SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
Registrant's telephone number, including area code: 602-269-2000
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 [ ]
The number of shares outstanding of registrant's Common Stock, par value $0.01
per share, as of November 8, 2002 was 37,102,345 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 1
Condensed Consolidated Statements of Income for the Three
months and Nine Months Ended September 30, 2002 and
September 30, 2001 3
Condensed Consolidated Statements of Cash Flows for the Nine
months ended September 30, 2002 and September 30, 2001 4
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES 22
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 24
INDEX TO EXHIBITS 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,703 $ 24,136
Accounts receivable, net 37,166 31,693
Notes receivable, net 1,049 777
Inventories and supplies 1,178 1,906
Prepaid expenses 9,117 7,964
Deferred tax asset 4,668 6,082
--------- ---------
Total current assets 95,881 72,558
--------- ---------
PROPERTY AND EQUIPMENT:
Land and improvements 14,156 13,112
Buildings and improvements 12,898 12,457
Furniture and fixtures 6,280 6,298
Shop and service equipment 1,948 1,790
Revenue equipment 190,253 169,630
Leasehold improvements 906 667
--------- ---------
226,441 203,954
Less: Accumulated depreciation (66,120) (50,259)
--------- ---------
PROPERTY AND EQUIPMENT, net 160,321 153,695
--------- ---------
NOTES RECEIVABLE - long-term 2,153 3,108
--------- ---------
OTHER ASSETS 12,678 11,753
--------- ---------
$ 271,033 $ 241,114
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,094 $ 3,838
Accrued liabilities 10,667 6,322
Line of credit 12,200 12,200
Current portion of long-term debt 3,068 3,159
Claims accrual 9,593 7,509
--------- ---------
Total current liabilities 40,622 33,028
LONG - TERM DEBT, less current portion 192 2,715
DEFERRED INCOME TAXES 39,966 37,675
--------- ---------
Total liabilities 80,780 73,418
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 50,000,000 shares,
none issued and outstanding -- --
Common stock, $0.01 par value;
Authorized 100,000,000 shares;
37,078,248 and 36,834,106 shares
issued and outstanding at
September 30, 2002 and and
December 31, 2001, respectively 371 368
Additional paid-in capital 72,444 69,847
Retained earnings 117,907 98,213
Accumulated other comprehensive loss (469) (732)
--------- ---------
Total shareholders' equity 190,253 167,696
--------- ---------
$ 271,033 $ 241,114
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUE
Revenue, before fuel surcharge $ 72,777 $ 63,785 $ 202,974 $ 176,531
Fuel surcharge 1,785 2,448 3,756 7,553
--------- --------- --------- ---------
Total revenue 74,562 66,233 206,730 184,084
--------- --------- --------- ---------
OPERATING EXPENSES:
Salaries, wages and benefits 24,506 21,420 68,706 59,295
Fuel 11,633 10,696 31,343 29,837
Operations and maintenance 4,743 3,668 12,228 9,962
Insurance and claims 3,196 2,863 8,870 7,113
Operating taxes and licenses 1,921 1,798 5,705 5,176
Communications 577 513 1,750 1,362
Depreciation and amortization 5,793 4,527 16,672 14,221
Lease expense - revenue equipment 2,304 2,255 6,904 6,248
Purchased transportation 5,607 5,794 16,134 17,814
Miscellaneous operating expenses 1,784 1,736 5,195 5,199
--------- --------- --------- ---------
62,064 55,270 173,507 156,227
--------- --------- --------- ---------
Income from operations 12,498 10,963 33,223 27,857
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 276 187 731 497
Other expense -- (5,679) -- (5,679)
Interest expense (237) (585) (750) (2,093)
--------- --------- --------- ---------
39 (6,077) (19) (7,275)
--------- --------- --------- ---------
Income before taxes 12,537 4,886 33,204 20,582
INCOME TAXES (5,100) (2,000) (13,510) (8,400)
--------- --------- --------- ---------
Net income $ 7,437 $ 2,886 $ 19,694 $ 12,182
========= ========= ========= =========
Net income per common share and
common share equivalent:
Basic $ 0.20 $ 0.08 $ 0.53 $ 0.36
========= ========= ========= =========
Diluted $ 0.20 $ 0.08 $ 0.52 $ 0.35
========= ========= ========= =========
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 37,047 34,067 36,981 33,994
========= ========= ========= =========
Diluted 38,001 34,950 38,059 34,785
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30
---------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,694 $ 12,182
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 16,672 14,221
Write-off of investment -- 5,679
Allowance for doubtful accounts 330 381
Interest rate swap agreement - fair value change 264 --
Tax benefit from exercise of stock options 974 --
Deferred income taxes 3,705 2,019
Changes in assets and liabilities:
(Increase) decrease in trade receivables (5,802) 947
Decrease (increase) in inventories and supplies 728 (191)
Increase in prepaid expenses (1,153) (2,760)
Increase in accounts payable 1,256 1,945
Increase in accrued liabilities and claims accrual 6,429 2,945
-------- --------
Net cash provided by operating activities 43,096 37,368
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (23,297) (22,076)
Increase in other assets (925) (876)
Decrease (increase) in notes receivable, net 683 (1,858)
-------- --------
Net cash used in investing activities (23,539) (24,810)
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Nine Months Ended
September 30
----------------------
2002 2001
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on line of credit, net -- (10,800)
Payments of long-term debt (2,614) (8,760)
Proceeds from exercise of stock options 1,624 2,176
-------- --------
Net cash used in financing activities (990) (17,384)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 18,567 (4,826)
CASH AND CASH EQUIVALENTS,
Beginning of period 24,136 6,151
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 42,703 $ 1,325
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash Flow Information:
Income taxes paid $ 5,700 $ 5,634
Interest paid 589 2,067
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Financial Information
The accompanying condensed 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.; Knight Transportation Gulf Coast, Inc., Knight Transportation South
Central Ltd.; and KTeCom, L.L.C. All material inter-company items and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
have been omitted or condensed pursuant to such rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Results of operations in interim periods are not necessarily indicative of
results for a full year. These condensed consolidated financial statements and
notes thereto should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001. The preparation of financial
statements in accordance with GAAP requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities as well as disclosure of contingent assets and
liabilities, at the date of the accompanying condensed consolidated financial
statements, and the reported amounts of the revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
6
Note 2. Net Income Per Share
A reconciliation of the basic and diluted earnings per share computations for
the three months and nine months ended September 30, 2002 and 2001 is as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Weighted average common
shares outstanding - Basic 37,047 34,067 36,981 33,994
Effect of stock options 954 883 1,078 791
-------- -------- -------- --------
Weighted average common
share and common share
equivalents outstanding -
Diluted 38,001 34,950 38,059 34,785
======== ======== ======== ========
Net income $ 7,437 $ 2,886 $ 19,694 $ 12,182
======== ======== ======== ========
Net income per common share and
common share equivalent
Basic $ 0.20 $ 0.08 $ 0.53 $ 0.36
======== ======== ======== ========
Diluted $ 0.20 $ 0.08 $ 0.52 $ 0.35
======== ======== ======== ========
Note 3. Comprehensive Income (Loss)
Comprehensive income (loss) for the period was as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 7,437 $ 2,886 $ 19,694 $ 12,182
Other comprehensive income (loss):
Interest rate swap agreement - fair
market value adjustment 86 (413) 263 (566)
-------- -------- -------- --------
Comprehensive income $ 7,523 $ 2,473 $ 19,957 $ 11,616
======== ======== ======== ========
7
Note 4. Segment Information
Although we have ten operating segments, we have determined that we have one
reportable segment. Nine of the segments are managed based on regions in the
United States in which we operate. Each of these segments has similar economic
characteristics as they all provide short to medium-haul truckload carrier
services of general commodities to a similar class of customers. In addition,
each segment exhibits similar financial performance, including average revenue
per mile and operating ratio. The remaining segment is not reported because it
does not meet the materiality thresholds in SFAS No. 131. As a result, we have
determined that it is appropriate to aggregate our operating divisions into one
reportable segment consistent with the guidance in SFAS No. 131. Accordingly, we
have not presented separate financial information for each of our operating
divisions as our consolidated financial statements present our one reportable
segment.
Note 5. Derivative Instruments and Hedging Activities
In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities." In June 2000 the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activity, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that
all derivative instruments be recorded on the balance sheet at their respective
fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters
of all fiscal years beginning after June 30, 2000; we adopted SFAS No. 133 and
SFAS No. 138 on January 1, 2001.
All derivatives are recognized on the balance sheet at their fair value. On the
date the derivative contract is entered into, we designate 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), 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), a foreign-currency fair-value
or cash-flow hedge ("foreign currency" hedge), or a hedge of a net investment in
a foreign operation. We formally document 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, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. We also formally
assess, 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, we discontinue hedge accounting
prospectively.
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 may be 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, we entered into a similar agreement. Under this
agreement, we purchased 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
8
through December 2005, the price index discussed above falls below $.58 per
gallon, we may be obligated to pay the difference between $.58 and the stated
index. The three agreements are stated at their fair value of $750,000 which is
included in accrued liabilities in the accompanying condensed consolidated
financial statements.
During 2001, we entered into an interest rate swap agreement on the $12.2
million outstanding on our line of credit for purposes of better managing cash
flow. On November 7, 2001, we 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.
Note 6. Recently Adopted Accounting Standards
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).
We 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, we were required to evaluate our 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. We were 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, we were required
to test those intangible asset 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 us to recognize an
impairment loss.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement required us to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, we were required to identify our reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. We were required to determine the fair value of each
reporting unit and compare it to the carrying amount of the reporting unit
within six months of January 1, 2002. To the extent the carrying amount of a
reporting unit exceeded the fair value of the reporting unit, an indication
existed that the reporting unit goodwill may be impaired and we would be
required to perform the second step of the transitional impairment test.
9
We identified our reporting units to be at the same level as our operating
segments as of January 1, 2002. As of January 1, 2002, we 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, we have determined that we have
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. We 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 we were 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:
Three Months Ended Nine Months Ended
September 30, 2001 September 30,2001
------------------ -----------------
Net income $ 2,886 $ 12,182
Add Back: amortization of goodwill, net of taxes* 140 512
--------- ---------
Adjusted net income $ 3,026 $ 12,694
========= =========
Basic earnings per share $ 0.08 $ 0.36
Add back: amortization of goodwill, net of taxes* -- 0.01
--------- ---------
Adjusted basic net earnings per share $ 0.08 $ 0.37
========= =========
Diluted earnings per share $ 0.08 $ 0.35
Add back: amortization of goodwill, net of taxes* -- 0.01
--------- ---------
Adjusted diluted earnings per share $ 0.08 $ 0.36
========= =========
- ----------
* Amortization of goodwill was non-deductible for income tax purposes,
therefore, the tax component of the adjustment for amortization of goodwill
is $0.
In August 2001, the FASB issued SFAS No. 144. SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business.
This statement also amends ARB No. 51, CONSOLIDATED FINANCIAL STATEMENTS to
eliminate the exception to consolidate a subsidiary for which control is likely
to be temporary. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 on January 1, 2002 and there was not
a material impact on our results of operations or financial position.
10
Note 7. Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs 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. The Company also records 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. The Company is required
to adopt SFAS No. 143 on January 1, 2003. Because of the extensive effort needed
to evaluate the impact of adopting SFAS No. 143, it is not practicable to
reasonably estimate the impact of adopting the Statement on the Company's
financial statements at the date of this report.
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 is not expected to have a
material impact on our consolidated financial statements.
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. We are in the
process of evaluating the adoption of SFAS No. 146 and its impact on our
financial position or results of operations.
Note 8. Commitments and Contingencies
We are involved in certain legal proceedings arising in the normal course of
business. In the opinion of management, our potential exposure under pending
legal proceedings is adequately provided for in the accompanying condensed
consolidated financial statements.
On July 31, 2002, we reached a resolution of our litigation with Freightliner,
L.L.C. ("Freightliner") through successful mediation. We initiated suit to
protect our contractual and other rights concerning new equipment purchase
prices and tractor repurchase commitments made to us by Freightliner. Of the
11
net benefits recognized under the settlement agreement, the majority has
primarily been recognized as an adjustment to the basis of the tractors acquired
from Freightliner, which will be depreciated over estimated lives of the
underlying equipment. In addition, Freightliner agreed to deliver 250 tractors
under the settlement agreement. We are pleased to put this dispute behind us and
hope to develop a positive working relationship with Freightliner in the near
future.
Note 9. 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 our 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 condensed
consolidated financial statements. All share amounts and earnings per share
amounts have been retroactively adjusted to reflect the stock splits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for certain historical information contained herein, this Quarterly
Report on Form 10-Q contains forward-looking statements that involve risks,
assumptions and uncertainties that 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
strategies or developments; any statements regarding future economic conditions
or performance; any statements of belief and any statement of assumptions
underlying any of the foregoing. Words such as "believe," "may," "could"
"expects," "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 items discussed in the section entitled "FACTORS THAT MAY AFFECT
FUTURE RESULTS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," set forth in our Annual Report on Form
10-K. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statement contained in this Quarterly Report.
RESULTS OF OPERATIONS
Our revenue, before fuel surcharge, for the nine months ended September 30,
2002, increased by 15.0% to $203.0 million from $176.5 million over the same
period in 2001. For the three months ended September 30, 2002, revenue, before
fuel surcharge, increased by 14.1% to $72.7 million from $63.8 million over the
same period in 2001. The increase in revenue, before fuel surcharge, resulted
from expansion of our customer base and increased volume from existing
customers. Our fleet increased by 10.1% to 2,037 tractors (including 203 owned
by independent contractors) as of September 30, 2002, from 1,850 tractors
(including 211 owned by independent contractors) as of September 30, 2001.
12
Salaries, wages and benefits increased as a percentage of revenue, before fuel
surcharge, to 33.7% for the nine months ended September 30, 2002, from 33.6% for
the same period in 2001. For the three months ended September 30, 2002,
salaries, wages and benefits increased as a percentage of revenue, before fuel
surcharge, to 33.7% from 33.6% for the same period in 2001. These increases were
primarily the result of the increase in the ratio of Company drivers to
independent contractors. At September 30, 2002, 90% of our fleet was operated by
Company drivers, compared to 89% at September 30, 2001. We record the cost of
medical insurance coverage, along with the uninsured portion, to salaries, wages
and benefits expense. Our insurance program for medical claims, which involves
self-insurance with risk retention levels, was higher for the 2002 period
compared to the 2001 period. Our health insurance self-insurance level is
$100,000 per person per year, and our worker's compensation self-insurance is at
a maximum of $500,000. Claims in excess of these retention levels are covered by
insurance, which management considers adequate. For Company drivers and
non-driving employees, we record accruals for worker's compensation as a
component of our claims accrual, and the related expense is reflected in
salaries, wages and benefits expense in our consolidated statements of income.
Fuel expense, net of fuel surcharge, increased as a percentage of revenue,
before fuel surcharge, to 13.6% for the nine months ended September 30, 2002,
compared to 12.6% for the same period in 2001. For the three months ended
September 30, 2002, fuel expense as a percentage of revenue, before fuel
surcharge, increased to 13.5% from 12.9% for the same period in 2001. This
increase was primarily the result of the increase in the ratio of Company
vehicles to independent contractors, as well as a reduction in fuel surcharge
billings to customers. Independent contractors pay their own fuel costs.
Operations and maintenance expense increased as a percentage of revenue, before
fuel surcharge, to 6.0% for the nine months ended September 30, 2002 from 5.6%
for the same period in 2001. For the three months ended September 30, 2002,
operations and maintenance expense increased as a percentage of revenue, before
fuel surcharge, to 6.5% compared to 5.7% for the same period in 2001. These
increases were primarily due to the increase in the ratio of Company vehicles to
independent contractors, along with increases in tire expenses as a result of
the aging of our fleet.
Insurance and claims expense increased as a percentage of revenue, before fuel
surcharge, to 4.4% for the nine months ended September 30, 2002, from 4.0% for
the same period in 2001. The primary reason for these increases is due to
increases in insurance premiums and the higher self-insurance retention levels
assumed by us. For the three months ended September 30, 2002, insurance and
claims expense decreased as a percentage of revenue, before fuel surcharge, to
4.4% from 4.5% for the same period in 2001, primarily due to increased
utilization of our revenue equipment. Our insurance program for liability,
physical damage and cargo damage involves self-insurance with varying risk
retention levels. Claims in excess of these risk retention levels are covered by
insurance which management considers adequate. We currently self-insure for a
portion of our claims expense resulting from personal injury, cargo loss and
property damage combined up to a maximum of $1,750,000 per occurrence. We accrue
the estimated cost of the uninsured portion of pending claims. These accruals
are estimated based on management's evaluation of the nature and severity of
individual claims and estimates of future claims development based on historical
claims development trends.
Operating taxes and licenses decreased as a percentage of revenue, before fuel
surcharge, to 2.8% for the nine months ended September 30, 2002, from 2.9% for
the same period in 2001. For the three months ended September 30, 2002,
operating taxes and licenses as a percentage of revenue, before fuel surcharge,
decreased to 2.6% compared to 2.8% for the same period in 2001. These decreases
were primarily due to increases in revenue per mile and improved utilization of
revenue equipment.
13
Communications expense as a percentage of revenue, before fuel surcharge, for
both the nine months and three months ended September 30, 2002, remained
relatively consistent with the same periods in 2001, at less than 1.0% of
revenue.
Depreciation and amortization expense as a percentage of revenue, before fuel
surcharge, increased to 8.2% for the nine month period ended September 30, 2002,
from 8.1% for the same period in 2001. For the three months ended September 30,
2002, depreciation and amortization increased as a percentage of revenue, before
fuel surcharge, to 8.0% from 7.1% for the same period in 2001. These increases
were primarily related to the increase in the ratio purchased Company vehicles
compared to leased vehicles, as well as the increase in the ratio of Company
vehicles compared to independent contractors.
Lease Expense - Revenue Equipment as percentage of revenue, before fuel
surcharge, was 3.4% for the nine months ended September 30, 2002, compared to
3.5% for the same period in 2001. For the three months ended September 30, 2002
Lease Expense - Revenue Equipment as a percentage of revenue, before fuel
surcharge, was 3.2% compared to 3.5% for the same period in 2001. These
decreases were primarily due to increases the ratio of purchased vehicles
compared to leased vehicles, as well as increases in revenue per mile and
improved utilization of our revenue equipment. Under this leasing program we had
568 tractors at both September 30, 2002 and September 30, 2001, under operating
leases with an average term of 3.5 years.
Purchased transportation decreased as a percentage of revenue, before fuel
surcharge, to 7.9% for the nine months ended September 30, 2002, from 10.1% for
the same period in 2001. For the three months ended September 30, 2002,
purchased transportation as a percentage of revenue, before fuel surcharge,
decreased to 7.7% from 9.1% for the same period in 2001. These decreases were
due to the decrease in the ratio of independent contractors to Company drivers
to 10% as of September 30, 2002, from 11% as of September 30, 2001. Independent
contractors pay their own expenses, including fuel, and are compensated at a
fixed rate per mile.
Miscellaneous operating expenses decreased as a percentage of revenue, before
fuel surcharge, to 2.6% for the nine months ended September 30, 2002, from 2.9%
for the same period in 2001. For the three months ended September 30, 2002,
miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.5% from 2.7% for the same period in 2001. These
decreases were primarily due to the increase in the utilization of our revenue
equipment and decreased travel expenses.
As a result of the above factors, our operating ratio (operating expenses, net
of fuel surcharge, as a percentage of revenue, before fuel surcharge) for the
nine months ended September 30, 2002, decreased to 83.6% from 84.2% for the same
period in 2001. Our operating ratio remained at 82.8% for the three months ended
September 30, 2002, compared to the same period in 2001.
During the three months ended September 30, 2001, the Company recorded a
non-recurring charge of $5.7 million. This charge was to record the write-off of
the Company's entire investment in Terion, Inc., (Terion) a communications
technology company made during 1998 and 1999. The Company owned less than four
percent of that technology company and did not derive any revenue from its
investment. The Company elected to write-off its investment after Terion
announced that it would cease operating its in-cab communications system. The
impact on earnings per diluted share, considering the stock split previously
mentioned, was $0.10 during the three months and nine months ended September 30,
2001. This write-off resulted in a reduction of net income as a percentage of
revenue, before fuel surcharge, of 5.3% for the three months ended September 30,
2001. As a result of Terion's decision to discontinue its in-cab communications
business, the Company replaced the Terion in-cab units with Qualcomm in-cab
satellite-based communications system. This transition resulted in an increase
in costs for communications equipment and related services.
14
For the nine months ended September 30, 2002 and September 30, 2001, net
interest remained at less than 0.1% of revenue, before fuel surcharge. This low
amount was primarily due to the reduction of our outstanding debt to
approximately $15.5 million at September 30, 2002, compared to $34.8 million at
September 30, 2001. Debt reduction was facilitated, in part, by proceeds
received from the offering of our Common Stock that closed on November 7, 2001.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement and
income tax reporting.
As a result of the preceding changes, our net income as a percentage of revenue,
before fuel surcharge, was 9.7% for the nine months ended September 30, 2002,
compared to 6.9% for the same period in 2001. For the three months ended
September 30, 2002, net income as a percentage of revenue, before fuel
surcharge, was 10.2%, compared to 4.5% for the same period in 2001.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting policies generally accepted in the United States of America requires
management to make decisions based upon estimates, assumptions, and factors we
consider as relevant to the circumstances. Such decisions include the selection
of applicable accounting principles and the use of judgement in their
application, the results of which impact reported amounts and disclosures.
Changes in future economic conditions or other business circumstances may affect
the outcomes of our estimates and assumptions. Accordingly, actual results could
differ from those anticipated. A summary of the significant accounting policies
followed in preparation of the consolidated financial statements is contained in
Note 1 of the consolidated financial statements contained in our annual report
on Form 10-K. Other footnotes describe various elements of the consolidated
financial statements and the assumption on which specific amounts were
determined.
Our critical accounting policies include the following:
Revenue Recognition - revenues are recognized on the date shipments are
delivered to the customer.
Insurance and Claims Reserves - 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.
Property and Equipment - 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, the methods of estimation used for
determining fair values.
15
Lease Obligations and Commitments - We have obligations outstanding related to
equipment and debt as of September 30, 2002. We have 568 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 September 30, 2002, was $16.3 million, with $7.7 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.
Inventories and supplies - Inventory and supplies consist of tires, fuel, and
spare parts which are recorded at the lower of cost, using first-in, first-out
method, or net realizable value.
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 lender. During the fourth quarter of
2001, we registered with the Securities and Exchange Commission and sold
2,678,907 shares of our Common Stock through a public offering, which resulted
in net proceeds to us of $41.2 million. 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 $43.1 million for the first
nine months of 2002, compared to $37.4 million for the corresponding period in
2001.
Capital expenditures for the purchase of revenue equipment, net of trade-ins,
office equipment and leasehold improvements, totaled $23.3 million for the first
nine months of 2002, compared to $22.1 million for the same period in 2001.
Net cash used in financing activities and direct financing was approximately
$1.0 million for the first nine months of 2002, compared to net cash used of
$17.4 million for the same period in 2001. Net cash used in financing activities
during the first nine months of 2002 was primarily for the payment of long-term
debt.
We maintain a line of credit totaling $50 million with our primary lender and
use this line to finance the acquisition of revenue equipment and other
corporate uses to the extent our need for capital is not provided by funds from
operations. We are obligated to comply with certain financial covenants under
our line of credit. The rate of interest on borrowings against the line of
credit will vary depending upon the interest rate election made by us, based
upon either the London Interbank Offered Rate ("Libor") plus an adjustment
factor, or the prime rate. The average interest rate for the three months ended
September 30, 2002 was 2.4%. Borrowings under the line of credit amounted to
$12.2 million at September 30, 2002. The line of credit expires in July 2003.
Through our subsidiaries, we have entered into operating lease agreements under
which we lease revenue equipment. The total amount outstanding under these
agreements as of September 30, 2002, was $16.3 million, with effective interest
rates from 5.2% to 8.2%, with $7.7 million due in the next 12 months.
Management believes the Company has adequate liquidity to meet its 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 this capital will depend upon prevailing market conditions, the
market price of the common stock and several other factors over which we have
limited control, as well as our financial condition and results of operations.
16
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 or claims costs, 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 or insurance and
claims costs, 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 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:
BUSINESS UNCERTAINTIES. We have experienced significant and rapid growth in
revenue and profits since the inception of our business in 1990. There can be no
assurance that our business will continue to grow in a similar fashion in the
future or that we can effectively adapt our management, administrative, and
operational systems to respond to any future growth. Further, there can be no
assurance that our operating margins will not be adversely affected by future
changes in and expansion of our business or by changes in economic conditions.
INSURANCE. Our future insurance and claims expenses might exceed historical
levels, which could reduce our earnings. We currently self-insure for a portion
of our claims exposure resulting from cargo loss, personal injury, and property
damage, combined up to $1,750,000 per occurrence. Our worker's compensation
self-insurance level remains at a maximum of $500,000, and our health insurance
self-insurance level is $100,000 per person per year. If the number of claims,
or severity of claims, for which we are self-insured increases, our operating
results could be adversely affected. Also, we maintain insurance with licensed
insurance companies above the amounts for which we self-insure. After several
years of aggressive pricing, insurance carriers have raised premiums which has
increased our insurance and claims expense. The terrorist attacks of September
11, 2001, in the United States, and subsequent events, may result in additional
increases in our insurance expenses. If these expenses continue to increase, and
we are unable to offset the increase with higher freight rates, our earnings
could be materially affected.
REVENUE EQUIPMENT. Our growth has been made possible through the addition of new
revenue equipment. Difficulty in financing or obtaining new revenue equipment
(for example, delivery delays from manufacturers or the unavailability of
independent contractors) could restrict future growth.
In the past we have acquired new tractors and trailers at favorable prices, and
have entered into agreements with the manufacturers to repurchase the tractors
from us at agreed prices in exchange for new tractors. Current developments in
the secondary tractor and trailer resale market have resulted in a large supply
of used tractors and trailers on the market. This supply of tractors has
depressed the market value of used equipment to levels significantly below the
prices at which the manufacturers have agreed
17
to repurchase the equipment. Accordingly, some manufacturers may refuse or be
financially unable to keep their commitments to repurchase equipment according
to their repurchase agreement terms, some manufacturers have increased prices
and refused to honor or have modified repurchase agreements. SEE PART II, ITEM
1, LEGAL PROCEEDINGS, BELOW FOR A DISCUSSION OF THE RESOLUTION OF OUR DISPUTE
WITH FREIGHTLINER, L.L.C.
Our business plan takes into account new equipment price increases due to engine
design requirements imposed effective October 1, 2002, by the Environmental
Protection Agency. The cost of operating new engines is expected to be somewhat
higher than the cost of operating the older engines. If new equipment prices
were to increase more than anticipated, or if the price of repurchase agreements
were to decrease, we may be required to increase our depreciation and financing
costs, write down the value of used equipment, or retain some of our equipment
longer, with the resulting increase in operating expense.
If our resulting cost of revenue equipment were to increase, or prices of used
revenue equipment were to decline, and if we were unable to offset these
increases through rate increases or cost savings, our operating costs could
increase, which could materially and adversely affect our earnings and cash
flows.
REGIONAL OPERATIONS. Currently, a significant portion of our business is
concentrated in the Arizona and California markets and a general economic
decline or a natural disaster in either of these markets could have a material
adverse effect on our growth and profitability. If we are successful in deriving
a more significant portion of our revenues from markets in the Midwest, South
Central, Southeastern and Southern regions, and from 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 our headquarters 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 of our regional operations throughout the United
States slow or stagnate, the results of our operations could be adversely
affected. We may encounter operating conditions in these new markets that differ
substantially from those previously experienced in our western United States
markets. There can be no assurance that our regional operating strategy, as
employed in the western United States, can be duplicated successfully in the
other areas of the United States or that it will not take longer than expected
or require a more substantial financial commitment than anticipated.
TECHNOLOGY. We utilize Terion's trailer-tracking technology to assist with
monitoring the majority of our trailers. Terion has recently reorganized under
Chapter 11 of the Federal Bankruptcy Code. If Terion ceases operations or
abandons that technology, we would be required to incur the cost of replacing
that technology or could be forced to operate without this trailer-tracking
technology, which could adversely affect our trailer utilization and our ability
to assess detention charges.
INVESTMENTS. We have invested $200,000 and loaned approximately $2.5 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. Randy Knight, Kevin
Knight, Gary Knight and Keith Knight have personally guaranteed $2,100,000 of
our loan to Concentrek. 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.
18
DRIVER RETENTION, DRIVER LITIGATION. Difficulty in attracting or retaining
qualified drivers, including independent contractors, or a downturn in customer
business cycles or shipping demands also could have a material adverse effect on
our growth and profitability. If a shortage of drivers should occur in the
future, or if we were unable to continue to attract and contract with
independent contractors, we could be required to adjust our driver compensation
package, which could adversely affect our profitability if not offset by a
corresponding increase in rates.
SEASONALITY. In the transportation industry, results of operations frequently
show a seasonal pattern. Seasonal variations may result from weather or from
customer's reduced shipments after the busy winter holiday season. To date, our
revenue has not shown any significant seasonal pattern. Because we operate
primarily in Arizona, California and the western United States, winter weather
conditions have generally not adversely affected our business. The expansion of
our operations in the Midwest, Rocky Mountain, the East Coast, the Southeast,
and Gulf Coast regions could expose us to greater operating variances due to
seasonal weather in these regions. Shortage of energy issues in California and
elsewhere in the Western United States could result in an adverse effect on our
operations and demand for our services should these shortages continue or
increase. This risk may exist in the other regions in which we operate,
depending upon future changes in the energy industry.
INFLATION. Many of our operating expenses, including fuel costs and fuel taxes,
are sensitive to the effects of inflation, which could result in higher
operating costs. During 2000, 2001 and the first nine months of 2002, we
experienced fluctuations in fuel costs as a result of varying conditions in the
petroleum industry. We have also periodically experienced some wage increases
for drivers. Increases in fuel costs and driver compensation are expected to
continue during 2002 and may affect our operating income, unless we are able to
pass those increased costs to customers through rate increases or fuel
surcharges. We have initiated an aggressive program to obtain rate increases and
fuel surcharges from customers in order to cover increased costs due to these
increases in fuel prices, driver compensation and other expenses and have been
successful in implementing some fuel surcharges. Competitive conditions in the
transportation industry, including fluctuating demand for transportation
services, could limit our ability to continue to obtain rate increases or fuel
surcharge.
For other risks and uncertainties that might affect our future operations,
please review Part II of our Annual Report on Form 10-K - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS -
FACTORS THAT MAY AFFECT FUTURE RESULTS."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rate on debt and
from changes in commodity prices. Under Financial Accounting Reporting Release
Number 48, we are required to disclose information concerning market risk with
respect to foreign exchange rates, interest rates, and commodity prices. We have
elected to make such disclosures, to the extent applicable, using a sensitivity
analysis approach, based on hypothetical changes in interest rates and commodity
prices.
Except as described below, we have not had occasion to use derivative financial
instruments for risk management purposes and do not use them for either
speculation or tracking. Because our operations are confined to the United
States, we are not subject to foreign currency risk.
19
INTEREST RATE RISK. We are subject to interest rate risk to the extent we borrow
against our line of credit or incur debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. We have not issued debt instruments. An increase in short-term
interest rates could have a material adverse effect on our financial condition
if our debt levels increase and if the interest rate increases are not offset by
freight rate increases or other items. We have entered into an interest rate
swap agreement with our primary lender to better manage cash flow.
Under this swap agreement a one- percent (1%) increase or decrease in interest
rates would result in a corresponding increase or decrease in annual interest
expense of approximately $122,000. Management does not foresee or expect in the
near future any significant changes in our exposure to interest rate
fluctuations or in how that exposure is managed by us. We have not issued
corporate debt instruments.
COMMODITY PRICE RISK. We are also subject to commodity price risk with respect
to purchases of fuel. Prices and availability of petroleum products are subject
to political, economic and market factors that are generally outside our
control. Because our operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect our results
of operations and financial condition if we are unable to pass increased costs
on to customers through rate increases or fuel surcharges. Historically, we have
sought to recover a portion of our short-term fuel price increases from
customers through fuel surcharges. Fuel surcharges that can be collected do not
always offset the increase in the cost of diesel fuel. For the three months
ended September 30, 2002, fuel expense, net of fuel surcharge, represented 16.3%
of our total operating expenses, net of fuel surcharge, compared to 15.6% 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 may be 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 purchased 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 may be 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 $1.9 million. Future increases in the NY MX HO average
price would result in us not having to make payments under these agreements.
Management's current valuation of the fuel purchase agreements indicates there
was no material impact upon adoption of SFAS No. 133 on our results of
operations and financial position, and we have valued these items at fair value
in the accompanying September 30, 2002, condensed consolidated financial
statements.
ITEM 4. 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 on under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief
20
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 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.
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 prevent all error or intentional fraud.
An internal control system, no matter how well-conceived and operated, can
provide only reasonable, 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 there are 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 control issues and instances of fraud, if
any, within the Company have been detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. These proceedings primarily involve
personnel matters, including Equal Employment Opportunity Commission ("EEOC")
claims and claims for personal injury or property damage incurred in the
transportation of freight. The Company maintains insurance to cover liabilities
arising from the transportation of freight for amounts in excess of self-insured
retentions. It is the Company's policy to comply with applicable equal
employment opportunity laws and the Company periodically reviews its policies
and practices for equal employment opportunity compliance.
On July 31, 2002, we reached a resolution of our litigation with Freightliner,
L.L.C. ("Freightliner") through successful mediation. We initiated suit to
protect our contractual and other rights concerning new equipment purchase
prices and tractor repurchase commitments made to us by Freightliner. Of the net
benefits recognized under the settlement agreement, the majority has been
primarily recognized as an adjustment to the basis of the tractors acquired from
Freightliner, which will be depreciated over estimated lives of the underlying
equipment. In addition, Freightliner agreed to deliver 250 tractors under the
settlement agreement. We are pleased to put this dispute behind us and hope to
develop a positive working relationship with Freightliner in the near future.
21
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
----------- -----------
Exhibit 3 Instruments defining the rights of security
holders, including indentures
(3.1) Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1. No
33-83534.)
(3.2) Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 to the
Company's report on Form 10-K for the period
ending December 31, 1996.)
Exhibit 4 Instruments defining the rights of security
holders, including indentures
(4.1) Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Report
on Form 10-K for the fiscal year ended December
31, 1994.)
(4.2) Sections 2 and 5 of the Amended and Restated
Bylaws of the Company. (Incorporated by reference
to Exhibit 3.2 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1995.)
22
Exhibit 11 Schedule of Computation of Net Income Per Share
(Incorporated by reference from Note 2, Net Income
Per Share, in the Notes To Condensed Consolidated
Financial Statements on Form 10-Q, for the quarter
and nine months ended September 30, 2002.)
(a) Reports on Form 8-K
1. Form 8-K filed August 5,2002, resolution of litigation with
Freightliner, L.L.C.
2. Form 8-K filed August 14, 2002, announcing filing
of certifications required pursuant to Section 906 of the
Sarbanes-Oxley Act.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
Date: November 8, 2002 By: /s/ Kevin P. Knight
------------------------------------
Kevin P. Knight
Chief Executive Officer
Date: November 8, 2002 By: /s/ Timothy Kohl
------------------------------------
Timothy Kohl
Chief Financial Officer and
Principal Financial Officer
24
CERTIFICATION
I, Kevin P. Knight, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Knight
Transportation, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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.
November 8, 2002
/s/ Kevin P. Knight
----------------------------------------
Kevin P. Knight
Chief Executive Officer
25
CERTIFICATION
I, Timothy M. Kohl, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Knight
Transportation, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
November 8, 2002
/s/ Timothy M. Kohl
----------------------------------------
Timothy M. Kohl
Chief Financial Officer
26
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File No. 0-24946
27
KNIGHT TRANSPORTATION, INC.
INDEX TO EXHIBITS TO FORM 10-Q
Sequentially
Exhibit No. Description Numbered Pages(1)
- ----------- ----------- -----------------
Exhibit 4 Instruments defining the rights of
security holders, including indentures
(a) Articles 4, 10 and 11 of the Restated
Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1
to the Company's Report on Form 10-K for
the fiscal year ended December 31, 1994.)
(b) Sections 2 and 5 of the Amended and
Restated By-laws of the Company.
(Incorporated by reference to Exhibit 3.2
to the Company's Report on Form 10-K for
the fiscal year ended December 31, 1995.)
- ----------
(1) The page numbers where exhibits (other than those incorporated by
reference) may be found are indicated only on the manually signed report.
28