annual rate, while net income increased at
a 20.9% compounded annual rate, including a one-time, pre-tax, write-off
recorded during 2001 of $5.7 million for an investment made in a communications
technology company. The compounded annual net income growth rate for 2001,
excluding this write-off, was 24.7%.
13
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of our expense
items to revenue, before fuel surcharge, for the three-year periods indicated
below:
2001 2000 1999
------ ------ ------
REVENUE, BEFORE FUEL SURCHARGE 100% 100.0% 100.0%
Operating expenses:
Salaries, wages and benefits 33.8 33.4 29.5
Fuel (1) 12.3 12.9 10.4
Operations and maintenance 5.7 5.4 5.8
Insurance and claims 4.2 2.3 2.6
Operating taxes and licenses 2.9 3.6 3.7
Communications 1.0 .8 .9
Depreciation and amortization 7.6 9.2 9.4
Lease expense - revenue equipment 3.5 1.8 --
Purchased transportation 9.7 12.5 18.2
Miscellaneous operating expenses 2.9 2.7 2.4
------ ------ ------
Total operating expenses 83.6 84.6 82.9
------ ------ ------
Income from operations 16.4 15.4 17.1
Net interest and other expense 3.1 1.6 .2
------ ------ ------
Income before income taxes 13.3 13.8 16.9
Income taxes 5.4 5.2 6.7
------ ------ ------
Net Income 7.9% 8.6% 10.2%
====== ====== ======
PRO FORMA DATA (UNAUDITED):
Income from operations 16.4 15.4 17.1
Net interest and other expense (2) .7 1.6 .2
------ ------ ------
Income before income taxes (2) 15.7 13.8 16.9
Income taxes (2) 6.3 5.2 6.7
------ ------ ------
Net Income (2) 9.4% 8.6% 10.2%
====== ====== ======
- ----------
(1) Net of fuel surcharge.
(2) Excluding a one-time, pre-tax, non-cash write-off of $5,679,000 relating to
a minority investment in a communications technology company, in 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue, before fuel surcharge, increased by 16.5% to $241.7 million in
2001 from $207.4 million in 2000. This increase resulted from expansion of our
customer base and increased volume from existing customers, that was facilitated
by an increase in our tractor and trailer fleet, which increased by 12.0% to
1,897 tractors (including 200 owned by independent contractors) as of December
31, 2001, from 1,694 tractors (including 239 owned by independent contractors)
as of December 31, 2000. The April 2000 acquisition of John Fayard Fast Freight,
Inc., renamed Knight Transportation Gulf Coast, Inc., which then operated
approximately 225 tractors, contributed to the increase in revenue for 2001,
compared to 2000. Average revenue per mile (exclusive of fuel surcharge)
increased slightly to $1.227 per mile for the year ended December 31, 2001, from
$1.225 per mile for the same period in 2000.
Salaries, wages and benefits expense increased as a percentage of revenue,
before fuel surcharge, to 33.8% in 2001 from 33.4% in 2000, primarily due to the
increase in the ratio of Company drivers to independent contractors. As of
December 31, 2001, 89.5% of our fleet was operated by Company drivers, compared
to 85.9% as of December 31, 2000. For our drivers, we record accruals for
14
workers' compensation benefits as a component of our claims accrual, and the
related expense is reflected in salaries, wages and benefits in our consolidated
statements of income.
Fuel expense, net of fuel surcharge, decreased, as a percentage of revenue,
before fuel surcharge, to 12.3% for 2001 from 12.9% in 2000, due mainly to lower
average fuel prices during 2001 compared to 2000. We believe that higher fuel
prices may continue to adversely impact operations throughout 2002. SEE "FACTORS
THAT MAY AFFECT FUTURE RESULTS," below.
During 2000, we implemented a fuel surcharge program to assist us in
recovering a portion of increased fuel costs. For the year ended December 31,
2001, fuel surcharge was $9.1 million, compared to $9.5 million for 2000.
Operations and maintenance expense increased, as a percentage of revenue,
before fuel surcharge, to 5.7% for 2001 from 5.4% in 2000. This increase was
primarily the result of the increase in the ratio of Company operated vehicles
to independent contractor operated vehicles. Independent contractors pay for the
maintenance on their own vehicles
Insurance and claims expense increased, as a percentage of revenue, before
fuel surcharge, to 4.2% for 2001, compared to 2.3% for 2000, primarily as a
result of the increase in insurance premiums and the higher self-insurance
retention levels assumed by the Company. We anticipate that casualty insurance
rates will continue to increase in the future and for 2002 we will retain a
larger portion of our claims risks, in response to the increased insurance
premiums. See "BUSINESS-SAFETY RISK MANAGEMENT", above, and "FACTORS THAT MAY
AFFECT FUTURE RESULTS," below.
Operating taxes and license expense, as a percentage of revenue, before
fuel surcharge, decreased to 2.9% for 2001 from 3.6% for 2000. The decrease
resulted primarily from a relative increase in miles run in lower tax rate
states for the 12 month period ended December 31, 2001.
Communications expenses increased slightly as a percentage of revenue,
before fuel surcharge, in 2001 compared to 2000, primarily due to the purchase
and utilization of new tractor and trailer communication technology. During 2001
we purchased new Qualcomm in-cab communications systems to replace the in-cab
communication system that was discontinued by Terion. (See non-recurring charge
below).
Depreciation and amortization expense, as a percentage of revenue, before
fuel surcharge, decreased to 7.6% for 2001 from 9.2% in 2000. This decrease was
primarily related to the increase in lease expenses incurred for revenue
equipment under operating lease agreements. Lease expense, which is the expense
for leased revenue equipment as a percentage of revenue, before fuel surcharge,
was 3.5% for 2001, compared to 1.8% for 2000. Several lease agreements have
variable payment terms which are amortized on a straight-line basis. SEE
"FACTORS THAT MAY AFFECT FUTURE RESULTS," below.
Purchased transportation expense, as a percentage of revenue, before fuel
surcharge, decreased to 9.7% in 2001 from 12.5% in 2000, primarily as a result
of a decrease in the ratio of independent contractors to Company drivers. As of
December 31, 2001, 10.5% of our fleet was operated by independent contractors,
compared to 14.1% at December 31, 2000. We have utilized independent contractors
as part of our fleet expansion because independent contractors provide their own
tractors. As of December 31, 2001, the Company had 200 tractors owned and
operated by independent contractors. As our Company-owned fleet has expanded,
purchased transportation has decreased as a percentage of revenue, before fuel
surcharge. Purchased transportation represents the amount an independent
contractor is paid to haul freight for us on a mutually agreed per-mile basis.
To assist us in continuing to attract independent contractors, we provide
financing to qualified independent contractors to assist them in acquiring
revenue equipment. As of December 31, 2001, we had $3.9 million in loans
outstanding to independent contractors to purchase revenue equipment. These
loans are secured by liens on the revenue equipment we finance.
15
Miscellaneous operating expenses, as a percentage of revenue, before fuel
surcharge, increased to 2.9% for 2001 from 2.7% in 2000, primarily due to
increases in bad debt reserves and increased travel expenses.
As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 83.6% for 2001, compared to 84.6% for 2000.
Net interest expense, as a percentage of revenue, before fuel surcharge,
decreased to 0.7% for 2001 from 1.5% for 2000. This decrease was primarily the
result of our ability to reduce our outstanding debt to approximately $18.1
million at December 31, 2001, compared to $54.4 million at December 31, 2000.
Debt reduction was facilitated, in part, by proceeds obtained from the offering
of our Common Stock that closed November 7, 2001.
During the third quarter of 2001, we recorded a non-recurring charge of
$5.7 million to record the write-off of our entire investment in Terion, Inc.
("Terion"), a communications technology company, made during 1998 and 1999. We
owned less than four percent of Terion and did not derive any revenue from our
investment. We elected to write-off our investment after Terion announced that
it would cease operating its in-cab communications system. In January, Terion
filed for protection under Chapter 11 of the Federal Bankruptcy Code. The impact
on earnings per diluted share was $0.10 for the year ended December 31, 2001.
This write-off resulted in a reduction of net income, as a percentage of revenue
before fuel surcharge, of 1.5% for the fiscal year ended December 31, 2001. As a
result of Terion's decision to discontinue its in-cab communications business,
we replaced the Terion in-cab units with Qualcomm in-cab satellite-based
communications systems.
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, as a percentage of revenue, before fuel surcharge,
increased to 5.4% for the year ended December 31, 2001, from 5.2% for the year
ended December 31, 2000, primarily due to a change in the mix of State tax
liabilities.
As a result of the preceding changes, our net income, as a percentage of
revenue, before fuel surcharge, was 7.9% for 2001, compared to 8.6% in 2000.
This percentage was 9.4% for 2001, excluding the write-off of our investment in
Terion, as discussed above.
FISCAL 2000 COMPARED TO FISCAL 1999
Revenue, before fuel surcharge, increased by 36.9% to $207.4 million in
2000 from $151.5 million in 1999. This increase resulted from expansion of our
customer base and increased volume from existing customers. This was facilitated
by a continued increase in our tractor and trailer fleet, including
approximately 225 tractors acquired in the April 2000 acquisition of John Fayard
Fast Freight, Inc., renamed Knight Transportation Gulf Coast, Inc., and 50
tractors acquired in the March, 1999 acquisition of Action Delivery Services,
Inc. Our fleet increased by 39.8% to 1,694 tractors (including 239 owned by
independent contractors) as of December 31, 2000, from 1,212 tractors (including
281 owned by independent contractors) as of December 31, 1999. Average revenue
per mile (exclusive of fuel surcharge) decreased to $1.225 per mile for the year
ended December 31, 2000, from $1.227 per mile for the same period in 1999.
Equipment utilization averaged 115,300 miles per tractor in 2000, down slightly
when compared to an average of 116,500 miles per tractor in 1999 primarily due
to the increase in fuel costs that we passed on to our customers. These changes
reflect increased competition in the short-to-medium truckload sector of the
transportation business.
Salaries, wages and benefits expense increased, as a percentage of revenue
before fuel surcharge, to 33.4% in 2000 from 29.5% in 1999, primarily due to the
increase in the ratio of Company drivers to independent contractors and
increased compensation to non-driving staff. As of December 31, 2000, 85.9% of
16
our fleet was operated by Company drivers, compared to 76.8% at December 31,
1999. For our drivers, we record accruals for workers' compensation benefits as
a component of our claim accrual, and the related expense is reflected in
salaries, wages and benefits in its consolidated statements of income.
Fuel expense, net of fuel surcharge, increased as a percentage of revenue
before fuel surcharge, to 12.9% for 2000 from 10.4% in 1999, due mainly to
higher average fuel prices during 2000 compared to 1999. We believe that higher
fuel prices will continue to adversely impact operations throughout most of
2001. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. Also, the increase in
the ratio of Company drivers to independent contractors in 2000 compared to 1999
contributed to this increase. Independent contractors pay for their own fuel.
During 2000, we implemented a fuel surcharge program to assist us in
recovering a portion of increased fuel costs. For the 12 month period ended
December 31, 2000, fuel surcharge was $9,452,816, compared to $968,669 for 1999.
Operations and maintenance expense decreased, as a percentage of revenue
before fuel surcharge, to 5.4% for 2000 from 5.8% in 1999. This decrease was the
result of improvements experienced in our equipment maintenance programs.
Insurance and claims expense decreased, as a percentage of revenue before
fuel surcharge, to 2.3% for 2000, compared to 2.6% for 1999 as a result of the
reduction in both the frequency and severity of claims activity incurred, and
favorable casualty insurance rates. We anticipate that casualty insurance rates
will increase in the future and we are retaining a larger portion of our claims
risks, in response to increased insurance expense.
Operating taxes and license expense, as a percentage of revenue before fuel
surcharge, decreased to 3.6% for 2000 from 3.7% for 1999. The decrease resulted
primarily from a relative increase in miles run in lower tax rate states for the
12 month period ended December 31, 2000.
Communications expenses decreased slightly, as a percentage of revenue
before fuel surcharge, in 2000 compared to 1999.
Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, decreased to 9.2% for 2000 from 9.4% in 1999. This decrease was
related to the increase in lease expenses incurred for revenue equipment under
operating lease agreements. This decrease was also related to certain dedicated
opportunities which do not require the use of certain Company revenue equipment.
Lease expense, which is the expense for leased revenue equipment as a percentage
of revenue, before fuel surcharge, was 1.8% for 2000, compared to 0% for 1999,
due to our initiation of a leasing program in 2000 to obtain additional revenue
equipment. Several lease agreements have variable payment terms which are
amortized on a straight-line basis.
Purchased transportation expense, as a percentage of revenue before fuel
surcharge, decreased to 12.5% in 2000 from 18.2% in 1999, primarily as a result
of a decrease in the ratio of independent contractors to Company drivers. As of
December 31, 2000, 14.1% of our fleet was operated by independent contractors,
compared to 23.2% at December 31, 1999. We have utilized independent contractors
as part of our fleet expansion because independent contractors provide their own
tractors. As of December 31, 2000, the Company had 239 tractors owned and
operated by independent contractors. As the Company-owned fleet has expanded,
purchased transportation has decreased as a percentage of revenue, before fuel
surcharge. Purchased transportation represents the amount an independent
contractor is paid to haul freight for us on a mutually agreed per-mile basis.
To assist us in continuing to attract independent contractors, we provide
financing to qualified independent contractors to assist them in acquiring
revenue equipment. As of December 31, 2000, we had $1.5 million in loans
outstanding to independent contractors to purchase revenue equipment. The loans
are secured by liens on the revenue equipment we finance.
17
Miscellaneous operating expenses, as a percentage of revenue before fuel
surcharge, increased to 2.7% for 2000 from 2.4% in 1999, primarily due to
decreases in utilization of Company equipment.
As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 84.6% for 2000, compared to 82.9% for 1999.
Net interest expense, as a percentage of revenue before fuel surcharge,
increased to 1.6% for 2000 from 0.2% for 1999. This increase was due to the
increase in our average borrowings to $48.9 million for 2000 from $20.7 million
for 1999.
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, before fuel
surcharge, to 5.2% for the year ended December 31, 2000, from 6.7% for the year
ended December 31, 1999, primarily due to a change in the mix of State tax
liabilities, as well as the increase in our operating ratio to 84.6% for 2000,
compared to 82.9% for 1999.
As a result of the preceding changes, our net income as a percentage of
revenue, before fuel surcharge, was 8.6% for 2000, compared to 10.2% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The growth of our business has required a significant investment in new
revenue equipment. Our primary source of liquidity has been funds provided by
operations and our lines of credit with our primary lender. During the fourth
quarter of 2001, we registered with the Securities and Exchange Commission and
sold 2,678,907 shares of our common stock through a public offering, which
resulted in net proceeds to us of $41,249,460. SEE our Registration Statements
on Form S-3 filed with the SEC on October 24, 2001 (File No. 333-72130), and
November 2, 2001 (File No. 333-72688). The proceeds we received from this
offering were used for the repayment of indebtedness and for general corporate
purposes.
Net cash provided by operating activities was approximately $46.2 million,
$34.5 million and $25.5 million for the years ended December 31, 2001, 2000 and
1999, respectively.
Capital expenditures for the purchase of revenue equipment, net of
trade-ins, office equipment, land and leasehold improvements, totaled $30.3
million, $35.0 million and $41.5 million, for the years ended December 31, 2001,
2000, and 1999, respectively. We expect that capital expenditures, net of
trade-ins, of approximately $45 million for 2002, will be applied primarily to
acquire new revenue equipment.
Net cash provided by financing activities was approximately $5.9 million,
$3.2 million and $22.6 million for the years ended December 31, 2001, 2000, and
1999, respectively. The change from 2000 to 2001 was the result of the proceeds
from the sale of common stock discussed previously, which were used primarily to
reduce outstanding debt. The change from 1999 to 2000 was primarily the result
of the proceeds from the sale of notes receivable and new borrowings on the line
of credit.
We maintain a line of credit totaling $50 million with our lenders and use
this line to finance the acquisition of revenue equipment and other corporate
purposes to the extent our need for capital is not provided by funds from
operations or otherwise. Under the line of credit, we are 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 us,
based on either the London Interbank Offered Rate ("LIBOR") plus an adjustment
factor, or the prime rate. At December 31, 2001, and March 4, 2002, we had $12.2
18
million in borrowings under our revolving line of credit, all of which was under
an interest rate swap agreement that expires in February 2004. The line of
credit expires in July 2003.
In October 1998, we entered into a $10 million term loan with our primary
lender which will mature in September 2003. The interest is at a fixed rate of
5.75%. The note is unsecured and had an outstanding balance of $4.0 million as
of December 31, 2001, $2.1 million of which is due in the next 12 months.
Through our subsidiaries, we have entered into lease agreements under which
we lease revenue equipment. The total amount outstanding under these agreements
as of December 31, 2001, was $23.7 million, with interest rates from 5.2% to
8.2%, and with $8.7 million due in the next 12 months.
Management believes we have adequate liquidity to meet our current needs.
We will continue to have significant capital requirements over the long term,
which may require us to incur debt or seek additional equity capital. The
availability of capital will depend upon prevailing market conditions, the
market price of our common stock, and several other factors over which we have
limited control, as well as our financial condition and results of operations.
SEASONALITY
In the transportation industry, results of operations frequently show a
seasonal pattern. Seasonal variations may result from weather or from customer's
reduced shipments after the busy winter holiday season.
To date, our revenue has not shown any significant seasonal pattern.
Because we operate primarily in Arizona, California and the western United
States, winter weather generally has not adversely affected our business.
Expansion of our operations in the Midwest, Rocky Mountain area, East Coast, and
the Southeast could expose us to greater operating variances due to seasonal
weather in these regions. Recent shortages of energy and related issues in
California, and elsewhere in the western United States, could result in an
adverse effect on our operations and demand for our services should these
shortages continue or increase. This risk may exist in other regions in which we
operate, depending upon availability of energy.
SELECTED QUARTERLY FINANCIAL DATA
The following tables set forth certain unaudited information about our
revenue and results of operations on a quarterly basis for 2000 and 2001 (in
thousands, except per share data):
2001
---------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148
Income from operations 7,808 9,086 10,963 11,694
Net Income 4,237 5,060 2,886 6,834
Earnings per common share:
Basic $ 0.12 $ 0.15 $ 0.08 $ 0.19
------- ------- ------- -------
Diluted $ 0.12 $ 0.15 $ 0.08 $ 0.19
------- ------- ------- -------
19
Pro Forma Data (unaudited):
2001
---------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148
Income from operations 7,808 9,086 10,963 11,694
Net Income 4,237 5,060 6,265(1) 6,834
Earnings per common share:
Basic $ 0.12 $ 0.15 $ 0.18(1) $ 0.19
------- ------- ------- -------
Diluted $ 0.12 $ 0.15 $ 0.18(1) $ 0.19
------- ------- ------- -------
- ----------
(1) Excludes one-time, pre-tax, non-cash write-off of $5,679,000 relating to an
investment in Terion, Inc.
2000
---------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
Revenue, before fuel surcharge $43,569 $51,676 $55,770 $56,391
Income from operations 6,874 8,072 8,433 8,644
Net Income 3,873 4,596 4,616 4,660
Earnings per common share:
Basic $ 0.12 $ 0.14 $ 0.14 $ 0.14
------- ------- ------- -------
Diluted $ 0.12 $ 0.14 $ 0.14 $ 0.14
------- ------- ------- -------
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Recently Adopted and to be Adopted Accounting Pronouncements - In July
2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
This statement also requires that we recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain criteria. SFAS No.
141 applies to all business combinations initiated after June 30, 2001. SFAS No.
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that we identify reporting units for purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS No. 142. This statement is required to be applied in fiscal years beginning
after December 15, 2001, to all goodwill and other intangible assets recognized
at that date, regardless of when those assets were initially recognized. SFAS
No. 142 requires us to complete a transitional goodwill impairment test within
six months from the date of adoption and reassess the useful lives of other
intangible assets within the first interim quarter after adoption. We had
$7,504,067 in net book value recorded for goodwill at December 31, 2001. The
current amortization of this goodwill was $46,782 per month. At present, we are
currently assessing but have not yet determined the complete impact the adoption
of SFAS No. 141 and SFAS No. 142 will have on our financial position and results
of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our future results may be affected by a number of factors over which we
have little or no control. Fuel prices, insurance and claims costs, liability
claims, interest rates, the availability of qualified drivers, fluctuations in
the resale value of revenue equipment, economic and customer business cycles and
20
shipping demands are economic factors over which we have little or no control.
Significant increases or rapid fluctuations in fuel prices, interest rates,
insurance costs or liability claims, to the extent not offset by increases in
freight rates, and the resale value of revenue equipment could reduce our
profitability. Weakness in the general economy, including a weakness in consumer
demand for goods and services, could adversely affect our customers and our
growth and revenues, if customers reduce their demand for transportation
services. Weakness in customer demand for our services or in the general rate
environment may also restrain our ability to increase rates or obtain fuel
surcharges. It is also not possible to predict the medium or long term affects
of the September 11, 2001, terrorist attacks and subsequent events on the
economy or on customer confidence in the United States, or the impact, if any,
on our future results of operations.
The following issues and uncertainties, among others, should be considered
in evaluating our growth outlook.
OUR GROWTH MAY NOT CONTINUE AT HISTORIC RATES.
We have experienced significant and rapid growth in revenue and profits
since the inception of our business in 1990. There can be no assurance that our
business will continue to grow in a similar fashion in the future or that we can
effectively adapt our management, administrative, and operational systems to
respond to any future growth. Further, there can be no assurance that our
operating margins will not be adversely affected by future changes in and
expansion of our business or by changes in economic conditions.
ONGOING INSURANCE AND CLAIMS EXPENSES COULD SIGNIFICANTLY REDUCE OUR
EARNINGS.
Our future insurance and claims expenses might exceed historical levels,
which could reduce our earnings. We are self-insured for personal injury and
property damage liability, cargo liability, collision and comprehensive, and for
worker's compensation up to a maximum limit of $500,000 per occurrence.
Subsequent to December 31, 2001, we increased our self-insurance levels for
personal injury and property damage liability, cargo liability, collision and
comprehensive from $500,000 to $1,750,000 per occurrence. Our worker's
compensation self-insurance level remains at $500,000. If the number of claims
for which we are self-insured increases, our operating results could be
adversely affected. Also, we maintain insurance with licensed insurance
companies above the amounts for which we self-insure. After several years of
aggressive pricing, insurance carriers have raised premiums which has increased
our insurance and claims expense. The terrorist attacks of September 11, 2001,
in the United States, and subsequent events, will likely result in additional
increases in our insurance expenses. If these expenses continue to increase, and
we are unable to offset the increase with higher freight rates, our earnings
could be materially and adversely affected.
INCREASED PRICES FOR NEW REVENUE EQUIPMENT AND DECREASES IN THE VALUE OF
USED REVENUE EQUIPMENT MAY MATERIALLY AND ADVERSELY AFFECT OUR EARNINGS AND CASH
FLOW.
Our growth has been made possible through the addition of new revenue
equipment. Difficulty in financing or obtaining new revenue equipment (for
example, delivery delays from manufacturers or the unavailability of independent
contractors) could restrict future growth.
In the past, we have acquired new tractors and trailers at favorable
prices, and have entered into agreements with the manufacturers to repurchase
the tractors at agreed prices. Current developments in the secondary tractor
resale market have resulted in a large supply of used tractors on the market.
This has depressed the market value of used equipment to levels below the prices
at which the manufacturers have agreed to repurchase the equipment. Accordingly,
some manufacturers may refuse or be financially unable to keep their commitments
to repurchase equipment according to their repurchase agreement terms. We
understand that tractor manufacturers have communicated to customers their
intention to significantly increase new equipment prices in 2002 and eliminate
or sharply reduce the price of repurchase commitments. We are currently in
21
discussions with one of our major tractor suppliers concerning new equipment
purchase prices and repurchase commitments previously made to us and whether
that supplier will honor its contractual commitments to us. Our business plan
and current contract take into account new equipment price increases due to
engine design requirements imposed effective October 1, 2002, by the
Environmental Protection Agency. If new equipment prices were to increase
otherwise, or if the price of repurchase commitments were to decrease or
contractual commitments are not honored by our current suppliers, we may be
required to increase our depreciation and financing costs, write down the value
of used equipment, and/or retain some of our equipment longer, with a resulting
increase in operating expenses. If our resulting cost of revenue equipment were
to increase and/or the prices of used revenue equipment were to decline, our
operating costs could increase, which could materially and adversely affect our
earnings and cash flow, if we are unable to offset these increases through rate
increases or cost savings.
FUEL PRICES MAY INCREASE SIGNIFICANTLY, OUR RESULTS OF OPERATIONS COULD BE
ADVERSELY AFFECTED.
We are also subject to risk with respect to purchases of fuel. Prices and
availability of petroleum products are subject to political, economic and market
factors that are generally outside our control. Because our operations are
dependent upon diesel fuel, significant increases in diesel fuel costs could
materially and adversely affect our results of operations and financial
condition if we are unable to pass increased costs on to customers through rate
increases or fuel surcharges. Historically, we have sought to recover a portion
of our short-term fuel price increases from customers through fuel surcharges.
Fuel surcharges that can be collected do not always offset the increase in the
cost of diesel fuel.
IF THE GROWTH IN OUR REGIONAL OPERATIONS THROUGHOUT THE UNITED STATES SLOWS
OR STAGNATES, OR IF WE ARE UNABLE TO COMMIT SUFFICIENT RESOURCES TO OUR REGIONAL
OPERATIONS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Currently, a significant portion of our business is concentrated in the
Arizona and California markets. A general economic decline or a natural disaster
in either of these markets could have a material adverse effect on our growth
and profitability. In addition, we have established regional operations in Katy,
Texas; Indianapolis, Indiana; Charlotte, North Carolina; Gulfport, Mississippi;
Salt Lake City, Utah; and Kansas City, Kansas in order to serve markets in these
regions. We are planning additional regional operations for 2002. These regional
operations require the commitment of additional revenue equipment and personnel,
as well as management resources, for future development. Should the growth in
our regional operations throughout the United States slow or stagnate, the
results of our operations could be adversely affected. We may encounter
operating conditions in these new markets that differ substantially from those
previously experienced in our western United States markets. There can be no
assurance that our regional operating strategy, as employed in the western
United States, can be duplicated successfully in the other areas of the United
States or that it will not take longer than expected or require a more
substantial financial commitment than anticipated.
DIFFICULTY IN DRIVER AND INDEPENDENT CONTRACTOR RETENTION MAY HAVE A
MATERIALLY ADVERSE AFFECT ON OUR BUSINESS.
Difficulty in attracting or retaining qualified drivers, including
independent contractors, or a downturn in customer business cycles or shipping
demands, could also have a material adverse effect on our growth and
profitability. If a shortage of drivers should occur in the future, or if we
were unable to continue to attract and contract with independent contractors, we
could be required to adjust our driver compensation package, which could
adversely affect our profitability if not offset by a corresponding increase in
rates.
22
WE ARE HIGHLY DEPENDENT ON A FEW MAJOR CUSTOMERS, THE LOSS OF ONE OR MORE
OF WHICH COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS.
A significant portion of our revenue is generated from a few major
customers. For the year ended December 31, 2001, our top 25 customers, based on
revenue, accounted for approximately 43.8% of our revenue; our top 10 customers,
approximately 27.8% of our revenue; and our top 5 customers, approximately 16.8%
of our revenue. Generally, we do not have long term contractual relationships
with our major customers, and we cannot assure you that our customer
relationships will continue as presently in effect. A reduction in or
termination of our services by one or more of our major customers could have a
materially adverse effect on our business and operating results.
TERION TRAILER-TRACKING TECHNOLOGY MAY NOT BE AVAILABLE TO US, WHICH COULD
REQUIRE US TO INCUR THE COST OF REPLACEMENT TECHNOLOGY, ADVERSELY AFFECT OUR
TRAILER UTILIZATION AND OUR ABILITY TO ASSESS DETENTION CHARGES.
We utilize Terion's trailer-tracking technology to assist with monitoring
the majority of our trailers. Terion has filed for bankruptcy protection and is
attempting a reorganization under Chapter 11 of the Federal Bankruptcy Code. If
Terion ceases operations or abandons that technology, we would be required to
incur the cost of replacing that technology or could be forced to operate
without this trailer-tracking technology, which could adversely affect our
trailer utilization and our ability to assess detention charges.
OUR INVESTMENT IN CONCENTREK MAY NOT BE SUCCESSFUL AND WE MAY BE FORCED TO
WRITE OFF PART OR ALL OF OUR INVESTMENT.
We have invested $1 million and loaned approximately $1.6 million to
Concentrek, Inc., ("Concentrek") a transportation logistics company and are
comitted to loan up to an additional $760,500 on a secured basis. We own
approximately 17% of Concentrek, and the remainder is owned by members of the
Knight family and Concentrek's management. If Concentrek's financial position
does not continue to improve, and if it is unable to raise additional capital,
we could be forced to write down all or part of that investment.
OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE OUR SHAREHOLDERS TO LOSE A
SIGNIFICANT PORTION OF THEIR INVESTMENT.
The market price of our common stock could be subject to significant
fluctuations in response to certain factors, such as variations in our
anticipated or actual results of operations or other companies in the
transportation industry, changes in conditions affecting the economy generally,
including incidents of terrorism, analyst reports, general trends in the
industry, sales of common stock by insiders, as well as other factors unrelated
to our operating results. Volatility in the market price of our common stock may
prevent a shareholder from being able to sell his shares at or above the price
paid for them.
WE MAY NOT BE SUCCESSFUL IN OUR ACQUISITION STRATEGY, WHICH COULD LIMIT OUR
GROWTH PROSPECTS.
We may grow by acquiring other trucking companies or trucking assets.
Acquisitions could involve the dilutive issuance of equity securities and/or the
incurrence of additional debt. In addition, acquisitions involve numerous risks,
including difficulties in assimilating the acquired company's operations, the
diversion of our management's attention from other business concerns, risks of
entering into markets in which we have had no or only limited direct experience,
and the potential loss of customers, key employees and drivers of the acquired
company, all of which could have a materially adverse effect on our business and
operating results. If we were to make acquisitions in the future, we cannot
assure our shareholders that we will be able to successfully integrate the
acquired companies or assets into our business.
23
OUR OPERATIONS ARE SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND REGULATIONS,
THE VIOLATION OF WHICH COULD RESULT IN SUBSTANTIAL FINES OR PENALTIES.
We are subject to various environmental laws and regulations dealing with
the handling of hazardous materials, underground fuel storage tanks and
discharge and retention of stormwater. We operate in industrial areas, where
truck terminals and other industrial activities are located, and where
groundwater or other forms of environmental contamination have occurred. Our
operations involve the risks of fuel spillage or seepage, environmental damage,
and hazardous waste disposal, among others. Two of our terminal facilities are
located adjacent to superfund sites. Although we have not been named as a
potentially responsible party in either case, we are potentially exposed to
claims that we may have contributed to environmental contamination in the areas
in which we operate. We also maintain bulk fuel storage and fuel islands at
several of our facilities.
If we are involved in a spill or other accident involving hazardous
substances, or if we are found to be in violation of applicable laws or
regulations, it could have a materially adverse effect on our business and
operating results. If we should fail to comply with applicable environmental
regulations, we could be subject to substantial fines or penalties and to civil
and criminal liability.
The U.S. DOT and various state agencies exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, rates and charges, operations, safety, and financial
reporting. We may also become subject to new or more restrictive regulations
relating to fuel emissions, drivers' hours in service, and ergonomics.
Compliance with such regulations could substantially impair equipment
productivity and increase our operating expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rate on debt and
from changes in commodity prices.
Under Financial Accounting Reporting Release Number 48, we are required to
disclose information concerning market risk with respect to foreign exchange
rates, interest rates, and commodity prices. We have elected to make such
disclosures, to the extent applicable, using a sensitivity analysis approach,
based on hypothetical changes in interest rates and commodity prices.
Except as described below, we have not had occasion to use derivative
financial instruments for risk management purposes and do not use them for
either speculation or tracking. Because our operations are confined to the
United States, we are not subject to foreign currency risk.
INTEREST RATE RISK
We are subject to interest rate risk to the extent we borrow against our
line of credit or incur debt in the acquisition of revenue equipment. We attempt
to manage our interest rate risk by managing the amount of debt we carry. An
increase in short-term interest rates could have a material adverse effect on
our financial condition if our debt levels increase and if the interest rate
increases are not offset by freight rate increases or other items. We have
entered into an interest rate swap agreement with our primary lender to better
manage cash flow. Under this swap agreement a one percent (1%) increase or
decrease in interest rates would result in a corresponding increase or decrease
in annual interest expense of approximately $122,000. Management does not
foresee or expect in the near future any significant changes in our exposure to
interest rate fluctuations or in how that exposure is managed by us. We have not
issued corporate debt instruments.
COMMODITY PRICE RISK
We are also subject to commodity price risk with respect to purchases of
fuel. Prices and availability of petroleum products are subject to political,
economic and market factors that are generally outside our control. Because our
24
operations are dependent upon diesel fuel, significant increases in diesel fuel
costs could materially and adversely affect our results of operations and
financial condition if we are unable to pass increased costs on to customers
through rate increases or fuel surcharges. Historically, we have sought to
recover a portion of our short-term fuel price increases from customers through
fuel surcharges. Fuel surcharges that can be collected do not always offset the
increase in the cost of diesel fuel. For the fiscal year ended December 31,
2001, fuel expense, net of fuel surcharge, represented 14.7% of our total
operating expenses, net of fuel surcharge, compared to 15.3% for the same period
ending in 2000.
In August and September 2000, we entered into two agreements to obtain
price protection to reduce a portion of our exposure to fuel price fluctuations.
Under these agreements, we purchased 1,000,000 gallons of diesel fuel, per
month, for a period of six months from October 1, 2000, through March 31, 2001.
If during the 48 months following March 31, 2001, the price of heating oil on
the New York Mercantile Exchange (NY MX HO) falls below $.58 per gallon, we are
obligated to pay, for a maximum of 12 different months as selected by the
contract holder during the 48-month period beginning after March 31, 2001, the
difference between $.58 per gallon and NY MX HO average price for the minimum
volume commitment. In July 2001, we entered into a similar agreement. Under this
agreement, we are obligated to purchase 750,000 gallons of diesel fuel, per
month, for a period of six months beginning September 1, 2001 through February
28, 2002. If during the 12-month period commencing January 2005 through December
2005, the price index discussed above falls below $.58 per gallon, we are
obligated to pay the difference between $.58 and the stated index. Management
estimates that any potential future payment under any of these agreements would
be less than the amount of our savings for reduced fuel costs. For example,
management estimates that a further reduction of $0.10 in the NY MX HO average
price would result in a net savings, after making a payment on this agreement,
to our total fuel expenses of approximately $1.0 million. Future increases in
the NY MX HO average price would result in us not having to make payments under
these agreements. Management's current valuation of the fuel purchase agreements
indicates there was no material impact upon adoption of SFAS No. 133 on our
results of operations and financial position and we have valued these items at
fair value by recording accrued liabilities for these in the accompanying
December 31, 2001, financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of Knight Transportation, Inc. and
Subsidiaries, as of December 31, 2001 and 2000, and the related Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 2001, together with the related notes and
report of Arthur Andersen LLP, independent public accountants, are set forth at
pages F-1 through F-20, below.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
We incorporate by reference the information contained under the heading
"Election of Directors" from our definitive Proxy Statement to be delivered to
our in connection with the 2002 Annual Meeting of Shareholders to be held May 8,
2002.
25
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the heading
"Executive Compensation" from our definitive Proxy Statement to be delivered to
our shareholders in connection with the 2002 Annual Meeting of Shareholders to
be held May 8, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the heading
"Security Ownership of Certain Beneficial Owners and Management" from our
definitive Proxy Statement to be delivered to our shareholders in connection
with the 2002 Annual Meeting of Shareholders to be held May 8, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference the information contained under the heading
"Certain Relationships and Related Transactions" from our definitive Proxy
Statement to be delivered to our shareholders in connection with the 2002 Annual
Meeting of Shareholders to be held May 8, 2002.
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 F-1 through F-20 , 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, 2001 and 2000
Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules required to be filed by
Item 8 and Paragraph (d) of Item 14:
Valuation and Qualifying Accounts and Reserves
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 27.
26
(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 DESCRIPTIONS
- ------ ------------
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.)
3.1.1 First Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.1 to the Company's report on
Form 10-K for the period ending December 31, 2000).
3.1.2 Second Amendment to Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1.2 to the Company's
Registration Statement on Form S-3 No. 333-72130).
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).
(Incorporated by reference to Exhibit 10.2.1 to the Company's report
on Form 10-K for the period ending December 31, 1997.)
27
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. (Incorporated by
reference to Exhibit 10.2.2 to the Company's report on Form 10-K for
the period ending December 31, 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. (Incorporated by
reference to Exhibit 10.4.1 to the Company's report on Form 10-K for
the period ending December 31, 1997.)
10.4.2 Loan Agreement and Revolving Line of Credit Note each dated November
24, 1999, between Wells Fargo Bank, N.A. and Knight Transportation,
Inc. (superseding prior revolving line of credit facilities)
(Incorporated by reference to Exhibit 10.4.2 to the Company's report
on Form 10-K for the period ending December 31, 1999.)
10.4.3 Term Note dated November 24, 1999, between Wells Fargo Bank, N.A. and
Knight Transportation, Inc. (superseding prior credit facility)
(Incorporated by reference to Exhibit 10.4.3 to the Company's report
on Form 10-K for the period ending December 31, 1999.)
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, Mark Scudder 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).
10.6.1* Indemnification Agreements between the Company and Timothy M. Kohl,
dated October 16, 2000, and Matt Salmon, dated May 9, 2001.
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.)
28
10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the
Company and RR-1 Limited Partnership. (Incorporated by reference to
Exhibit 10.9 to the Company's report on Form 10-K for the period ended
December 31, 1995.)
10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight
Transportation, Inc., Knight Acquisition Corporation, Action Delivery
Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis.
(Incorporated by reference to Exhibit 2.1 to the Company's report on
Form 8-K filed with the Securities and Exchange Commission on March
25, 1999.)
10.11 Master Equipment Lease Agreement dated as of October 28, 1998, between
Knight Transportation Midwest, Inc., formerly known as "Knight
Transportation Indianapolis, Inc." and Quad-K Leasing, Inc.
(Incorporated by reference to Exhibit 10.11 to the Company's report on
Form 10-K for the period ending December 31, 1999.)
10.12 Consulting Agreement dated as of March 1, 2000 between Knight
Transportation, Inc. and LRK Management, L.L.C. (Incorporated by
reference to Exhibit 10.12 to the Company's report on Form 10-K for
the period ending December 31, 1999.)
10.13 Stock Purchase Agreement dated April 19, 2000 by and among Knight
Transportation, Inc., as Buyer, John R. Fayard, Jr., and John Fayard
Fast Freight, Inc. (Incorporated by reference to the Company's Form
8-K filed with the Securities and Exchange Commission on May 4, 2000.)
21.1* Subsidiaries of the Company.
23* Consent of Arthur Andersen LLP
- ----------
* Filed herewith.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Knight Transportation, Inc. has duly caused this report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
KNIGHT TRANSPORTATION, INC.
By: /s/ Kevin P. Knight
------------------------------------
Kevin P. Knight,
Date: March 15, 2002 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ Kevin P. Knight March 15, 2002
- --------------------------------------------
Kevin P. Knight, Chairman of the Board,
Chief Executive Officer, Director
/s/ Gary J. Knight March 15, 2002
- --------------------------------------------
Gary J. Knight, President, Director
/s/ Keith T. Knight March 15, 2002
- --------------------------------------------
Keith T. Knight,
Executive Vice President, Director
/s/ Timothy M. Kohl March 15, 2002
- --------------------------------------------
Timothy M. Kohl,
Chief Financial Officer, Secretary, Director
/s/ Randy Knight March 15, 2002
- --------------------------------------------
Randy Knight, Director
/s/ Mark Scudder March 15, 2002
- --------------------------------------------
Mark Scudder, Director
/s/ Donald A. Bliss March 15, 2002
- --------------------------------------------
Donald A. Bliss, Director
/s/ G.D. Madden March 15, 2002
- --------------------------------------------
G.D. Madden, Director
/s/ Matt Salmon March 15, 2002
- --------------------------------------------
Matt Salmon, Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Knight Transportation, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of KNIGHT
TRANSPORTATION, INC. (an Arizona corporation) AND SUBSIDIARIES (the Company) as
of December 31, 2001 and 2000, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2001. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Phoenix, Arizona
January 16, 2002
F-1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
2001 2000
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 24,135,601 $ 6,151,383
Trade receivables, net of allowance for doubtful
accounts of $1,131,682 and $1,121,375, respectively 31,693,074 33,923,878
Notes receivable, net of allowance for doubtful
notes receivable of $66,181 and $80,645, respectively 777,218 143,576
Inventories and supplies 1,905,934 792,683
Prepaid expenses 7,964,109 5,018,559
Deferred tax assets 6,081,462 3,046,756
------------- -------------
72,557,398 49,076,835
------------- -------------
Property and Equipment:
Land and land improvements 13,112,344 11,309,547
Buildings and improvements 12,456,546 9,684,086
Furniture and fixtures 6,297,862 5,620,344
Shop and service equipment 1,789,903 1,435,818
Revenue equipment 169,630,340 156,429,863
Leasehold improvements 666,860 611,475
------------- -------------
203,953,855 185,091,133
Less: accumulated depreciation (50,258,826) (42,113,992)
------------- -------------
Property and Equipment, net 153,695,029 142,977,141
------------- -------------
Notes Receivable, net of current portion 3,108,263 1,398,475
------------- -------------
Other Assets, net of accumulated amortization of
$929,833 and $277,046, respectively 11,753,359 13,531,568
------------- -------------
$ 241,114,049 $ 206,984,019
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
2001 2000
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,838,011 $ 6,125,474
Accrued liabilities 6,321,829 4,406,341
Current portion of long-term debt 3,159,162 5,477,868
Claims accrual 7,509,397 5,554,127
------------- -------------
20,828,399 21,563,810
Line of Credit 12,200,000 34,000,000
Long-Term Debt, net of current portion 2,714,526 14,885,268
Deferred Tax Liabilities 37,675,395 31,414,320
------------- -------------
73,418,320 101,863,398
------------- -------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; 50,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 100,000,000
shares authorized; 36,834,106 and 33,732,423
shares issued and outstanding at December 31, 2001
and 2000, respectively 368,341 337,324
Additional paid-in capital 69,846,990 25,586,963
Accumulated other comprehensive loss (732,470) --
Retained earnings 98,212,868 79,196,334
------------- -------------
167,695,729 105,120,621
------------- -------------
$ 241,114,049 $ 206,984,019
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------- ------------- -------------
Revenue:
Revenue, before fuel surcharge $ 241,679,351 $ 207,406,059 $ 151,489,829
Fuel surcharge 9,139,382 9,452,816 968,669
------------- ------------- -------------
Total revenue 250,818,733 216,858,875 152,458,498
------------- ------------- -------------
Operating Expenses:
Salaries, wages and benefits 81,778,739 69,193,161 44,688,774
Fuel 38,934,360 36,256,884 16,769,280
Operations and maintenance 13,892,190 11,236,724 8,776,253
Insurance and claims 10,229,692 4,869,166 4,005,111
Operating taxes and licenses 7,037,838 7,514,597 5,646,079
Communications 2,057,222 1,510,153 1,190,164
Depreciation and amortization 18,416,513 19,131,183 14,179,613
Lease expense - revenue equipment 8,510,616 3,717,044 --
Purchased transportation 23,494,931 25,856,976 27,585,318
Miscellaneous operating expenses 6,915,149 5,549,612 3,707,892
------------- ------------- -------------
211,267,250 184,835,500 126,548,484
------------- ------------- -------------
Income from operations 39,551,483 32,023,375 25,910,014
------------- ------------- -------------
Other Income (Expense):
Interest income 708,073 917,975 901,332
Other expense (5,679,000) (287,500) --
Interest expense (2,514,022) (4,048,664) (1,197,446)
------------- ------------- -------------
(7,484,949) (3,418,189) (296,114)
------------- ------------- -------------
Income before income taxes 32,066,534 28,605,186 25,613,900
Income Taxes (13,050,000) (10,860,000) (10,150,000)
------------- ------------- -------------
Net income $ 19,016,534 $ 17,745,186 $ 15,463,900
============= ============= =============
Basic Earnings Per Share $ .55 $ .53 $ .46
============= ============= =============
Diluted Earnings Per Share $ .54 $ .53 $ .45
============= ============= =============
Weighted Average Shares
Outstanding - Basic 34,275,107 33,409,660 33,727,858
============= ============= =============
Weighted Average Shares
Outstanding - Diluted 35,145,442 33,770,410 34,273,249
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Net Income $ 19,016,534 $ 17,745,186 $ 15,463,900
Other Comprehensive Loss:
Interest rate swap agreement fair market value adjustment (732,470) -- --
------------ ------------ ------------
Comprehensive Income $ 18,284,064 $ 17,745,186 $ 15,463,900
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2001, 2000, and 1999
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Comprehensive Retained
Shares Issued Amount Capital (Loss) Earnings Total
------------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 1998 33,708,335 $ 337,083 $ 24,574,745 $ -- $45,987,248 $ 70,899,076
Exercise of stock options 81,900 819 322,189 -- -- 323,008
Issuance of shares for business
acquisition 219,512 2,195 1,830,732 -- -- 1,832,927
Issuance of common stock 1,152 12 9,988 -- -- 10,000
Tax benefit on stock option exercises -- -- 98,712 -- -- 98,712
Purchase of stock, at cost (1,117,800) (11,178) (5,802,804) -- -- (5,813,982)
Net income -- -- -- -- 15,463,900 15,463,900
----------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 1999 32,893,099 328,931 21,033,562 -- 61,451,148 82,813,641
Exercise of stock options 322,553 3,225 1,214,988 -- -- 1,218,213
Issuance of shares for business
acquisition 514,773 5,148 2,944,072 -- -- 2,949,220
Issuance of common stock 1,998 20 14,980 -- -- 15,000
Tax benefit on stock option exercises -- -- 379,361 -- -- 379,361
Net income -- -- -- -- 17,745,186 17,745,186
----------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 2000 33,732,423 337,324 25,586,963 -- 79,196,334 105,120,621
Exercise of stock options 421,576 4,216 1,994,250 -- -- 1,998,466
Issuance of shares in stock offering,
net of offering costs of $2,517,091 2,678,907 26,789 41,202,671 -- -- 41,229,460
Issuance of common stock 1,200 12 14,988 -- -- 15,000
Tax benefit on stock option exercises -- -- 1,048,118 -- -- 1,048,118
Other comprehensive loss -- -- -- (732,470) -- (732,470)
Net income -- -- -- -- 19,016,534 19,016,534
----------- ----------- ------------ ----------- ----------- ------------
Balance, December 31, 2001 36,834,106 $ 368,341 $ 69,846,990 $ (732,470) $98,212,868 $167,695,729
=========== =========== ============ =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ------------ ------------
Cash Flows From Operating Activities:
Net income $ 19,016,534 $ 17,745,186 $ 15,463,900
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 18,416,513 19,131,183 14,179,613
Write-off of investment in communications company 5,679,000 -- --
Non-cash compensation expense for issuance of
common stock to certain members of board of directors 15,000 15,000 10,000
Provision for allowance for doubtful accounts and
notes receivable 470,007 668,409 320,759
Deferred income taxes 3,226,369 5,815,361 5,051,072
Tax benefit on stock option exercises 1,048,118 379,361 98,712
Changes in assets and liabilities:
(Increase) decrease in trade receivables 1,774,804 (4,954,286) (6,857,721)
(Increase) decrease in inventories and supplies (1,113,251) (151,262) 778,426
(Increase) decrease in prepaid expenses (2,945,550) (3,448,536) 80,769
Increase in other assets (272,334) (2,028,902) (1,640,016)
Increase (decrease) in accounts payable (2,287,463) 319,348 (1,086,359)
Increase (decrease) in accrued liabilities and claims
accrual 3,138,288 1,058,560 (897,123)
------------ ------------ ------------
Net cash provided by operating activities 46,166,035 34,549,422 25,502,032
------------ ------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment, net (30,377,780) (33,965,304) (37,273,468)
Investment in communications company -- -- (879,000)
Investment in/advances to other companies (1,334,000) (1,720,000) (250,000)
Cash received from business acquired -- 2,528,420 64,501
Increase in notes receivable (2,357,437) (1,735,218) (6,576,353)
------------ ------------ ------------
Net cash used in investing activities (34,069,217) (34,892,102) (44,914,320)
------------ ------------ ------------
Cash Flows From Financing Activities:
(Payments) borrowings on line of credit, net (21,800,000) 4,963,030 25,536,970
Proceeds from sale of notes receivable -- 10,091,166 --
Borrowings of long-term debt -- -- 6,645,895
Payments of long-term debt (14,489,448) (9,862,592) (1,888,184)
Payments of accounts payable - equipment (1,051,078) (3,210,581) (2,220,780)
Proceeds from issuance of common stock 43,746,551 -- --
Payment of stock offering costs (2,517,091) -- --
Purchase of treasury stock, at cost -- -- (5,813,982)
Proceeds from exercise of stock options 1,998,466 1,218,213 323,008
------------ ------------ ------------
Net cash provided by financing activities 5,887,400 3,199,236 22,582,927
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 17,984,218 2,856,556 3,170,639
Cash and Cash Equivalents, beginning of year 6,151,383 3,294,827 124,188
------------ ------------ ------------
Cash and Cash Equivalents, end of year $ 24,135,601 $ 6,151,383 $ 3,294,827
============ ============ ============
Supplemental Disclosures:
Noncash investing and financing transactions:
Equipment acquired by accounts payable $ -- $ 1,051,078 $ 4,261,659
Cash flow information:
Income taxes paid $ 7,481,894 $ 6,264,157 $ 6,001,684
Interest paid 2,488,547 4,036,509 1,117,787
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the
Company) is a short to medium-haul, truckload carrier of general
commodities. The operations are based in Phoenix, Arizona, where the
Company has its corporate offices, fuel island, truck terminal, dispatching
and maintenance services. The Company also has operations in Katy, Texas;
Indianapolis, Indiana; Charlotte, North Carolina; Salt Lake City, Utah and
Kansas City, Kansas. During 2000, the Company expanded its operations by
acquiring the facilities of John Fayard Fast Freight, Inc., now Knight
Transportation Gulf Coast, Inc., in Gulfport, Mississippi. The Company
operates in one industry, road transportation, which is subject to
regulation by the Department of Transportation and various state regulatory
authorities. The Company has an owner-operator program. Owner-operators are
independent contractors who provide their own tractors. The Company views
owner-operators as an alternative method to obtaining additional revenue
equipment.
b. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the parent company Knight Transportation, Inc., and its
wholly owned subsidiaries, Knight Administrative Services, Inc., Quad-K
Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc., Knight Management
Services, Inc., Knight Transportation Midwest, Inc., KTeCom, L.L.C., Knight
Transportation South Central Ltd. Partnership and Knight Transportation
Gulf Coast, Inc. All material intercompany items and transactions have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
NOTES RECEIVABLE - Included in notes receivable are amounts due from
independent contractors under a program whereby the Company finances
tractor purchases for its independent contractors. These notes receivable
are collateralized by revenue equipment and are due in monthly
installments, including principal and interest at 14%, over periods
generally ranging from three to five years.
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.
F-8
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 5-10
Leasehold improvements 10
The Company expenses repairs and maintenance as incurred. For the years
ended December 31, 2001, 2000, and 1999, repairs and maintenance expense
totaled approximately $8,900,000, $6,100,000, and $4,240,000, respectively,
and is included in operations and maintenance expense in the accompanying
consolidated statements of income.
Revenue equipment is depreciated to salvage values of 15% to 30% for all
tractors. Trailers are depreciated to salvage values of 10% to 40%. The
Company periodically reviews and adjusts its estimates related to useful
lives and salvage values for revenue equipment.
Tires on revenue equipment purchased are capitalized as a part of the
equipment cost and depreciated over the life of the vehicle. Replacement
tires and recapping costs are expensed when placed in service.
OTHER ASSETS - Other assets include:
2001 2000
------------ ------------
Investment in communications technology company $ -- $ 4,879,000
Investment in logistics company and related advances 1,774,500 720,200
Investment in aircraft company 1,717,700 1,450,000
Goodwill 8,433,900 5,798,179
Other 757,092 961,235
Accumulated amortization (929,833) (277,046)
------------ ------------
$ 11,753,359 $ 13,531,568
============ ============
The Company's ownership percentage in each of the investments above is less
than 20% at December 31, 2001 and 2000 and the Company does not have
significant influence over the operating decisions of the entities;
therefore, the investments are carried at cost. In 1998 and 1999 the
Company invested in a communications technology company. The Company owned
less than four percent of that technology company and did not derive any
revenue from its investment. In August 2001, the investee announced changes
to its strategic operations which caused the Company to evaluate the
investment for impairment. During 2001, the Company elected to write-off
this investment in accordance with its policy on evaluating the impairment
of long-lived assets. The investee, subsequent to the Company writing-off
the investment, filed for bankruptcy protection. This non-recurring charge
is reflected in other expense in the accompanying consolidated financial
statements. The logistics company and aircraft company are related parties.
(see notes 5 and 7) Goodwill was being amortized over 15 years. On January
1, 2002, the Company adopted SFAS No. 141 and 142 which will impact future
amortization. (See "Recently Adopted and to be Adopted Pronouncements"
below in Note 1).
F-9
IMPAIRMENT OF LONG-LIVED ASSETS - The Company assesses the recoverability
of long-lived assets, including property and equipment and goodwill, by
determining whether the assets can be recovered from undiscounted future
cash flows. The amount of impairment, if any, is measured based on
projected future cash flows (using a discount rate reflecting the Company's
average cost of funds) compared to the carrying value of those assets.
Recoverability of long-lived assets is dependent upon, among other things,
the Company's ability to continue to achieve profitability, in order to
meet its obligations when they become due. In the opinion of management,
based upon current information, long-lived assets will be recovered over
the period of benefit.
REVENUE RECOGNITION - The Company recognizes revenues when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable and collectibility is probable. Generally, all of these
conditions are met upon delivery.
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 (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.
STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation plan under Accounting Principles Board Opinion (APB) No. 25.
In accordance with SFAS No. 123, a company is required to disclose the pro
forma effects on earnings and earnings per share as if SFAS No. 123 had
been adopted. See Note 9.
FINANCIAL INSTRUMENTS - The Company's financial instruments include cash
equivalents, trade receivables, notes receivable, accounts payable and
notes payable. Due to the short-term nature of cash equivalents, trade
receivables and accounts payable, the fair value of these instruments
approximates their recorded value. In the opinion of management, based upon
current information, the fair value of notes receivable and notes payable
approximates market value. The Company does not have material financial
instruments with off-balance sheet risk, with the exception of operating
leases. See Note 5.
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
2001, 2000 and 1999, aggregated approximately 11%, 15% and 16% of revenues,
respectively. Revenue from the Company's single largest customers represent
approximately 4%, 7% and 7% of revenues for the years 2001, 2000, and 1999,
respectively.
RECAPITALIZATION AND STOCK SPLIT - On May 9, 2001 the Board of Directors
approved a three-for-two stock split, effected in the form of a 50 percent
stock dividend. The stock split occurred on June 1, 2001, to all
shareholders of record as of the close of business on May 18, 2001. Also on
December 7, 2001 the Company's Board of Directors approved another
three-for-two stock split, effected in the form of a 50 percent stock
dividend. The stock split occurred on December 28, 2001, to all
stockholders of record as of the close of business on December 7, 2001.
These stock splits have been given retroactive recognition for all periods
presented in the accompanying consolidated financial statements. All share
amounts and earnings per share amounts have been retroactively adjusted to
reflect the stock splits.
EARNINGS PER SHARE - The Company accounts for its earnings per share (EPS)
in accordance with SFAS No. 128, EARNINGS PER SHARE.
A reconciliation of the numerators (net income) and denominators (weighted
average number of shares outstanding) of the basic and diluted EPS
computations for 2001, 2000, and 1999, are as follows:
F-10
2001 2000 1999
------------------------------------ ------------------------------------ ------------------------------------
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 $19,016,534 34,275,107 $ .55 $17,745,186 33,409,660 $ .53 $15,463,900 33,727,858 $ .46
====== ====== ======
Effect of stock
options -- 870,335 -- 360,750 -- 545,391
----------- ---------- ----------- ---------- ----------- ----------
Diluted EPS $19,016,534 35,145,442 $ .54 $17,745,186 33,770,410 $ .53 $15,463,900 34,273,249 $ .45
=========== =========== ====== =========== =========== ====== =========== =========== ======
SEGMENT INFORMATION - Although the Company has eight operating segments, it
has determined that it has one reportable segment. Seven of the segments
are managed based on the regions of the United States in which each
operates. Each of these segments have similar economic characteristics as
they all provide short to medium haul truckload carrier service of general
commodities to a similar class of customers. In addition, each segment
exhibits similar financial performance, including average revenue per mile
and operating ratio. The remaining segment is not reported because it does
not meet the materiality thresholds in SFAS No. 131. As a result, the
Company has determined that it is appropriate to aggregate its operating
segments into one reportable segment consistent with the guidance in SFAS
No. 131. Accordingly, the Company has not presented separate financial
information for each of its operating segments as the Company's
consolidated financial statements present its one reportable segment.
RECENTLY ADOPTED AND TO BE ADOPTED ACCOUNTING PRONOUNCEMENTS - In June
1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. This statement, as amended, establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. In
June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS
NO. 133. This statement deferred the effective date of SFAS No. 133 for the
Company until January 1, 2001.
In August and September 2000, the Company entered into two agreements to
obtain price protection to reduce a portion of the Company's exposure to
fuel price fluctuations. Under these agreements, the Company purchased
1,000,000 gallons of diesel fuel, per month, for a period of six months
from October 1, 2000 through March 31, 2001. If during the 48 months
following March 31, 2001, the price of heating oil on the New York
Mercantile Exchange (NY MX HO) falls below $.58 per gallon, the Company is
obligated to pay, for a maximum of 12 different months selected by the
contract holder during the 48-month period beginning after March 31, 2001,
the difference between $.58 per gallon and NY MX HO average price for the
minimum volume commitment. In July 2001, the Company entered into a similar
agreement. Under this agreement, the Company is obligated to purchase
750,000 gallons of diesel fuel, per month, for a period of six months
beginning September 1, 2001 through February 28, 2002. If during the
12-month period commencing January 2005 through December 2005, the price
index discussed above falls below $.58 per gallon, the Company is obligated
to pay the difference between $.58 and the stated index.
The Company adopted SFAS No. 133 on January 1, 2001. There was not a
material impact on the Company's results of operations or financial
position as a result of the adoption of SFAS No. 133. As of December 31,
2001, the three agreements described above are stated at their fair market
value, based on an option provided by the issuer of the agreements to
dissolve the agreements for $750,000, which expires on April 16, 2002, and
are included in accrued liabilities in the accompanying consolidated
financial statements.
F-11
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. This statement also requires that the
Company recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS No. 142 requires,
among other things, that companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In addition, SFAS No. 142
requires that the Company identify reporting units for purposes of
assessing potential future impairments of goodwill, reassess the useful
lives of other existing recognized finite-lived intangible assets, and
cease amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS No. 142. This statement
is required to be applied in fiscal years beginning after December 15, 2001
to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS No. 142
requires the Company to complete a transitional goodwill impairment test
within six months from the date of adoption and reassess the useful lives
of other intangible assets within the first interim quarter after adoption.
The Company had $7,504,067 in net book value recorded for goodwill at
December 31, 2001. The current amortization of this goodwill was $46,782
per month. The Company adopted SFAS No. 141 and 142 on January 1, 2002. At
present, the Company is currently assessing but has not yet determined the
complete impact the adoption of SFAS No. 141 and SFAS No. 142 will have on
its financial position and results of operations. The Company ceased
amortization of its indefinite life intangibles as of January 1, 2002.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 covers all legally enforceable
obligations associated with the retirement of tangible long-lived assets
and provides the accounting and reporting requirements for such
obligations. SFAS No. 143 is effective for the Company beginning January 1,
2003. The Company has not assessed the impact of this new statement on its
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of APB Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS,
AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS, for the disposal of a segment of a business. This statement
also amends ARB No. 51, CONSOLIDATED FINANCIAL STATEMENTS to eliminate the
exception to consolidate a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002 and
there was not a material impact on the Company's results of operations or
financial position.
2. ACQUISITIONS
The Company acquired the assets of a Texas-based truckload carrier during the
quarter ended March 31, 1999. The purchased assets and assumed liabilities were
recorded at their estimated fair values at the acquisition date in accordance
with APB No. 16, BUSINESS COMBINATIONS. In conjunction with the acquisition, the
Company issued 219,512 shares of its common stock.
The aggregate purchase price of the acquisition consisted of the following (in
thousands):
Common stock $ 1,833
Assumption of liabilities 331
--------
$ 2,164
========
F-12
The fair value of the assets purchased has been allocated as follows (in
thousands):
Cash $ 65
Trade receivable 407
Property and equipment 1,492
Goodwill 200
--------
$ 2,164
========
The Company acquired the stock of a Mississippi-based truckload carrier during
the quarter ended June 30, 2000. The acquired assets and assumed liabilities
were recorded at their estimated fair values at the acquisition date in
accordance with APB No. 16, BUSINESS COMBINATIONS. In conjunction with the
acquisition, the Company issued 514,773 shares (after effect of two stock splits
discussed previously) of common stock. These shares were valued at fair market
value less a discount due to the restricted nature of these shares. The Company
has completed its allocation of the purchase price; adjustments to the purchase
price allocations did not have a material impact on the accompanying
consolidated financial statements. Terms of the purchase agreement set forth
conditions upon which an earn-out adjustment to the purchase price based upon
future earnings may be necessary over a two-year period. The first year earn-out
period was from April 1, 2000 to March 31, 2001. At the end of that period, an
adjustment in the form of additional shares of the Company's common stock up to
a maximum of 45,000 shares was possible, but did not occur. Along with these
shares of stock, a cash bonus up to $495,000 was possible, but did not occur.
The second, and final, year for an earn-out is for the period of April 1, 2001
to March 31, 2002. At the end of this period, an adjustment in the form of
additional shares of the Company's stock up to a maximum of 60,000 shares is
possible. Along with these shares of stock, a cash bonus up to $660,000 is
possible.
The aggregate purchase price of the acquisition consisted of the following (in
thousands):
Cash $ 4,000
Issuance of common stock 2,949
Assumption of liabilities 20,830
--------
$ 27,779
========
The fair value of the assets purchased has been allocated as follows (in
thousands):
Cash $ 2,528
Trade receivable 4,360
Property and equipment 11,764
Goodwill 8,234
Other assets 893
--------
$ 27,779
========
F-13
The following unaudited pro forma information reflects the acquisitions
previously discussed as if they occurred at the beginning of the periods
presented, but may not be indicative of the actual results, which would have
occurred had the acquisitions been consummated at the beginning of such periods
or of future consolidated operations of the Company. The unaudited pro forma
financial information is based on the purchase method of accounting and reflects
an adjustment to amortize the excess purchase price over the underlying value of
net assets acquired and to adjust income taxes for the unaudited pro forma
adjustments.
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999
-------------- -------------
(Unaudited) (Unaudited)
Total revenues $ 226,603,099 $ 185,744,068
Net income 18,200,636 16,911,274
Basic earnings per share .54 .49
Diluted earnings per share .54 .49
Weighted average shares outstanding
Basic 33,564,798 34,290,743
Diluted 33,925,547 34,836,134
3. LINE OF CREDIT AND LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2001 2000
------------ ------------
Note payable to financial institution with
monthly principal and interest payments
of $192,558 through October 2003; the note
is unsecured with interest at a fixed
rate of 5.75% $ 4,008,688 $ 6,022,254
Notes payable to a third party with a
payment totaling $1,025,679 due in 2002,
and final payment of $839,321 due in 2003
The note is secured by real property of
the Company 1,865,000 --
Notes payable to a commercial lender with
monthly principal and interest payments
of approximately $29,700 through $75,500
The notes were secured by certain revenue
equipment with interest rates from 6.95%
to 6.99% and were paid in 2001 -- 5,695,597
Notes payable to commercial lenders with
monthly principal and interest payments
of approximately $3,100 through $55,100
The notes were secured by certain revenue
equipment with interest rates from 6.75%
to 8.25% and were paid in 2001 -- 8,645,285
------------ ------------
5,873,688 20,363,136
Less - current portion (3,159,162) (5,477,868)
------------ ------------
$ 2,714,526 $ 14,885,268
============ ============
Long-term debt maturities are as follows:
2002 $ 3,159,162
2003 2,714,526
------------
$ 5,873,688
============
The Company maintains a $50.0 million revolving line of credit (see Note 6) with
principal due at maturity, July 2003, and interest payable monthly at two
options (prime or LIBOR plus .625%). During 2001, the Company entered into an
interest rate swap agreement on the $12.2 million outstanding under the
revolving line of credit for purposes of better managing cash flow. At December
F-14
31, 2001 the fair value of this agreement is included in other comprehensive
loss on the Company's balance sheet. The available credit at December 31, 2001
under this line of credit is $33.4 million.
Under the terms of the line of credit and certain notes payable, the Company is
required to maintain certain financial ratios such as net worth and funded debt
to earnings before income taxes, depreciation and amortization. The Company is
also required to maintain certain other covenants relating to corporate
structure, ownership and management. The Company was in compliance with its
financial debt covenants at December 31, 2001.
4. INCOME TAXES
Income tax expense consists of the following:
2001 2000 1999
----------- ----------- -----------
Current income taxes:
Federal $ 7,951,816 $ 4,118,681 $ 4,198,003
State 1,871,815 925,958 900,925
----------- ----------- -----------
9,823,631 5,044,639 5,098,928
----------- ----------- -----------
Deferred income taxes:
Federal 2,649,207 4,652,261 4,044,413
State 577,162 1,163,100 1,006,659
----------- ----------- -----------
3,226,369 5,815,361 5,051,072
----------- ----------- -----------
$13,050,000 $10,860,000 $10,150,000
=========== =========== ===========
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:
2001 2000 1999
----------- ----------- -----------
Tax at the statutory rate (34%) $10,902,622 $ 9,725,764 $ 8,708,726
State income taxes, net of federal benefit 2,147,378 1,134,236 1,441,274
----------- ----------- -----------
$13,050,000 $10,860,000 $10,150,000
=========== =========== ===========
The net effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2001 and
2000, are as follows:
2001 2000
----------- -----------
Short-term deferred tax assets:
Claims accrual $ 3,157,449 $ 2,229,202
Capital loss carryforward 1,951,600 --
Other 972,413 817,554
----------- -----------
$ 6,081,462 $ 3,046,756
=========== ===========
Long-term deferred tax liabilities:
Property and equipment depreciation $36,093,198 $30,341,574
Prepaid expenses deducted for tax purposes 1,582,198 1,072,746
----------- -----------
$37,675,395 $31,414,320
=========== ===========
In management's opinion, it is more likely than not that the Company will be
able to utilize its deferred tax assets in future periods.
F-15
5. COMMITMENTS AND CONTINGENCIES
a. PURCHASE COMMITMENTS
As of December 31, 2001, the Company had purchase commitments for
additional tractors and trailers with an estimated purchase price, net of
estimated trade-in values, of approximately $45,000,000 for delivery
throughout 2002. 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.
As of December 31, 2001, the Company had a commitment to purchase 2,250,000
gallons of fuel by February 28, 2002. Under the agreement, the price of
fuel is set at a maximum of $0.80 per gallon. The Company will also receive
a rebate of $0.04 per gallon for all gallons purchased during the agreement
term. In the event that the Company fails to purchase the required
quantities during any month of the agreement period, the Company will
forfeit the rebate and favorable pricing for that month. Historically, the
Company has purchased fuel in excess of the committed amount above.
b. OTHER
The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying consolidated financial statements.
c. OPERATING LEASES
The Company leases certain revenue equipment under non-cancelable operating
leases. Rent expense related to these lease agreements totaled
approximately $8.5 million and $3.7 million, for the years ended December
31, 2001 and 2000, respectively.
Future lease payments under non-cancelable operating leases are as follows:
Year Ending
December 31, Amount
------------ -----------
2002 $ 8,723,210
2003 7,062,633
2004 4,318,435
2005 2,848,888
2006 788,748
-----------
$23,741,914
===========
d. RELATED PARTY LOGISTICS LINE OF CREDIT
In April 1999, the Company acquired a 17% interest in a related party
logistics company. Through a limited liability company, the Company has
agreed to lend up to a maximum of $2,335,000 to the related party logistics
company pursuant to two promissory notes. One note has a principal amount
of $935,000 and is convertible into the related party logistic company's
Class A Preferred Stock. The other note is not convertible and has an
available principal amount of $1,400,000. Both notes are secured by a lien
on substantially all of the logistic company's assets and these notes share
first priority with respect to their security interests. Both notes are due
in April, 2004. At December 31, 2001, the Company had advanced $1,574,500
under these promissory notes. The advances are included in other assets at
December 31, 2001.
F-16
6. CLAIMS ACCRUAL
The primary claims arising for the Company consist of cargo loss and damage and
auto liability (personal injury and property damage). The Company is
self-insured for personal injury and property damage liability, cargo liability,
collision and comprehensive, and for worker's compensation up to a maximum limit
of $500,000 per occurrence. The Company establishes reserves to cover these
self-insured liabilities and maintains insurance to cover liabilities in excess
of those amounts. Subsequent to December 31, 2001, the Company increased its
self-insurance levels for personal injury and property damage liability, cargo
liability, collision and comprehensive up to $1,750,000. The worker's
compensation self-insurance level remains at $500,000. The Company's insurance
policies provide for excess personal injury and property damage liability, cargo
liability, collision and comprehensive coverage up to a total of $30,000,000 per
occurrence. The Company also maintains primary and excess coverage for employee
medical expenses and hospitalization, and damage to physical properties.
The claims accrual represents accruals for the estimated uninsured portion of
pending claims including adverse development of known claims and incurred but
not reported claims. These estimates are based on historical information along
with certain assumptions about future events. Changes in assumptions as well as
changes in actual experience could cause these estimates to change in the near
term. Liabilities in excess of the self-insured amounts are collateralized by
letters of credit totaling $4.4 million. These letters of credit reduce the
available borrowings under the Company's line of credit (see Note 3).
7. RELATED PARTY TRANSACTIONS
The Company leases land and facilities from a shareholder and director (the
Shareholder), with monthly payments of $6,100. In addition to base rent, the
lease requires the Company to pay its share of all expenses, utilities, taxes
and other charges. Rent expense paid to the Shareholder under this lease was
approximately $81,000 during each of 2001, 2000 and 1999, respectively.
The Company paid approximately $90,000 annually for certain of its key
employees' life insurance premiums during 2001, 2000, and 1999, respectively. A
portion of the premiums paid is 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.
During 2001 and 2000, the Company purchased approximately $1,061,447 and
$2,092,000, respectively, of communications equipment from the communications
technology company in which it has an investment (see Note 1). Additionally at
December 31, 2001, the Company had a receivable included in trade receivables
for approximately $27,000 related to the reimbursement of expenses.
During 2001, the Company paid approximately $64,500 for legal services to a firm
that employs a member of the Company's Board of Directors.
During 2001, the Company paid approximately $620,000 for travel services for its
employees to an aircraft company in which the Company has an investment (see
Note 1).
The Company has a consulting agreement with a former employee, shareholder and
officer of the Company to provide services related to marketing and consulting
and paid this former employee approximately $50,000 each for the years ended
December 31, 2001 and 2000, respectively.
Total Warehousing, Inc. (Total), a company owned by a shareholder and director
of the Company provided general warehousing services to the Company in the
amount of approximately $5,300, $33,000 and $64,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
F-17
8. SHAREHOLDERS' EQUITY
In November 2001, the Company issued 2,678,907 shares of common stock at $16.33
(the Offering). The offering consisted of 4,928,907 shares of common stock
comprised of 2,678,907 of newly issued Company shares and 2,250,000 shares from
existing shareholders. The net proceeds from the offering were $41,229,460 after
deducting offering costs of $2,517,091.
The Company's Board of Directors have authorized the repurchase from time to
time of up to 1,500,000 shares of the Company's common stock on the open market
or in negotiated transactions depending upon market conditions and other
factors. During 1999, the Company purchased 496,800 shares, prior to adjustment
for the stock splits in 2001, under the repurchase program at a total cost of
$5.8 million.
During 2001, 2000 and 1999, certain non-employee Board of Director members
received their director fees of $5,000 each through the issuance of common stock
in equivalent shares. The Company issued a total of 1,200, 1,998 and 1,152
shares of common stock to certain directors during 2001, 2000 and 1999,
respectively.
9. EMPLOYEE BENEFIT PLANS
a. 1994 STOCK OPTION PLAN
The Company established the 1994 Stock Option Plan (the Plan) with
3,375,000 shares of common stock reserved for issuance thereunder. The Plan
will terminate on August 31, 2004. The Compensation Committee of the Board
of Directors administers the 1994 Plan and has the discretion to determine
the employees, officers and independent directors who receive awards, the
type of awards to be granted (incentive stock options, nonqualified stock
options and restricted stock grants) and the term, vesting and exercise
price. Incentive stock options are designed to comply with the applicable
provisions of the Internal Revenue Code (the Code) and are subject to
restrictions contained in the Code, including a requirement that exercise
prices are equal to at least 100% of the fair market value of the common
shares on the grant date and a ten-year restriction on the option term.
Independent directors are not permitted to receive incentive stock options.
Non-qualified stock options may be granted to directors, including
independent directors, officers, and employees and provide for the right to
purchase common stock at a specified price, which may not be less than 85%
of the fair market value on the date of grant, and usually become
exercisable in installments after the grant date. Non-qualified stock
options may be granted for any reasonable term. The 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
or no 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 SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
the Company has elected to account for stock transactions with employees
and directors pursuant to the provisions of APB No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES. Had compensation cost for the Plan been recorded
consistent with SFAS No. 123, the Company's net income and EPS amounts
would have been changed to the following pro forma amounts for the years
ended December 31:
2001 2000 1999
----------- ----------- -----------
Net income:
As reported $19,016,534 $17,745,186 $15,463,900
Pro forma 19,150,571 17,327,911 15,192,844
Earnings per share:
As reported - Diluted EPS $ .54 $ .53 $ .45
Pro forma - Diluted EPS .54 .51 .44
F-18
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 1999; risk free interest rate of 6.87%,
expected life of six years, expected volatility of 48%, expected dividend
rate of zero, and expected forfeitures of 3.75%. The following weighted
average assumptions were used for grants in 2000; risk free interest rate
of 7.25%, expected life of six years, expected volatility of 45%, expected
dividend rate of zero, and expected forfeitures of 3.04%. The following
weighted average assumptions were used for grants in 2001; risk free
interest rate of 5.25%, expected life of six years, expected volatility of
52%, expected dividend rate of zero, and expected forfeitures of 3.83%.
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------- ---------- ------- ---------- -------
Outstanding at beginning of year 1,922,022 $ 6.16 1,822,918 $ 5.72 1,584,337 $ 5.20
Granted 643,573 9.89 495,900 6.42 457,988 7.53
Exercised (421,576) 5.02 (322,553) 3.92 (81,900) 3.93
Forfeited (203,449) 7.25 (74,243) 6.74 (137,507) 6.49
---------- ------- ---------- ------- ---------- -------
Outstanding at end of year 1,940,570 $ 7.52 1,922,022 $ 6.16 1,822,918 $ 5.72
========== ======= ========== ======= ========== =======
Exercisable at end of year 385,704 $ 8.55 591,485 $ 4.69 517,547 3.69
========== ======= ========== ======= ========== =======
Weighted average fair value of
options granted during the period $ 5.49 $ 3.50 $ 4.30
======= ======= =======
Options outstanding at December 31, 2001, have exercise prices between
$3.56 and $14.06. There are 312,553 options outstanding with exercise
prices ranging from $3.56 to $5.98 with weighted average exercise prices of
$4.63 and weighted average remaining contractual lives of 4.3 years. There
are 1,143,818 options outstanding with exercise prices ranging from $6.55
to $7.65 with weighted average exercise prices of $7.08 and weighted
average contractual lives of 7.5 years. There are 484,199 options
outstanding with exercise prices ranging from $8.47 to $14.06 with weighted
average exercise prices of $10.96 and weighted average contractual lives of
9.6 years.
b. 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the Plan) for all employees
who are 19 years of age or older and have completed one year of service
with the Company. The Plan 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 2001, 2000, and 1999, there were no discretionary
contributions. Employees' rights to employer contributions vest after five
years from their date of employment. The Company's matching contribution
was approximately $125,000, $136,000 and $105,000 in 2001, 2000 and 1999,
respectively.
F-19
10. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables set forth certain unaudited information about the Company's
revenue and results of operations on a quarterly basis for 2000 and 2001 (in
thousands, except per share data):
2001
-------------------------------------------------
March 31, June 30, September 30 December 31,
--------- -------- ------------ ------------
Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148
Income from operations 7,808 9,086 10,963 11,694
Net income 4,237 5,060 2,886 6,834
Earnings per common share:
Basic $ 0.12 $ 0.15 $ 0.08 $ 0.19
Diluted 0.12 0.15 0.08 0.19
2000
-------------------------------------------------
March 31, June 30, September 30 December 31,
--------- -------- ------------ ------------
Revenue, before fuel surcharge $43,569 $51,676 $55,770 $56,391
Income from operations 6,874 8,072 8,433 8,644
Net income 3,873 4,596 4,616 4,660
Earnings per common share:
Basic $ 0.12 $ 0.14 $ 0.14 $ 0.14
Diluted 0.12 0.14 0.14 0.14
F-20
SCHEDULE II
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2001, 2000 and 1999
Balance at Balance at
Beginning Expense End
of Period Recorded Other of Period
----------- ----------- ----------- -----------
Allowance for doubtful accounts:
Year ended December 31, 2001 $ 1,121,375 $ 456,000 $ (445,693)(1) $ 1,131,682
Year ended December 31, 2000 688,432 582,409 (149,466)(1) 1,121,375
Year ended December 31, 1999 662,700 219,759 (194,027)(1) 688,432
Allowance for doubtful notes receivable:
Year ended December 31, 2001 80,645 14,007 (28,471)(1) 66,181
Year ended December 31, 2000 101,000 86,000 (106,355)(1) 80,645
Year ended December 31, 1999 -- 101,000 -- 101,000
Claims accrual:
Year ended December 31, 2001 5,554,127 9,838,117 (7,882,847)(2) 7,509,397
Year ended December 31, 2000 4,639,993 4,056,658 (3,142,524)(2) 5,554,127
Year ended December 31, 1999 3,724,385 3,632,994 (2,717,386)(2) 4,639,993
- ----------
(1) Write-off of bad debts
(2) Cash paid for claims and premiums
S-1