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, 2002
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 February 26, 2003, was $461,449,532 (based upon $19.09 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 February
26, 2003 was approximately 37,185,582.
The Proxy Statement for the Annual Meeting of Shareholders to be held on May 21,
2003 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.
OUR HEADQUARTERS ARE LOCATED AT 5601 WEST BUCKEYE ROAD, PHOENIX, ARIZONA
85043 AND OUR WEBSITE ADDRESS IS WWW.KNIGHTTRANS.COM. THIS ANNUAL REPORT ON FORM
10-K, OUR QUARTERLY REPORTS ON FORM 10-Q, OUR CURRENT REPORTS ON FORM 8-K AND
ALL OTHER REPORTS FILED WITH THE SEC PURSUANT TO SECTION 13(A) OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 CAN BE OBTAINED FREE OF CHARGE THROUGH A LINK TO
THE SEC'S WEBSITE BY VISITING OUR WEBSITE.
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 throughout the U.S.
from our facilities located in Phoenix, Arizona; Katy, Texas; Indianapolis,
Indiana; Charlotte, North Carolina; Salt Lake City, Utah; Gulfport, Mississippi;
Kansas City, Kansas; Portland, Oregon; and Memphis, Tennessee.
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 23%, from $125.0 million in 1998 to $279.4 million
in 2002. During the same period, we have increased our net income at a
compounded annual growth rate of approximately 23%, from $13.3 million to $27.9
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 and our geographic coverage. SEE "GROWTH STRATEGY," below.
OPERATIONS
Our operating strategy is to achieve a high level of asset utilization
within a highly disciplined operating system 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
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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 to
accelerate revenue growth and enhance our operating efficiencies. 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 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 nine regional facilities which
are located in Phoenix, Arizona; Katy, Texas; Indianapolis, Indiana; Charlotte,
North Carolina; Gulfport, Mississippi; Salt Lake City, Utah; Kansas City,
Kansas; Portland, Oregon; and Memphis, Tennessee. We concentrate our freight
operations in an approximately 750-mile radius around each of our terminals,
with an average length of haul in 2002 of approximately 540 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
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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 that 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.
GROWTH STRATEGY
We believe that industry trends, our strong operating results and financial
position, and the proven operating model replicated in our regional operations
create significant opportunities for us 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 nine 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 regions that we believe will
permit us to develop transportation lanes that 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 our marketing targets include
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 - (i) Knight Transportation Gulf Coast, Inc., formerly John
Fayard Fast Freight, Inc., now merged with and into Knight Transportation, Inc.,
and (ii) Action Delivery Service, Inc. We believe economic trends will lead to
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, 2002,
our top 25 customers represented 47% of operating revenue; our top 10 customers
represented 28% of operating revenue; and our top 5 customers represented 17% of
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
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obtain a competitive advantage by providing high quality and consistent capacity
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 may 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 employees, and independent contractors.
Each of our nine regional facilities 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") and internet ("E") services to
shippers requiring such service.
DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS
As of December 31, 2002, we employed 2,772 persons. 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
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 are invited to 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. As of
December 31, 2002, a total of 557 of our current employees had participated in
and received option grants under 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, 2002,
we had agreements for 209 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 who desire
such services for a charge. We provide financing at market interest rates to our
independent contractors to assist them in acquiring revenue equipment. Our loans
5
to independent contractors are secured by a lien on the independent contractor's
revenue equipment. As of December 31, 2002, we had outstanding loans of
approximately $2.4 million to independent contractors.
REVENUE EQUIPMENT
As of December 31, 2002, we operated a fleet of 5,441, 53-foot long, high
cube trailers, including 50 refrigerated trailers, with an average age of 3.7
years. As of December 31, 2002, we operated 1,916 Company tractors with an
average age of 2.0 years. As of December 31, 2002, we also had under contract
209 tractors owned and operated by independent contractors.
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 maintain a high
trailer to tractor ratio, targeting a 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 or Volvo 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, which may result in increased
operating expenses. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below.
In 2001, we 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 allows us to improve fleet control and the quality of
customer service.
6
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
acquired a less than four percent interest 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 all of our trailers, we have replaced Terion technology with
Qualcomm's satellite based tracking technology in substantially all of our
tractors. SEE "REVENUE EQUIPMENT," above. During the third quarter of 2001, we
recorded a non-recurring charge of $5.7 million to write-off our entire
investment in Terion. We 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. In 2002, we abandoned our investment in Terion in order
to take advantage of our tax loss and we are continuing to purchase
trailer-tracking technology from Terion. Terion recently reorganized under
Chapter 11 of the Federal Bankruptcy Code. 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 our Vice President of Safety are
responsible for securing appropriate insurance coverages at competitive rates.
The primary claims arising in our business consist of cargo loss and physical
damage and auto liability (personal injury and property damage). During 2002, we
were self-insured for personal injury and property damage liability, cargo
liability, collision and comprehensive up to a maximum limit of $1.75 million
per occurrence. We were self-insured for worker's compensation up to a maximum
limit of $500,000 per occurrence. Subsequent to December 31, 2002, we increased
the self-insurance retention levels for personal injury and property damage
liability, cargo liability, collision, comprehensive and worker's compensation
to $2.0 million per occurrence. Our maximum self-retention for a separate
worker's compensation claim remains $500,000 per occurrence. Also, our insurance
policies now provide for excess personal injury and property damage liability up
to a total of $35.0 million per occurrence, compared to $30.0 million per
occurrence for 2002, and cargo liability, collision, comprehensive and worker's
compensation coverage up to a total of $10.0 million per occurrence. Our
personal injury and property damage primary policies also include coverage for
punitive damages, subject to policy limits. We also maintain excess coverage for
employee medical expenses and hospitalization. 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
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claims, are accrued as liabilities on our balance sheet. We are currently
establishing a captive insurer to assist in the management of insurance costs
and claims.
COMPETITION
The entire trucking industry is highly competitive and fragmented. 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
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 capacity and cost-efficient service to
shippers.
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 equipment dimensions are also
subject to federal and state regulation. The DOT requires 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, Arizona,
Indianapolis, Indiana, and Katy, Texas, 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 materials
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.
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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.
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," below, 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. We own a 17% interest in Concentrek, Inc.,
a logistics business, and a 19% interest in Knight Flight Services, LLC, which
operates and leases a Cessna Citation 560 XL jet aircraft which we use in
connection with our business. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OFF BALANCE SHEET ARRANGEMENTS,"
below, for a discussion of our investments in other businesses.
ITEM 2. PROPERTIES
The following table provides information regarding the Company's facilities
and/or offices:
COMPANY LOCATION OWNED OR LEASED PROPERTIES
- ---------------- --------------------------
Phoenix, Arizona Owned
Indianapolis, Indiana Owned
Katy, Texas Owned
Charlotte, North Carolina Owned
Kansas City, Kansas Owned
Salt Lake City, Utah Leased
Gulf Port, Mississippi Leased
Portland, Oregon Leased
Memphis, Tennessee Leased
Mobile, Alabama Leased
Fontana, California Owned
Oklahoma City, Oklahoma 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 21, 2003, 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 offices for operations and dispatching, 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 facility in Katy, Texas, near
Houston, that was completed in June 2000. This facility includes offices for
operations and dispatching, maintenance services, a bulk fuel storage facility
and fuel island.
We own and operate a 21-acre regional facility in Charlotte, North
Carolina, that serves the East Coast and Southeast regions. This facility was
acquired in February 2000, and includes offices for operations and dispatching
and maintenance services.
We own and operate a 15-acre regional facility in Kansas City, Kansas, that
serves the Midwest region. This facility was acquired in May 2002, and includes
offices for operations and dispatching, and maintenance services.
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 being
developed for a future operations and maintenance facility.
We operate a regional facility in Gulfport, Mississippi, under a long-term
lease agreement. This facility includes offices for operations and dispatching
and maintenance services, and supports our operations in the South and Southeast
regions.
We operate a regional facility in Portland, Oregon, under a long-term lease
agreement. This facility includes offices for operations and dispatching, a bulk
fuel storage facility and fuel island. This facility supports our operations in
the Northwest and West Coast regions.
We operate a regional facility in Memphis, Tennessee, under a short-term
lease agreement. This facility includes offices for operations and dispatching,
and supports our operations in the Midwest 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 secure trailer drop facility to support our
operations in California. The Company also leases 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.
As of December 31, 2002, our aggregate monthly rent for these terminals
and/or offices was approximately $37,000.
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.
10
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.
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 2002.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded under the symbol KNGT on the NASDAQ National
Market tier of The NASDAQ Stock Market. 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
---- ---
2001
----
First Quarter $11.31 $ 8.22
Second Quarter $14.05 $10.40
Third Quarter $16.39 $10.97
Fourth Quarter $20.73 $12.42
2002
----
First Quarter $24.27 $18.00
Second Quarter $23.45 $17.00
Third Quarter $22.82 $15.35
Fourth Quarter $21.53 $14.67
As of February 26, 2003, we had 66 shareholders of record and approximately
3,793 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, tax treatment, and certain corporate
law requirements, as well as other factors deemed relevant by our Board of
Directors.
We incorporate by reference the Equity Compensation Plan Information
contained under the heading "Executive Compensation - Securities Authorized For
Issuance Under Equity Compensation Plans," from our definitive Proxy Statement
to be delivered to our shareholders in connection with the 2003 Annual Meeting
of Shareholders to be held May 21, 2003.
11
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, 2002, are
derived from our Consolidated Financial Statements, (including the notes
thereto) contained elsewhere in this Annual Report. THE INFORMATION SET FORTH
BELOW SHOULD BE READ IN CONJUNCTION WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," BELOW, AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN ITEM 8 OF THIS FORM 10-K.
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."
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
STATEMENTS OF INCOME DATA:
Revenue, before fuel surcharge $ 279,360 $ 241,679 $ 207,406 $ 151,490 $ 125,030
Operating expenses 238,296 211,266 184,836 125,580 102,049
Income from operations 47,494 39,552 32,023 25,910 22,981
Net interest expense and other (149) (7,485) (3,418) (296) (259)
Income before income taxes 47,345 32,067 28,605 25,614 22,722
Net income 27,935 19,017 17,745 15,464 13,346
Diluted earnings per share(1) .73 .54 .53 .45 .39
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 64,255 $ 50,505 $ 27,513 $ 15,887 $ 6,995
Total assets 283,840 239,890 206,984 164,545 116,958
Long-term obligations, net of current
portion -0- 2,715 14,885 11,736 7,920
Shareholders' equity 199,657 167,696 105,121 82,814 70,899
OPERATING DATA (UNAUDITED):
Operating ratio(2) 83.0% 83.6% 84.6% 82.9% 81.6%
Average revenue per mile(3) $ 1.24 $ 1.23 $ 1.23 $ 1.23 $ 1.24
Average length of haul (miles) 543 527 530 491 489
Empty mile factor 10.7% 10.9% 10.5% 10.5% 10.0%
Tractors operated at end of period(4) 2,125 1,897 1,694 1,212 933
Trailers operated at end of period 5,441 4,898 4,627 3,350 2,809
PRO FORMA DATA (UNAUDITED):
Income from operations $ 47,494 $ 39,552 $ 32,023 $ 25,910 $ 22,981
Net interest expense and other(5) (149) (1,806) (3,418) (296) (259)
Income before income taxes(5) 47,345 37,745 28,605 25,614 22,722
Net income(5) 27,935 22,400 17,745 15,464 13,346
Diluted earnings per share(1)(5) .73 .64 .53 .45 .39
- ----------
(1) Diluted earnings per share for 2001, 2000, 1999 and 1998 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, exclusive
of fuel surcharge.
12
(4) Includes 209 independent contract operated vehicles at December 31, 2002;
includes 200 independent contract 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.
(5) Excluding a pre-tax write-off of $5.7 million ($3.4 million net of income
taxes) in 2001 relating to an investment in Terion, Inc.
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, 2002, should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
contained elsewhere in this Annual Report. Our fiscal year end is December 31.
Unless otherwise stated, all years and dates refer to our fiscal year.
We were incorporated in 1989 and commenced operations in July 1990. For the
five-year period ended December 31, 2002, our operating revenue, before fuel
surcharge, grew at a 23% compounded annual rate, while net income increased at a
23% compounded annual rate.
We generate revenue by providing transportation services to customers in
the short-to-medium haul dry-van market. Approximately 80% of all truckload
freight moves in the short-to-medium haul market. We seek to operate primarily
in high-density, predictable traffic lanes in select geographic regions. This
strategy allows us to achieve a high level of equipment utilization, while
maintaining strict cost controls and obtaining operating efficiencies.
We offer our customers a range of services, including multiple pick ups and
deliveries, dedicated fleet and personnel, specialized driver training, and
other services. We seek to obtain freight rates commensurate with the services
we offer. We have also enhanced revenue by charging for tractor and trailer
detention, loading and unloading, and providing other services. By focusing our
services in high density traffic lanes, we are able to minimize empty miles,
increase equipment utilization, and offer customers a high level of service and
consistent capacity.
13
An important element of our profit strategy is to increase equipment
utilization, improve rates and reduce our empty miles. We work continuously to
improve our operations in these areas. Historically, the excess capacity in the
transportation industry has limited our ability to improve rates. Over the past
two years, the transportation industry has seen some reduction in capacity. We
hope that in 2003, this change in capacity will provide us with better pricing
power. Nevertheless, our ability to obtain higher rates may be restricted by the
national level of economic activity, which has been somewhat sluggish and which
could limit our ability to obtain better rates.
An important source of our revenue growth has been our ability to open new
regional facilities in certain geographic areas and operate these facilities at
a profit. As part of our growth strategy, we also periodically evaluate
acquisition opportunities and we will continue to consider acquisitions that
meet our financial and operating criteria.
As the discussion below indicates, controlling our expenses is also an
important element of assuring profitability. We view any operating ratio,
whether for the Company or any division, in excess of 85% as unacceptable
performance. In 2003, we will begin to operate more tractors with engines that
meet the October 2002 EPA emission guidelines. These tractors may result in
slightly higher expenses due to engine design differences, but we believe that
by continuing to focus on achieving and maintaining operating efficiencies, we
should be able to manage these expenses. Fuel is also a significant element of
our operating expense, and we continue to seek to obtain fuel surcharges, as
fuel prices remain volatile. The ability to obtain fuel surcharges will become
increasingly important if unrest continues in Venezuela or war breaks out in the
Middle East. We have also experienced increases in the cost of insurance since
2000. We actively manage our safety and liability risk as a cost control
measure. To manage the increases we have experienced in property and casualty
insurance premiums we have increased self-retention risk and our emphasis on
safety to help us manage that risk. SEE "BUSINESS - SAFETY AND RISK MANAGEMENT,"
above.
The sales of our transportation services are dependent, to a large degree,
on customers whose industries are subject to cyclical trends in the demand for
their products. Shifts in the consumer products market and overall economy may
have a significant impact on our business.
We operate in an economic and legal environment that involves many
different risks. These risks range from such unpredictable matters as the
continued unrest and potential war with Iraq to general economic conditions and
to the pace of overall economic growth. We have described below, a number of
these risks. We expect that we will continue to be subject to these risks and to
other risks that we have not anticipated. We will continue to rely upon our
employees and upon our operating strategy to address these risks as best we can
and we will continue to work towards delivering value to our shareholders. SEE
"FACTORS THAT MAY AFFECT FUTURE RESULTS," below.
A discussion of the results of our operations for the periods 2002 to 2001
and 2001 to 2000 is set forth below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. requires that management make a number
of assumptions and estimates that affect the reported amounts of assets,
liabilities, revenue and expenses in our consolidated financial statements and
accompanying notes. Management bases its estimates on historical experience and
various other assumptions believed to be reasonable. Although these estimates
are based on management's best knowledge of current events and actions that may
impact the Company in the future, actual results may differ from these estimates
and assumptions.
14
Our critical accounting policies are those that affect our financial
statements materially and involve a significant level of judgment by management.
These policies are described in the notes to our Consolidated Financial
Statements contained elsewhere in this Report, and include revenue recognition,
depreciation and amortization, reserves and estimates for claims, valuation of
long-lived assets and accounting for income taxes.
We recognize revenue when persuasive evidence and arrangement exists,
delivery has occurred, the fee is fixed or determined and collectibility is
probable. These conditions are met upon delivery.
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated by the straight-line method over five to ten years with
salvage values ranging from 15% to 40%. We periodically evaluate the carrying
value of long-lived assets held for use for possible impairment losses by
analyzing the operating performance and future cash flows for those assets. If
necessary, we would adjust the carrying value of the underlying assets if the
sum of the undiscounted cash flows were less than the carrying value. Impairment
could be impacted by our projection of future cash flows, the level of cash
flows and salvage values or the methods of estimation used for determining fair
values.
We have assessed reporting unit goodwill for impairment by comparing the
implied fair value of the goodwill with the carrying value. The implied fair
value of goodwill was determined by allocating the fair value of the reporting
unit to all of the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with the guidance in SFAS No. 141, "Business Combinations." The residual fair
value after this allocation was the implied fair value of the reporting unit
goodwill. The implied fair value of the reporting unit has exceeded its carrying
amount and we have not been required to recognize an impairment loss.
Reserves and estimates for claims is another of our critical accounting
policies. The primary claims arising for us consist of cargo liability, personal
injury, property damage, collision and comprehensive, worker's compensation, and
employee medical expenses. We maintain self-insurance levels for these various
areas of risk and have established reserves to cover these self-insured
liabilities. We also maintain insurance to cover liabilities in excess of the
self-insurance amounts. The claims reserves represent accruals for the estimated
uninsured portion of pending claims including adverse development of known
claims as well as 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.
Accounting for long-lived assets involves the leasing of certain revenue
equipment. We have obligations outstanding related to equipment and debt. As of
December 31, 2002, we leased 494 tractors under noncancelable operating leases.
In accordance with SFAS No. 13, "Accounting for Leases," the rental expense for
these leases is recorded as "lease expense - revenue equipment." These operating
leases are carried off balance sheet in accordance with SFAS No. 13. The total
obligation outstanding under these agreements as of December 31, 2002, was $14.6
million, with $6.7 million due in the next 12 months. Long-term debt and the
outstanding balance on our revolving line of credit are recorded at the carrying
amount which represents the amount due at maturity.
Significant management judgment is required in determining our provision
for income taxes and in determining whether deferred tax assets will be realized
in full or in part. 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 as expected to be recovered or settled. When it is
more likely than not that all or some portion of specific deferred tax assets
such as certain tax credit carryovers will not be realized, a valuation
allowance must be established for the amount of the deferred tax assets that are
determined not to be realizable. A valuation allowance for deferred tax assets
15
has not been deemed necessary. Accordingly, if the facts or financial results
were to change, thereby impacting the likelihood of realizing the deferred tax
assets, judgment would have to be applied to determine the amount of valuation
allowance required in any given period. We continually evaluate strategies that
would allow for the future utilization of our deferred tax assets and currently
believe we have the ability to enact strategies to fully realize our deferred
tax assets should our earnings in future periods not support the full
realization of the deferred tax assets.
Estimates are involved in other aspects of our business. For example, in
establishing reserves and estimates for claims, we rely upon our own claims
experience and the experience of our third party administrator in assessing the
amounts to be accrued as claims are incurred and the reserves to be established
for those claims. We make similar types of estimates concerning the
collectibility of our accounts receivable and the concentration of our credit
exposure.
We account for stock-based compensation, which is almost exclusively stock
options, under Accounting Principles Board Opinion No. 25 ("APB No. 25"). In
addition, as required by SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure, an Amendment of SFAS Statement No. 123,"
we disclosed in the footnotes to our financial statements the pro forma effects
on our earnings and earnings per share of the issuance of our stock options. We
have historically spread our stock options widely over our employee group in
order to align the interest of employees with those of the shareholders of the
Company and to reward employees as the Company grows. As of December 31, 2002,
shares of our common stock subject to options granted to our employees was
approximately 4.8% of total issued and outstanding shares as of the same date.
We believe that our method of using stock options has not been abusive or unduly
expensive or dilutive to shareholders. For additional information concerning our
Stock Option Plan, see our Proxy Statement issued in connection with the May 21,
2003, Annual Meeting of Shareholders.
16
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:
2002 2001 2000
------ ------ ------
REVENUE, BEFORE FUEL SURCHARGE 100% 100% 100.0%
- ------------------------------ ------ ------ ------
Operating expenses:
Salaries, wages and benefits 33.5 33.8 33.4
Fuel (1) 13.6 12.3 12.9
Operations and maintenance 6.1 5.7 5.4
Insurance and claims 4.4 4.2 2.3
Operating taxes and licenses 2.6 2.9 3.6
Communications 0.9 1.0 0.8
Depreciation and amortization 8.2 7.6 9.2
Lease expense - revenue equipment 3.4 3.5 1.8
Purchased transportation 7.8 9.7 12.5
Miscellaneous operating expenses 2.5 2.9 2.7
------ ------ ------
Total operating expenses 83.0 83.6 84.6
------ ------ ------
Income from operations 17.0 16.4 15.4
Net interest and other expense 0.1 3.1 1.6
------ ------ ------
Income before income taxes 16.9 13.3 13.8
Income taxes 6.9 5.4 5.2
------ ------ ------
Net income 10.0% 7.9% 8.6%
====== ====== ======
PRO FORMA DATA (UNAUDITED):
- ---------------------------
Income from operations 17.0% 16.4% 15.4%
Net interest and other expense (2) 0.1 0.7 1.6
------ ------ ------
Income before income taxes (2) 16.9 15.7 13.8
Income taxes (2) 6.9 6.3 5.2
------ ------ ------
Net income (2) 10.0% 9.4% 8.6%
====== ====== ======
(1) Net of fuel surcharge.
(2) Excluding a pre-tax write-off of $5.7 million ($3.4 million net of income
taxes) in 2001 relating to an investment in Terion, Inc.
FISCAL 2002 COMPARED TO FISCAL 2001
Revenue, before fuel surcharge, increased by 15.6% to $279.4 million in
2002 from $241.7 million in 2001. This increase resulted from the expansion of
our customer base and increased volume from existing customers, that was
facilitated by a continued growth of our tractor and trailer fleet, which
increased by 12.0% to 2,125 tractors (including 209 owned by independent
contractors) as of December 31, 2002, from 1,897 tractors (including 200 owned
by independent contractors) as of December 31, 2001. Average revenue per mile
(exclusive of fuel surcharge) increased to $1.239 per mile for 2002, from $1.227
per mile in 2001.
Salaries, wages and benefits expense decreased as a percentage of revenue,
before fuel surcharge, to 33.5% in 2002 from 33.8% in 2001, primarily due to the
improved efficiencies in the Company's personnel operations, improved
utilization of revenue equipment, and improved revenue per mile. As of December
31, 2002, 90.2% of our fleet was operated by Company drivers, compared to 89.5%
as of December 31, 2001. For our drivers, we record accruals for worker's
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.
17
Fuel expense, net of fuel surcharge, increased, as a percentage of revenue
before fuel surcharge, to 13.6% for 2002 from 12.3% in 2001, due mainly to
higher average fuel prices during 2002 compared to 2001, along with the increase
in the ratio of Company vehicles to independent contractors, from 89.5% in 2001
to 90.2% in 2002. We believe that higher fuel prices may continue to adversely
affect operating expenses throughout 2003. Continued unrest or war in the Middle
East could have a significantly material adverse effect on fuel prices. SEE
"FACTORS THAT MAY AFFECT FUTURE RESULTS," below. We have entered into fuel
hedging agreements as a means of managing the cost of our fuel. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OFF BALANCE SHEET ARRANGEMENTS," and Item 7A "QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK - COMMODITY PRICE RISK," below.
The Company maintains a fuel surcharge program to assist us in recovering a
portion of increased fuel costs. For the year ended December 31, 2002, fuel
surcharge was $6.4 million, compared to $9.1 million for the same period in
2001. This decrease was primarily the result of overall lower average fuel
prices in 2002 compared to 2001.
Operations and maintenance expense increased, as a percentage of revenue
before fuel surcharge, to 6.1% for 2002 from 5.7% in 2001. This increase was
primarily due to a slight aging of the Company's fleet, along with 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 4.4% for 2002, compared to 4.2% for 2001, primarily as a
result of the increase in insurance premiums and an increase in the frequency of
claims by the Company. We anticipate that casualty insurance rates will continue
to increase in the future and for 2003 we have retained a larger portion of our
claims risks, in order to manage our insurance expense. SEE "BUSINESS-SAFETY
RISK MANAGEMENT," above.
Operating taxes and license expense, as a percentage of revenue before fuel
surcharge, decreased to 2.6% for 2002 from 2.9% for 2001. The decrease resulted
primarily from a relative increase in miles run in lower tax rate states, an
increase in equipment utilization for 2002 and increased revenue per mile.
Communications expenses, as a percentage of revenue before fuel surcharge,
decreased to 0.9% for 2002 from 1.0% for 2001. This decrease was primarily due
to increased utilization of the Company's revenue equipment along with increased
revenue per mile.
Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 8.2% for 2002 from 7.6% in 2001. This increase was
primarily related to the adoption in 2000 of lower salvage values due to changes
in the used tractor market and the increase in the relative percentage of
Company owned vehicles to independent contractor owned vehicles from 89.5% in
2001 to 90.2% in 2002. Lease expense, which is the expense for leased revenue
equipment as a percentage of revenue, before fuel surcharge, was 3.4% for 2002,
compared to 3.5% for 2001. Several lease agreements have variable payment terms
that are amortized on a straight-line basis.
Purchased transportation expense, as a percentage of revenue before fuel
surcharge, decreased to 7.8% in 2002 from 9.7% in 2001, primarily as a result of
a decrease in the ratio of independent contractors to Company drivers. As of
December 31, 2002, 9.8% of our fleet was operated by independent contractors,
compared to 10.5% at December 31, 2001. We have utilized independent contractors
as part of our fleet expansion because independent contractors provide their own
tractors. As of December 31, 2002, the Company had 209 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
18
revenue equipment. As of December 31, 2002, we had $2.4 million in loans
outstanding to independent contractors to purchase revenue equipment. These
loans are secured by liens on the revenue equipment we finance.
Miscellaneous operating expenses, as a percentage of revenue before fuel
surcharge, decreased to 2.5% for 2002 from 2.9% in 2001, primarily due to
decreased travel expenses, increases in equipment utilization and increased
revenue per mile.
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 83.0% for 2002, compared to 83.6% for 2001.
Net interest and other expense, as a percentage of revenue before fuel
surcharge, decreased to 0.1% for 2002 from 0.7% for 2001, excluding the
write-off of our $5.7 million investment in Terion, Inc. This decrease was
primarily the result of the Company's ability to reduce its outstanding debt to
approximately $14.9 million at December 31, 2002, compared to $18.1 million at
December 31, 2001. Debt reduction was facilitated, in part, by proceeds obtained
from the offering of our Common Stock that closed November 7, 2001. Also, our
interest income was higher in 2002 compared to 2001 due to a higher average cash
balance in 2002.
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 6.9% for 2002, from 5.4% for 2001, primarily due to the recording
of the non-recurring charge of our investment in Terion in 2001, as discussed
above, along with 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 10.0% for 2002, compared to 7.9% in 2001.
This percentage was 9.4% for 2001, excluding the write-off of our investment in
Terion, as discussed below.
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 a continued growth of 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., and now
merged with and into Knight Transportation, 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 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
worker's 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.
19
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.
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
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 2000
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.
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.
20
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 and other expense, as a percentage of revenue before fuel
surcharge, decreased to 0.7% for 2001, excluding the write-off of $5.7 million
of our investment in Terion, Inc., from 1.6% for 2000. This decrease was
primarily the result of the Company's ability to reduce its 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 pre-tax 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 for
financial accounting purposes after Terion announced that it would cease
operating its on-cab communications system. In January, 2002, Terion filed for
protection under Chapter 11 of the federal bankruptcy laws. 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.
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 2001, from 5.2% for 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.
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 line of credit with our primary lenders. 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 secondary public offering,
that 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 $55.5 million,
$46.2 million, and $34.6 million for 2002, 2001 and 2000, respectively.
Capital expenditures for the purchase of revenue equipment, net of
trade-ins, office equipment, land and leasehold improvements, totaled $41.8
million, $30.4 million and $34.0 million for the years ended December 31, 2002,
21
2001 and 2000, respectively. We expect capital expenditures, net of trade-ins,
of approximately $55 million for 2003, that will be applied primarily to acquire
new revenue equipment.
Net cash used for financing activities was approximately $1.1 million for
2002. Net cash provided by financing activities was approximately $5.9 million
and $3.2 million for the years ended December 31, 2001 and 2000, respectively.
The change for the periods presented was the result of the proceeds from the
sale of common stock discussed previously, which were used primarily to reduce
outstanding debt.
We maintain a line of credit totaling $50.0 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 varies 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, 2002, and February 27,
2003, we had $12.2 million in borrowings under our revolving line of credit. The
line of credit expires in June 2004.
In October 1998, we entered into a $10 million term loan with our primary
lender that matures in September 2003. The interest rate is fixed at 5.75%. The
note is unsecured and had an outstanding balance of $2.7 million as of December
31, 2002, all of which is due in 2003.
Through our subsidiaries, we entered into operating lease agreements under
which we lease revenue equipment. The total remaining amount due under these
agreements as of December 31, 2002, was $14.6 million with effective annual
interest rates from 5.2% to 6.6%, with $6.7 million due in the next 12 months.
As of December 31, 2002, we held $36.2 million in cash and cash
equivalents. 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.
OFF BALANCE SHEET ARRANGEMENTS
Our liquidity has not depended on off balance sheet transactions. Our
off-balance sheet investments relate either to the truckload carrier business or
provide us access to an asset (an aircraft) we use in our business.
In April 1999, we acquired a 17% interest in Concentrek, Inc.
("Concentrek"), with the intent of acquiring an interest in a logistics
business. We have loaned $3.4 million to Concentrek to fund start-up costs.
Through a limited liability company, we have loaned $824,500 evidenced by a
promissory note that is convertible into Concentrek's Class A Preferred Stock.
The additional $2.6 million is evidenced by a promissory note, and Kevin Knight,
Gary Knight, Keith Knight and Randy Knight, who collectively own 34% of our
issued and outstanding stock, and who are also investors in Concentrek, along
with other unrelated Concentrek shareholders, have personally guaranteed
repayment of this note. Both loans are secured by a lien on Concentrek's assets.
These loans are on parity with respect to their security.
During 2000, Concentrek filed suit against the Descartes Systems Group,
Inc., a Canadian corporation ("Descartes"), seeking damages for breach of
contract, in connection with an agreement to provide Concentrek with certain
logistics software. On August 1, 2002, an arbitrator awarded Concentrek $1.1
million on its breach of contract claim against Descartes. By an award entered
October 29, 2002, Concentrek was awarded interest at the rate of 7% per annum
22
from November 22, 2000, through June 26, 2002. The arbitrator has since awarded
Concentrek $300,000 for attorney's fees and expenses. Concentrek has applied to
the United States District Court for the Eastern District of Michigan to reduce
the award to a judgment. SEE our Proxy Statement "Other Investments and
Transactions with Affiliates," to be delivered to our shareholders in connection
with the 2003 Annual Meeting of Shareholders to be held May 21, 2003, for more
information on Concentrek.
In November 2000, we acquired a 19% interest in Knight Flight Services, LLC
("Knight Flight") which purchased and operates a Cessna Citation 560 XL jet
aircraft. The aircraft is leased to Pinnacle Air Charter, L.L.C., an
unaffiliated entity, which leases the aircraft on behalf of Knight Flight. The
cost of the aircraft to Knight Flight was $8.9 million. We invested $1.7 million
in Knight Flight in order to assure access to charter air travel for the
Company's employees. We have no further financial commitments to Knight Flight.
The remaining 81% interest in Knight Flight is owned by Randy, Kevin, Gary and
Keith Knight. We have a priority use right for the aircraft. We believe that our
interest in Knight Flight allows us to obtain any access to needed charter air
services for Company business at prices equal to or less than is available from
unrelated charter companies. Knight Flight also makes the aircraft available for
charter to third parties through a licensed aircraft charter company. SEE our
Proxy Statement "Other Investments and Transactions with Affiliates," to be
delivered to our shareholders in connection with the 2003 Annual Meeting of
Shareholders to be held May 21, 2003, for more information on Knight Flight.
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 were 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. SEE "QUALITATIVE AND
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK - COMMODITY PRICE RISK," below.
We lease 494 tractors under non-cancelable operating leases with varying
termination dates ranging from 2005 to 2006. Rent expense related to these
leases was $8.4 million for 2002, compared to $8.5 million for 2001.
The following table sets forth our contractual obligations and payments due
by corresponding period for our short and long term operating expenses,
including operating leases and other commitments.
23
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN MORE THAN 5
(IN THOUSANDS) TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
-------------- ----- ------ --------- --------- -----
Long-Term Debt Obligations(1) 14,915 2,715 12,200
Operating Lease Obligations(2) 14,596 6,658 7,938
Purchase Obligations (Revenue Equipment, net)(3) 27,000 27,000
Total 56,511 36,373 20,138
(1) Long-Term Debt Obligations consists of a $50.0 million line of credit with
principal due at maturity, June 2004, and interest payable monthly, a note
payable to a financial institution with monthly principal and interest
payments due through October 2003, and notes payable to third party due in
2003.
(2) Operating Lease Obligations consists of amounts due under non-cancelable
operating leases for the leasing of certain revenue equipment.
(3) Purchase Obligations for Revenue Equipment includes purchase commitments
for additional tractors and trailers with an estimated purchase price, net
of estimated trade-in values, of approximately $27.0 million for delivery
throughout 2003.
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 have significant operations 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 if these shortages
continue or increase. This risk may also exist in other regions in which we
operate, depending upon availability of energy.
SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited information about our
revenue and results of operations on a quarterly basis for 2002 and 2001 (in
thousands, except per share data):
24
2002
----------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
------- ------- ------- -------
Revenue, before fuel surcharge $61,890 $68,307 $72,777 $76,386
Income from operations 9,410 11,315 12,498 14,271
Net income 5,553 6,704 7,437 8,241
Earnings per common share:
Basic $ 0.15 $ 0.18 $ 0.20 $ 0.22
------- ------- ------- -------
Diluted $ 0.15 $ 0.18 $ 0.20 $ 0.22
------- ------- ------- -------
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(1) $ 0.19
------- ------- ------- -------
Diluted $ 0.12 $ 0.15 $ 0.08(1) $ 0.19
------- ------- ------- -------
(1) Includes a pre-tax write-off of $5.7 million ($3.4 million net of income
taxes) relating to an investment in Terion, Inc.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires us to record the
fair value of an asset retirement obligation as a liability in the period in
which we incur a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets and to record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. We were required to adopt SFAS No. 143 on
January 1, 2003. SFAS No. 143 is not expected to have a material impact on our
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS No. 146 also addresses recognition of
certain costs related to terminating a contract that is not a capital lease,
costs to consolidate facilities or relocate employees and termination of
benefits provided to employees that are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred compensation contract. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. SFAS No. 146
is not expected to have a material impact on our results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
25
issued. This interpretation also clarifies that a guarantor is required to
recognize at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
this interpretation are applicable to guarantees issued or modified alter
December 31, 2002, and are not expected to have a material effect on our
consolidated financial statements. The disclosure requirement, are effective for
financial statements of interim and annual periods ending after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, ("SFAS No. 148"). SFAS No. 148 amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair market value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002, and are included in
the notes to the consolidated financial statements contained elsewhere in this
report.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in this interpretation. This interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February l, 2003, this
interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
application of this interpretation is not expected to have a material effect on
our consolidated financial statements. This interpretation requires certain
disclosures in financial statements issued after January 31, 2003, if it is
reasonably possible that we will consolidate or disclose information about
variable interest entities when this interpretation becomes effective.
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
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 effects
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
26
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. During 2002, we were self-insured for personal
injury and property damage liability, cargo liability, collision and
comprehensive up to a maximum limit of $1.75 million per occurrence. We were
self-insured for worker's compensation up to a maximum limit of $500,000 per
occurrence. Subsequent to December 31, 2002, we increased the self-insurance
retention levels for personal injury and property damage liability, cargo
liability, collision, comprehensive and worker's compensation to $2.0 million
per occurrence. Our maximum self-retention for a separate worker's compensation
claim remains $500,000 per occurrence. Also, our insurance policies now provide
for excess personal injury and property damage liability up to a total of $35.0
million per occurrence, compared to $30.0 million per occurrence for 2002, and
cargo liability, collision, comprehensive and worker's compensation coverage up
to a total of $10.0 million per occurrence. Our personal injury and property
damage policies also include coverage for punitive damages. If the number of
claims for which we are self-insured increases, our operating results could be
adversely affected. After several years of aggressive pricing, insurance
carriers have raised premiums which have increased our insurance and claims
expense. The terrorist attacks of September 11, 2001, in the United States, and
conditions in the insurance market have resulted in additional increases in our
insurance expenses. If these expenses continue to increase, or if the severity
or number of claims increase or exceed our self-retention limits, and if 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, including 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. Some tractor
manufacturers have significantly increased new equipment prices, in part to meet
new engine design requirements imposed, effective October 1, 2002, by the EPA
and eliminate or sharply reduce the price of repurchase commitments.
Our business plan and current contract take into account new equipment
price increases due to new engine design requirements imposed effective October
1, 2002, by the EPA. The cost of operating new engines is expected to be
somewhat higher than the cost of operating older engines. If new equipment
prices were to increase, or the price of repurchase commitments were to decrease
or fail to be honored by the manufacturer, 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 obtain commensurate rate increases or cost savings.
27
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. The political events in the
Middle East, Venezuela and elsewhere may also cause the price of fuel to
increase. 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. If we do not continue to be successful in deriving a more
significant portion of our revenues from markets in the Midwest, South Central,
Southeastern and Southern regions, and on the East Coast, our growth and
profitability could be materially adversely affected by general economic
declines or natural disasters in those markets.
In addition to the regional facility in Phoenix, Arizona, we have
established regional operations in: Katy, Texas; Indianapolis, Indiana;
Charlotte, North Carolina; Gulfport, Mississippi; Salt Lake City, Utah; Kansas
City, Kansas; Portland, Oregon; and Memphis, Tennessee, in order to serve
markets in these regions. 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, can be
duplicated successfully in throughout 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.
Although our independent contractors are responsible for paying for their
own equipment, fuel, and other operating costs, significant increases in these
costs could cause them to seek higher compensation from us or seek other
contractual opportunities. Difficulty in attracting or retaining qualified
drivers, including independent contractors, or a downturn in customer business
cycles or shipping demands, could also have a materially 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. We have experienced the effects of fuel and driver wage
increases and are seeking to recover such charges through rate increases and a
fuel surcharge. By increasing rates and imposing a fuel surcharge, we could lose
customers who are unwilling to pay these increases.
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, 2002, our top 25 customers, based on
revenue, accounted for approximately 47% of our revenue; our top 10 customers,
approximately 28% of our revenue; and our top 5 customers, approximately 17% of
our revenue. Generally, we do not have long term contractual relationships with
28
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 emerged from a Chapter 11 bankruptcy
and a plan of reorganization has been approved by the Bankruptcy Court. If
Terion ceases operations or abandons that trailer-tracking technology, we would
be required to incur the cost of replacing that technology or could be forced to
operate without this 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 also invested and/or loaned a total of approximately $3.6 million
to Concentrek, Inc., ("Concentrek") a transportation logistics company 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - OFF BALANCE SHEET ARRANGEMENTS," above.
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 you from being able to sell your shares at or above the price you paid
for your shares.
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 our
incurring 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; the 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 you that we will be able to successfully integrate the acquired
companies or assets into our business.
29
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 environmental "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 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 the Company borrows
against its line of credit or incurs debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. We have entered into an interest rate swap agreement with our
primary lender to protect us against interest rate risk. In the opinion of
management, an increase in short-term interest rates could have a materially
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.
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
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
30
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,
2002, fuel expense, net of fuel surcharge, represented 16.4% of our total
operating expenses, net of fuel surcharge, compared to 14.7% for the same period
ending in 2001.
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 were 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 our 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, 2002, financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of Knight Transportation, Inc. and
Subsidiaries, as of December 31, 2002 and 2001, and the related Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 2002, together with the related notes and
report of KPMG LLP, independent public accountants for the year ended December
31, 2002, and related notes and report of Arthur Andersen LLP, independent
public accountants for the years ended December 31, 2001 and 2000, respectively,
are set forth at pages F-1 through F-21, below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in our Report on Form 8-K filed on May 3, 2002, with
the Securities and Exchange Commission, on April 29, 2002, we elected to replace
our independent auditor, Arthur Andersen LLP ("Arthur Andersen") with KPMG LLP
("KPMG") as our new independent auditor, effective immediately. These actions
were approved by our Board of Directors upon the recommendation of our Audit
Committee. KPMG audited the consolidated financial statements of the Company for
the year ending December 31, 2002.
The reports issued by Arthur Andersen in connection with our financial
statements for the fiscal years ended December 31, 2001, and December 31, 2000,
respectively, did not contain an adverse opinion or disclaimer of opinion, nor
were these reports qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the two fiscal years ended December 31, 2001, and December 31, 2000,
and the subsequent interim periods through the date of Arthur Andersen's
dismissal, there was no disagreement between us and Arthur Andersen, as defined
31
in Item 304 of Regulation S-K, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen, would
have caused Arthur Andersen to make reference to the subject matter of the
disagreements in connection with its reports, and there occurred no "reportable
events" as defined in Item 304(a)(1)(v) of Regulation S-K.
During our two most recent fiscal years ended December 31, 2001 and 2000,
through the date of Arthur Andersen's dismissal, neither us nor anyone on our
behalf consulted with KPMG regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
We have provided Arthur Andersen with a copy of the foregoing statements.
Attached to this Form 10-K as Exhibit 16 is a copy of Arthur Andersen's letter
to the Securities and Exchange Commission dated May 3, 2002, stating its
agreement with the foregoing statements.
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 2003 Annual Meeting of Shareholders to be held May
21, 2003.
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 2003 Annual Meeting of Shareholders to
be held May 21, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the headings
"Security Ownership of Certain Beneficial Owners and Management" and "Executive
Compensation - Securities Authorized For Issuance Under Equity Compensation
Plans" from our definitive Proxy Statement to be delivered to our shareholders
in connection with the 2003 Annual Meeting of Shareholders to be held May 21,
2003.
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 2003 Annual
Meeting of Shareholders to be held May 21, 2003.
ITEM 14. CONTROLS AND PROCEDURES
As required by Rule 13a-14 under the Exchange Act, within 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our controls and
procedures are effective. There have been no significant changes in the
32
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out this
evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
The Company has confidence in its internal controls and procedures and has
expanded its efforts to develop and improve its controls. Nevertheless, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure procedures and controls, or our
internal controls, will necessarily prevent all error or intentional fraud. An
internal control system, no matter how well-conceived and operated, can provide
only reasonable, but not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that we are subject to resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all internal control systems, no evaluation of controls
can provide absolute assurance that all internal control issues or instances of
fraud, if any, within the Company be detected.
PART IV
ITEM 15. 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-21, below.
1. Consolidated Financial Statements:
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Report of KPMG LLP, Independent Public Accountants
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
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 for the years ended
December 31, 2002, 2001 and 2000
33
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 34.
(b) Reports on Form 8-K:
1. Form 8-K filed November 14, 2002, announcing filing of certifications
required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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).
3.1.3* Third Amendment to Restated Articles of Incorporation of the
Company.
3.2 Restated Bylaws of the Company. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-3
No. 333-72130).
3.2.1* First Amendment to Restated Bylaws of the Company.
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.)
34
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.)
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).
35
10.6.1 Indemnification Agreement between the Company and Matt Salmon,
dated as of 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.)
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.)
10.14 Credit Agreement by and among Knight Transportation, Inc., Wells
Fargo Bank and Northern Trust Bank, dated April 6, 2001.
(Incorporated by reference to Exhibit 10(a) to the Company's
report on Form 10-Q for the period ending June 30, 2001.)
10.14.1* Modification Agreement to Credit Agreement by and among Knight
Transportation, Inc. and Wells Fargo Bank, dated February 13,
2003.
16 Letter of Arthur Andersen LLP to the Securities and Exchange
Commission dated May 3, 2002. (Incorporated by reference to
Exhibit 16 to the Company's current report on Form 8-K filed with
the Securities and Exchange Commission on May 3, 2002.)
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG LLP
23.2* Notice Regarding Consent of Arthur Andersen LLP
- ----------
* Filed herewith.
36
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: February 27, 2003 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 February 27, 2003
- --------------------------------------------
Kevin P. Knight, Chairman of the Board,
Chief Executive Officer, Director
/s/ Gary J. Knight February 27, 2003
- --------------------------------------------
Gary J. Knight, President, Director
/s/ Keith T. Knight February 27, 2003
- --------------------------------------------
Keith T. Knight,
Executive Vice President, Director
/s/ Timothy M. Kohl February 27, 2003
- --------------------------------------------
Timothy M. Kohl,
Chief Financial Officer, Secretary, Director
/s/ Randy Knight February 27, 2003
- --------------------------------------------
Randy Knight, Director
/s/ Mark Scudder February 27, 2003
- --------------------------------------------
Mark Scudder, Director
/s/ Donald A. Bliss February 27, 2003
- --------------------------------------------
Donald A. Bliss, Director
/s/ G.D. Madden February 27, 2003
- --------------------------------------------
G.D. Madden, Director
/s/ Matt Salmon February 27, 2003
- --------------------------------------------
Matt Salmon, Director
CERTIFICATION
I, Kevin P. Knight, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Knight
Transportation, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
February 27, 2003 /s/ Kevin P. Knight
----------------------------------------
Kevin P. Knight
Chief Executive Officer
CERTIFICATION
I, Timothy M. Kohl, Chief Financial Officer, certify that:
1) I have reviewed this annual report on Form 10-K of Knight
Transportation, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
February 27, 2003 /s/ Timothy M. Kohl
----------------------------------------
Timothy M. Kohl
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Knight Transportation, Inc.:
We have audited the accompanying consolidated balance sheet of Knight
Transportation, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows for the year then ended. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
Schedule II for the year ended December 31, 2002. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit. The consolidated financial statements and financial statement schedule of
Knight Transportation, Inc. and subsidiaries as of December 31, 2001 and 2000,
and for each of the years in the two-year period then ended were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements and financial
statement schedule in their report dated January 16, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Knight
Transportation, Inc. and subsidiaries as of December 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement Schedule II for the year
ended December 31, 2002, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed above, the consolidated financial statements of Knight
Transportation, Inc. and subsidiaries as of December 31, 2001 and for each of
the years in the two-year period then ended were audited by other auditors who
have ceased operations. As described in Note 1, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which was adopted by the Company as of January 1, 2002. In
our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of Knight Transportation, Inc.
and subsidiaries other than with respect to such disclosures and, accordingly,
we do not express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
/s/ KPMG LLP
Phoenix, Arizona
January 22, 2003, except as to paragraph 1
of Note 3, which is as of February 13, 2003
F-1
THE REPORT PRESENTED BELOW IS A COPY OF THE INDEPENDENT AUDITORS' REPORT OF
ARTHUR ANDERSEN LLP, THE FORMER AUDITOR FOR KNIGHT TRANSPORTATION, INC. ISSUED
ON JANUARY 16, 2002. ARTHUR ANDERSEN LLP HAS BEEN UNABLE TO ISSUE AN UPDATED
REPORT. ADDITIONALLY THE OPINION PRESENTED BELOW COVERS THE BALANCE SHEET AS OF
DECEMBER 31, 2000 AND THE STATEMENTS OF INCOME, COMPREHENSIVE INCOME,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, WHICH
STATEMENTS ARE NOT INCLUDED IN THIS REPORT ON FORM 10-K.
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.
/s/ Arthur Andersen LLP
Phoenix, Arizona
January 16, 2002
F-2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands)
2002 2001
---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 36,198 $ 24,136
Trade receivables, net of allowance for doubtful
accounts of $1,325 and $1,132, respectively 40,356 31,693
Notes receivable, net of allowance for doubtful
notes receivable of $142 and $66, respectively 956 777
Inventories and supplies 1,345 1,906
Prepaid expenses 9,653 7,964
Deferred tax assets 3,428 4,857
---------- ----------
91,936 71,333
---------- ----------
Property and Equipment:
Land and land improvements 14,158 13,112
Buildings and improvements 12,898 12,457
Furniture and fixtures 6,134 6,298
Shop and service equipment 1,975 1,790
Revenue equipment 211,184 169,630
Leasehold improvements 1,049 667
---------- ----------
247,398 203,954
Less: accumulated depreciation (70,505) (50,259)
---------- ----------
Property and Equipment, net 176,893 153,695
---------- ----------
Notes Receivable, net of current portion 1,487 3,108
---------- ----------
Other Assets, net of accumulated amortization of
$930 and $930, respectively 13,524 11,754
---------- ----------
$ 283,840 $ 239,890
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except par value)
2002 2001
---------- ----------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 7,749 $ 3,838
Accrued payroll 3,571 1,540
Accrued liabilities 3,227 4,782
Current portion of long-term debt 2,715 3,159
Claims accrual 10,419 7,509
---------- ----------
27,681 20,828
Line of Credit 12,200 12,200
Long-Term Debt, net of current portion -- 2,715
Deferred Tax Liabilities 44,302 36,451
---------- ----------
84,183 72,194
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; 50,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 100,000 shares
authorized; 37,145 and 36,834 shares issued
and outstanding at December 31, 2002 and 2001,
respectively 371 368
Additional paid-in capital 73,521 69,847
Accumulated other comprehensive loss (383) (732)
Retained earnings 126,148 98,213
---------- ----------
199,657 167,696
---------- ----------
$ 283,840 $ 239,890
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
---------- ---------- ----------
Revenue:
Revenue, before fuel surcharge $ 279,360 $ 241,679 $ 207,406
Fuel surcharge 6,430 9,139 9,453
---------- ---------- ----------
Total revenue 285,790 250,818 216,859
---------- ---------- ----------
Operating Expenses:
Salaries, wages and benefits 93,596 81,779 69,193
Fuel 44,389 38,934 36,257
Operations and maintenance 17,150 13,892 11,237
Insurance and claims 12,377 10,230 4,869
Operating taxes and licenses 7,383 7,038 7,515
Communications 2,407 2,057 1,510
Depreciation and amortization 22,887 18,417 19,131
Lease expense - revenue equipment 9,370 8,511 3,717
Purchased transportation 21,797 23,495 25,857
Miscellaneous operating expenses 6,940 6,913 5,550
---------- ---------- ----------
238,296 211,266 184,836
---------- ---------- ----------
Income from operations 47,494 39,552 32,023
---------- ---------- ----------
Other Income (Expense):
Interest income 935 708 918
Other expense -- (5,679) (287)
Interest expense (1,084) (2,514) (4,049)
---------- ---------- ----------
(149) (7,485) (3,418)
---------- ---------- ----------
Income before income taxes 47,345 32,067 28,605
Income Taxes (19,410) (13,050) (10,860)
---------- ---------- ----------
Net income $ 27,935 $ 19,017 $ 17,745
========== ========== ==========
Basic Earnings Per Share $ 0.75 $ 0.55 $ 0.53
========== ========== ==========
Diluted Earnings Per Share $ 0.73 $ 0.54 $ 0.53
========== ========== ==========
Weighted Average Shares
Outstanding - Basic 37,012 34,275 33,410
========== ========== ==========
Weighted Average Shares
Outstanding - Diluted 38,029 35,145 33,770
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
---------- ---------- ----------
Net Income $ 27,935 $ 19,017 $ 17,745
Other Comprehensive Income (Loss):
Interest rate swap agreement fair market value adjustment 349 (732) --
---------- ---------- ----------
Comprehensive Income $ 28,284 $ 18,285 $ 17,745
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Comprehensive Retained
Shares Issued Amount Capital Income Earnings Total
------------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 32,893 $ 329 $ 21,034 $ -- $ 61,451 $ 82,814
Exercise of stock options 322 3 1,215 -- -- 1,218
Issuance of shares for business
acquisition 515 5 2,944 -- -- 2,949
Issuance of common stock 2 -- 15 -- -- 15
Tax benefit on stock option exercises -- -- 379 -- -- 379
Net income -- -- -- -- 17,745 17,745
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 33,732 337 25,587 -- 79,196 105,120
Exercise of stock options 422 4 1,994 -- -- 1,998
Issuance of shares in stock offering,
net of offering costs of $2,517 2,679 27 41,203 -- -- 41,230
Issuance of common stock 1 -- 15 -- -- 15
Tax benefit on stock option exercises -- -- 1,048 -- -- 1,048
Other comprehensive loss -- -- -- (732) -- (732)
Net income -- -- -- -- 19,017 19,017
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 36,834 368 69,847 (732) 98,213 167,696
Exercise of stock options 310 3 2,021 -- -- 2,024
Issuance of common stock 1 -- 15 -- -- 15
Tax benefit on stock option exercises -- -- 1,638 -- -- 1,638
Other comprehensive loss -- -- -- 349 -- 349
Net income -- -- -- -- 27,935 27,935
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 37,145 $ 371 $ 73,521 $ (383) $ 126,148 $ 199,657
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
---------- ---------- ----------
Cash Flows From Operating Activities:
Net income $ 27,935 $ 19,017 $ 17,745
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 22,887 18,417 19,131
Write-off of investment in communications company -- 5,679 --
Non-cash compensation expense for issuance of
common stock to certain members of board of directors 15 15 15
Provision for allowance for doubtful accounts and
notes receivable 613 470 668
Deferred income taxes 9,280 3,225 5,815
Interest rate swap agreement - fair value change 349 -- --
Tax benefit on stock option exercises 1,638 1,048 379
Changes in assets and liabilities:
(Increase) decrease in trade receivables (9,200) 1,775 (4,954)
Decrease (increase) in inventories and supplies 561 (1,113) (151)
Increase in prepaid expenses (1,689) (2,946) (3,449)
Decrease (increase) in other assets 75 (272) (2,029)
(Decrease) increase in accounts payable (363) (2,287) 319
Increase in accrued liabilities and claims accrual 3,386 3,138 1,059
---------- ---------- ----------
Net cash provided by operating activities 55,487 46,166 34,550
---------- ---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment, net (41,811) (30,378) (33,965)
Investment in communications company -- -- --
Investment in/advances to other companies (1,845) (1,334) (1,720)
Cash received from business acquired -- -- 2,528
Decrease (increase) in notes receivable 1,366 (2,357) (1,735)
---------- ---------- ----------
Net cash used in investing activities (42,290) (34,069) (34,892)
---------- ---------- ----------
Cash Flows From Financing Activities:
(Payments) borrowings on line of credit, net -- (21,800) 4,963
Proceeds from sale of notes receivable -- -- 10,091
Payments of long-term debt (3,159) (14,489) (9,863)
Payments of accounts payable - equipment -- (1,051) (3,211)
Proceeds from issuance of common stock -- 43,747 --
Payment of stock offering costs -- (2,517) --
Proceeds from exercise of stock options 2,024 1,998 1,218
---------- ---------- ----------
Net cash provided by (used in)
financing activities (1,135) 5,888 3,198
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents 12,062 17,985 2,856
Cash and Cash Equivalents, beginning of year 24,136 6,151 3,295
---------- ---------- ----------
Cash and Cash Equivalents, end of year $ 36,198 $ 24,136 $ 6,151
========== ========== ==========
Supplemental Disclosures:
Noncash investing and financing transactions:
Equipment acquired included in accounts payable $ 4,274 $ -- $ 1,051
Cash flow information:
Income taxes paid $ 8,581 $ 7,482 $ 6,264
Interest paid 996 2,489 4,037
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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;
Gulfport, Mississippi; Kansas City, Kansas; Portland, Oregon and Memphis,
Tennessee. 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 effect 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-9
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, 2002, 2001, and 2000, repairs and maintenance expense
totaled approximately $9.8 million, $8.9 million and $6.1 million,
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:
2002 2001
---------- ----------
(In thousands) (In thousands)
Investment in and related advances
to Concentrek, Inc. $ 3,620 $ 1,774
Investment in Knight Flight, LLC 1,718 1,718
Goodwill 8,434 8,434
Other 682 758
Accumulated amortization (930) (930)
---------- ----------
$ 13,524 $ 11,754
========== ==========
In April 1999, the Company acquired a 17% interest in Concentrek, Inc.
("Concentrek"). Through a limited liability company, the Company has loaned
and invested a total of $3.6 million to Concentrek to fund start-up costs.
Of the total loan amounts, $824,500 million is evidenced by a promissory
note that is convertible into Concentrek's Class A Preferred Stock, and
$2.6 million is evidenced by a promissory note which is personally
guaranteed by Concentrek shareholders. Both loans are secured by a lien on
Concentrek's assets. These loans are on parity with respect to their
security. This investment is recorded at cost and Company's ownership
percentage in this investment is less than 20% at December 31, 2002 and
2001 and the Company does not have significant influence over the operating
decisions of that entity.
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 charge is reflected in other expense for the year-ended December 31,
2001, in the accompanying consolidated financial statements.
In November 2000, the Company acquired a 19% interest in Knight Flight
Services, LLC ("Knight Flight") which purchased and operates a Cessna
Citation 560 XL jet aircraft. The aircraft is leased to Pinnacle Air
F-10
Charter, L.L.C., an unaffiliated entity, which leases the aircraft on
behalf of Knight Flight. The cost of the aircraft to Knight Flight was $8.9
million. The Company invested $1.7 million in Knight Flight to obtain a 19%
interest in order to assure access to charter air travel for the Company's
employees. The Company has no further financial commitments to Knight
Flight. The remaining 81% interest in Knight Flight is owned by Randy,
Kevin, Gary and Keith Knight, who have personally guaranteed the balance of
the purchase price and to contribute any capital required to meet any cash
short falls. The Company has a priority use right for the aircraft. This
investment is accounted for on the equity method. According to terms under
an operating agreement with Knight Flight, losses are first allocated to
those members with the 81% ownership interest. Since Knight Flight has
incurred losses to date, no adjustment has been made to the investment
under the equity method of accounting.
IMPAIRMENT OF LONG-LIVED ASSETS - SFAS No. 144 provides a single accounting
model for long-lived assets to be disposed of. SFAS No. 144 also changes
the criteria for classifying an asset as held for sale; and broadens the
scope of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing losses on
such operations. The Company adopted SFAS No. 144 on January 1, 2002. The
adoption of SFAS No. 144 did not affect the Company's financial statements.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
balance sheet.
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 covered 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. These conditions are met
upon delivery.
INCOME TAXES - The Company uses the asset and liability method of
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 - At December 31, 2002, the Company has one
stock-based employee compensation plan, which is described more fully in
Note 9. The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. No
stock-based employee compensation cost is reflected in net income, as well
all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant. SFAS
No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair-value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic-value-based
method of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
F-11
net income if the fair-value-based method had been applied to all
outstanding and unvested awards for the years ended December 31 (in
thousands, except per share data):
2002 2001 2000
-------- -------- --------
Net income, as reported $ 27,935 19,017 17,745
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all rewards,
net of tax (682) 134 (417)
-------- -------- --------
Pro forma net income $ 27,253 19,151 17,328
======== ======== ========
Diluted earnings per share - as reported $ 0.73 0.54 0.53
======== ======== ========
Diluted earnings per share - pro forma $ 0.72 0.54 0.51
======== ======== ========
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
2002, 2001 and 2000, aggregated approximately 11%, 11% and 15% of revenues,
respectively. Revenue from the Company's single largest customer represents
approximately 4%, 4% and 7% of revenues for the years 2002, 2001, and 2000,
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 - A reconciliation of the numerator (net income) and
denominator (weighted average number of shares outstanding) of the basic
and diluted EPS computations for 2002, 2001, and 2000, are as follows (In
thousands, except per share data):
2002 2001 2000
------------------------------------ ------------------------------------ ------------------------------------
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 $27,935 37,012 $ .75 $19,017 34,275 $ .55 $17,745 33,410 $ .53
======= ======= =======
Effect of stock
options -- 1,017 -- 870 -- 360
------- ------- ------- ------- ------- -------
Diluted EPS $27,935 38,029 $ .73 $19,017 35,145 $ .54 $17,745 33,770 $ .53
======= ======= ======= ======= ======= ======= ======= ======= =======
F-12
SEGMENT INFORMATION - Although the Company has ten operating segments, it
has determined that it has one reportable segment. Nine 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.
DERVIATIVE AND HEDGING INFORMATION - On January 1, 2001, the Company
adopted 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,
requires that all derivative instruments be recorded on the balance sheet
at their respective fair values.
On the date the derivative contract is entered into, the Company designates
the derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge), on a
hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow"
hedge). The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value or cash-flow
hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The Company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged
items. When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
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.
As of December 31, 2002 and 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 10, 2003, and are included in accrued liabilities in the
accompanying consolidated financial statements.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - In June 2001, the FASB issued
SFAS No. 141, "Business Combinations" (SFAS No. 141) and SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS (SFAS No. 144).
F-13
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, are not amortized.
Goodwill and indefinite useful life intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized
through December 31, 2001. Amortization of such assets ceased on January 1,
2002 upon adoption of SFAS 142.
Upon adoption of SFAS No. 142, the Company was required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company was also required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. For intangible assets
identified as having indefinite useful lives, the Company was required to
test those intangible assets for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment was
measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. The results of this analysis did
not require the Company to recognize an impairment loss.
The Company identified its reporting units to be at the same level as the
operating segments as of January 1, 2002. As of January 1, 2002, the
Company had eight operating segments, however, these operating segments
have been aggregated and reported as one reportable segment in accordance
with the aggregation provisions of SFAS No. 131. In applying this same
aggregation criteria, the Company determined that it had one reporting unit
as of January 1, 2002 under SFAS No. 142. At January 1, 2002, the carrying
value of the reporting unit goodwill was $7.5 million. The Company compared
the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which were measured as of
the date of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation was the implied fair
value of the reporting unit goodwill. The implied fair value of the
reporting unit exceeded its carrying amount and the Company was not
required to recognize an impairment loss.
Application of the provisions of SFAS No. 142 has affected the
comparability of current period results of operations with prior periods
because goodwill is no longer being amortized. Thus, the following
transitional disclosure presents prior period net income and earnings per
share, adjusted as shown below (in thousands, except per share data):
2001 2000
-------- --------
Net income $ 19,017 $ 17,745
Add Back: amortization of goodwill, net of taxes* 653 276
-------- --------
Adjusted net income $ 19,670 $ 18,021
======== ========
Basic earnings per share $ 0.55 $ 0.53
Add back: amortization of goodwill, net of taxes* 0.02 0.01
-------- --------
Adjusted basic net earnings per share $ 0.57 $ 0.54
======== ========
Diluted earnings per share $ 0.54 $ 0.53
Add back: amortization of goodwill, net of taxes* 0.02 0.01
-------- --------
Adjusted diluted earnings per share $ 0.56 $ 0.54
======== ========
* Amortization of goodwill was non-deductible for income tax purposes,
therefore, the tax component of the adjustment for amortization of
goodwill is $0.
F-14
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145), which addresses financial accounting and
reporting for reporting gains and losses from extinguishment of debt,
accounting for intangible assets of motor carriers and accounting for
leases. SFAS No. 145 requires that gains and losses from early
extinguishment of debt should not be classified as extraordinary, as
previously required. SFAS No. 145 also rescinds Statement 44, which was
issued to establish accounting requirements for the effects of transition
to the provisions of the Motor Carrier Act of 1980 (Public Law 96-296, 96th
Congress, July 1, 1980). Those transitions are completed; therefore,
Statement 44 is no longer necessary. SFAS No. 145 also amends Statement 13
to require sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also makes various technical corrections to existing
pronouncements. Those corrections are not substantive in nature. The
provisions of this statement relating to Statement 4 are applicable in
fiscal years beginning after May 15, 2002. The provisions of this Statement
related to Statement 13 are effective for transactions occurring after May
15, 2002. All other provisions of this statement are effective for
financial statements issued on or after May 15, 2002. The adoption of SFAS
No. 145 did not have an impact on the Company's consolidated financial
statements.
RECLASIFICATIONS - Certain amounts included in the 2001 and 2000
consolidated financial statements have been reclassified to conform with
the 2002 presentation.
2. ACQUISITION
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 was 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 was
possible, but did not occur. Along with those shares of stock, a cash bonus up
to $660,000 was possible, but did not occur.
3. LINE OF CREDIT AND LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
2002 2001
-------- --------
Note payable to financial institution with
monthly principal and interest payments of
$193 through October 2003; the note is
unsecured with interest at a fixed rate
of 5.75% $ 1,876 $ 4,009
Notes payable to a third party with a
payment totaling $839 due in 2003. The note
is secured by real property of the Company
and has an imputed interest rate of 7.0% 839 1,865
-------- --------
2,715 5,874
Less - current portion (2,715) (3,159)
-------- --------
$ -- $ 2,715
======== ========
F-15
The Company maintains a $50.0 million revolving line of credit (see Note 6) with
principal due at maturity and interest payable monthly at two options (prime or
LIBOR plus .625%). On February 13, 2003, the Company amended the revolving line
of credit agreement to extend the maturity date from June 2003 to June 2004.
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. On November 7, 2001, the Company paid $762,500 to
settle this swap agreement. The amount paid is included in other comprehensive
loss and is being amortized to interest expense over the original 36-month term
of the swap agreement. The available credit at December 31, 2002 under this line
of credit is $31.1 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, 2002.
4. INCOME TAXES
Income tax expense consists of the following (in thousands):
2002 2001 2000
-------- -------- --------
Current income taxes:
Federal $ 7,849 $ 7,952 $ 4,119
State 2,281 1,872 926
-------- -------- --------
10,130 9,824 5,045
-------- -------- --------
Deferred income taxes:
Federal 7,656 2,649 4,652
State 1,624 577 1,163
-------- -------- --------
9,280 3,226 5,815
-------- -------- --------
$ 19,410 $ 13,050 $ 10,860
======== ======== ========
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 (in thousands):
2002 2001 2000
-------- -------- --------
Tax at the statutory rate (35%) $ 16,571 $ 11,223 $ 10,072
State income taxes, net of
federal benefit 1,749 826 537
Non-deductible expenses 1,081 897 --
Other, net 9 104 251
-------- -------- --------
$ 19,410 $ 13,050 $ 10,860
======== ======== ========
The net effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001, are as follows (in thousands):
2002 2001
-------- --------
Short-term deferred tax assets:
Claims accrual $ 3,764 $ 3,157
Capital loss carryforward -- 1,952
Other 1,041 972
-------- --------
$ 4,805 $ 6,081
-------- --------
Short -term deferred tax liabilities:
Prepaid expenses deducted for tax purposes (1,377) (1,224)
-------- --------
Short-term deferred tax assets, net $ 3,428 $ 4,857
======== ========
Long-term deferred tax liabilities:
Property and equipment depreciation $ 43,934 $ 36,093
Other 368 358
-------- --------
$ 44,302 $ 36,451
======== ========
F-16
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.
5. COMMITMENTS AND CONTINGENCIES
a. PURCHASE COMMITMENTS
As of December 31, 2002, the Company had purchase commitments for
additional tractors and trailers with an estimated purchase price, net of
estimated trade-in values, of approximately $27.0 million for delivery
throughout 2003. 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.
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.
On July 31, 2002, the Company reached a resolution of our litigation with
Freightliner, L.L.C. ("Freightliner") through successful mediation. The
Company initiated suit to protect its contractual and other rights
concerning new equipment purchase prices and tractor repurchase commitments
made by Freightliner. Of the net benefits recognized under the settlement
agreement, the majority has been recognized as an adjustment to the basis
of the tractors acquired from Freightliner, which will be depreciated over
the estimated lives of the underlying equipment. In addition, Freightliner
agreed to deliver 250 tractors under the settlement agreement.
c. OPERATING LEASES
The Company leases certain revenue equipment under non-cancelable operating
leases. Rent expense related to these lease agreements totaled
approximately $9.4 million, $8.5 million and $3.7 million, for the years
ended December 31, 2002, 2001 and 2000, respectively.
Future lease payments under non-cancelable operating leases are as follows
(in thousands):
Year Ending
December 31, Amount
------------ --------
2003 $ 6,658
2004 4,305
2005 3,202
2006 431
--------
$ 14,596
========
F-17
6. CLAIMS ACCRUAL
The primary claims arising for the Company consist of auto liability (personal
injury and property damage), cargo liability, collision, comprehensive and
worker's compensation. The Company was self-insured for personal injury and
property damage liability, cargo liability, collision and comprehensive up to a
maximum limit of $1.75 million per occurrence. Subsequent to December 31, 2002,
the Company increased the self-insurance retention levels for personal injury
and property damage liability, cargo liability, collision, comprehensive and
worker's compensation to $2.0 million per occurrence. The maximum self-retention
for a separate worker's compensation claim remains at $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. The
Company's insurance policies were increased subsequent to December 31, 2002, to
provide for excess personal injury and property damage liability up to a total
of $35.0 million from $30.0 million per occurrence and cargo liability,
collision, comprehensive and worker's compensation coverage up to a total of
$10.0 million per occurrence. The Company also maintains 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 $6.7 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 $6,700. 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 $83,000 during 2002 and $81,000 during each of 2001 and 2000,
respectively.
The Company paid approximately $50,000, $90,000 and $90,000 for certain of its
key employees' life insurance premiums during 2002, 2001, and 2000,
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 2002, 2001, and 2000, the Company purchased approximately $250,000, $1.1
million and $2.1million, respectively, of communications equipment and services
from the communications technology company in which it formerly had an
investment (see Note 1). Additionally, the Company had a receivable included in
trade receivables for approximately $0 and $27,000 at December 31, 2002 and
2001, respectively, related to reimbursement of expenses.
During 2002 and 2001, the Company paid approximately $22,000 and $64,500,
respectively, for legal services to a firm that employs a member of the
Company's Board of Directors.
During 2002 and 2001, the Company paid approximately $326,000 and $620,000,
respectively, for travel services for its employees to an aircraft company in
which the Company has an investment (see Note 1).
F-18
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 2002, 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 $15,000, $5,000 and $33,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
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 $41.2 million
after deducting offering costs of $2.5 million.
During 2002, 2001 and 2000, 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 798, 1,200 and 1,998 shares
of common stock to certain directors during 2002, 2001 and 2000, respectively.
9. EMPLOYEE BENEFIT PLANS
a. 1994 STOCK OPTION PLAN
The Company established the 1994 Stock Option Plan (the Plan) with
3,675,000 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.
At December 31, 2002, there were 1,793,008 options granted under the plan.
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 2002; risk free interest rate of 3.36%,
expected life of six years, expected volatility of 52%, expected dividend
rate of zero, and expected forfeitures of 3.92%. 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%. 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%.
F-19
2002 2001 2000
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------- --------- ------- --------- -------
Outstanding at beginning of year 1,940,570 $ 7.52 1,922,022 $ 6.16 1,822,918 $ 5.72
Granted 313,750 19.01 643,573 9.89 495,900 6.42
Exercised (303,725) 6.35 (421,576) 5.02 (322,553) 3.92
Forfeited (157,587) 9.52 (203,449) 7.25 (74,243) 6.74
--------- ------- --------- ------- --------- -------
Outstanding at end of year 1,793,008 $ 9.58 1,940,570 $ 7.52 1,922,022 $ 6.16
========= ======= ========= ======= ========= =======
Exercisable at end of year 599,932 $ 6.39 385,704 $ 8.55 591,485 4.69
========= ======= ========= ======= ========= =======
Weighted average fair value of
options granted during the period $ 11.35 $ 5.49 $ 3.50
======= ======= =======
Options outstanding at December 31, 2002, have exercise prices between
$3.56 and $22.87. There are 1,068,923 options outstanding with exercise
prices ranging from $3.56 to $7.65 with weighted average exercise prices of
$6.38 and weighted average remaining contractual lives of 6.8 years. There
are 424,186 options outstanding with exercise prices ranging from $8.47 to
$15.29 with weighted average exercise prices of $10.94 and weighted average
contractual lives of 9.6 years. There are 299,899 options outstanding with
exercise prices ranging from $16.07 to $22.87 with weighted average
exercise prices of $19.06 and weighted average contractual lives of 9.4
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 2002, 2001, and 2000, 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 $150,000, $125,000 and $136,000 in 2002, 2001 and 2000,
respectively.
F-20
SCHEDULE II
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
Balance at Balance at
Beginning Expense End
of Period Recorded Deductions of Period
--------- -------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 2002 $ 1,132 $ 537 $ (344)(1) $ 1,325
Year ended December 31, 2001 1,121 456 (445)(1) 1,132
Year ended December 31, 2000 688 582 (149)(1) 1,121
Allowance for doubtful notes receivable:
Year ended December 31, 2002 66 76 -- 142
Year ended December 31, 2001 81 14 (29)(1) 66
Year ended December 31, 2000 101 86 (106)(1) 81
Claims accrual:
Year ended December 31, 2002 7,509 12,377 (9,467)(2) 10,419
Year ended December 31, 2001 5,554 10,230 (8,275)(2) 7,509
Year ended December 31, 2000 4,640 4,869 (3,955)(2) 5,554
(1) Write-off of bad debts
(2) Cash paid for claims and premiums
F-21