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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-24946
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Buckeye Road 85043
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
(602) 269-2000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $0.01 par value NASDAQ-NMS
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 10, 1997, was $89,305,900 (based upon $22.63 per share
being the closing sale price on that date as reported by the National
Association of Securities Dealers Automated Quotation System-National Market
System ("NASDAQ-NMS")). In making this calculation, the issuer has assumed,
without admitting for any purpose, that all executive officers and directors of
the company, and no other persons, are affiliates.
The number of shares outstanding of the registrant's common stock as of March
10, 1997, was 9,904,500.
The Information Statement for the Annual Meeting of Shareholders to be held on
May 14, 1997 is incorporated into this Form 10-K Part III by reference.
TABLE OF CONTENTS
KNIGHT TRANSPORTATION, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996
Pages
-----
PART I
Item 1. Business......................................................................................1
Item 2. Properties................................................................................... 7
Item 3. Legal Proceedings............................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 8
PART II
Item 5. Market For Company's Common Equity and Related Shareholder Matters........................... 8
Item 6. Selected Financial Data...................................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................................10
Item 8. Financial Statements and Supplementary Data..................................................16
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure..........................16
PART III
Item 10. Directors And Executive Officers of The Company..............................................17
Item 11. Executive Compensation.......................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................17
Item 13. Certain Relationships and Related Transactions...............................................17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................17
SIGNATURES.......................................................................................................20
INDEX TO EXHIBITS............................................................................................... 37
PART I
Item 1. Business
Except for the historical information contained herein, the
discussion in this Annual Report contains forward-looking statements that
involve risks, assumptions and uncertainties which are difficult to predict.
Words such as "believe," "may," "could" and "likely" and variations of these
words, and similar expressions, are intended to identify such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled
"Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed in this Part and elsewhere in this Annual Report.
General.
Knight Transportation, Inc. ("Knight" or the "Company") is a
short-to-medium haul, dry van truckload carrier headquartered in Phoenix,
Arizona. The Company transports general commodities, including consumer goods,
packaged foodstuffs, paper products, beverage containers and imported and
exported commodities.
The Company commenced operations in July 1990, when Kevin,
Gary and Keith Knight joined Randy Knight to establish a new short-to-medium
haul truckload carrier. The Company's stock has been publicly traded since
October 1994. From 1991 to 1996, Knight's revenue has grown to $77.5 million
from $13.4 million, and net income has increased to $7.5 million from $.9
million. This growth resulted from expansion of the Company's customer base and
increased volume from existing customers, and was facilitated by the continued
expansion of the Company's fleet, including an increase in the Company's
independent contractor fleet. The Company has provided truckload carrier service
to the Western United States out of its Phoenix, Arizona headquarters since
1990. During 1996, the Company established operations near Houston, Texas to
provide dedicated services to one of its larger customers and to commence
service in the Texas and Louisiana region. During the same period, the Company
also established operations in Indianapolis, Indiana, from which it provides
regional and dedicated services in the Midwest and on the East Coast.
Operations
Knight's operating strategy focuses on four key elements:
growth, regional operations, customer service, and operating efficiencies.
o Growth. Knight's objective is to achieve significant growth
through the controlled expansion of high quality service to existing customers
and the development of new customers in its expanded market areas. The Company
has developed an independent contractor program in order to increase its tractor
fleet and provide additional service to customers, while minimizing capital
investment by the Company. The Company believes that there are significant
opportunities to continue to increase its business in the short-to-medium haul
market by pursuing existing strategies and expanding its dedicated services.
-1-
o Regional Operations. The Company has established operations
near Houston, Texas to provide dedicated services to one of its larger customers
and to commence regional services in Texas and Louisiana. The Company has also
initiated operations in Indianapolis, Indiana, from which it provides regional
and dedicated service in the Midwest and on the East Coast. Knight anticipates
that its three regional operating bases will provide a platform for future
growth.
o Customer Service. Knight's operating strategy is to provide
a high level of service to customers, establishing the Company as a preferred or
"core carrier" for customers who have time sensitive, high volume or high weight
requirements. The Company's services include multiple pick-ups and deliveries,
dedicated equipment and personnel, on-time pickups and deliveries within narrow
time frames, specialized driver training, and other services tailored to meet
its customers' needs. The Company has adopted an equipment configuration that
meets a wide variety of customer needs and facilitates customer shipping
flexibility. The Company uses light weight tractors and high cube trailers
capable of handling both high volume and high weight shipments.
o Operating Efficiencies. The Company employs a number of
strategies that it believes are instrumental to its efforts to achieve and
maintain operating efficiencies. Knight seeks to maintain a simplified operation
that focuses on operating dry vans in particular geographical and shipping
markets. This approach allows the Company to concentrate its marketing efforts
to achieve higher penetration of its targeted service areas. The Company seeks
operating economies by purchasing a generally uniform and compatible fleet of
tractors and trailers that facilitates Knight's ability to serve a broad range
of customer needs and thereby maximizes equipment utilization and efficiencies
in maintenance and positioning.
Marketing and Customers
The Company's sales and marketing function is led by its
senior management, who are assisted by other sales professionals. The Company's
marketing team emphasizes the Company's high level of service and ability to
accommodate a variety of customer needs. The Company's marketing efforts are
designed to take advantage of the trend among shippers toward private fleet
conversions, outsourcing transportation requirements, and the use of core
carriers to meet shippers' needs.
Knight has a diversified customer base. For the year ended
December 31, 1996, the Company's twenty-five (25) largest customers represented
56.7% of operating revenue, its ten largest customers represented 36.9% of
operating revenue, and its five largest customers represented 24.0% of the
Company's operating revenue. The Company believes that a substantial majority of
the Company's twenty-five (25) largest customers regard Knight as a preferred or
"core carrier." Most of the Company's truckload carriage contracts are
cancelable on 30-days notice. The loss of one or more large customers could have
a materially adverse effect on the Company's operating results.
Knight seeks to provide consistent, timely, flexible and cost
efficient service to shippers. The Company's objective is to develop and service
specified traffic lanes for customers who ship on a consistent basis, thereby
providing a sustained, predictable traffic flow and ensuring high equipment
utilization. The short-to-medium haul segment of the truckload carrier market
demands timely pickup and delivery and, in some cases, response on short notice.
Although price is a primary concern to all shippers, the Company seeks to obtain
a competitive advantage by providing high quality service to customers.
-2-
To be responsive to customers' and drivers' needs, the Company often assigns
particular drivers and equipment to prescribed routes, providing better service
to customers, while obtaining higher equipment utilization.
Knight's standard dedicated fleet services involve management
of a significant part of a customer's transportation operations. Under a
dedicated carriage service agreement, the Company provides drivers, equipment
and maintenance, and, in some instances, transportation management services that
supplement the in-house transportation department. The Company's primary
arrangements for dedicated services in the Houston area obligate the Company to
provide a portion of its customer's transportation needs from one of the
customer's distribution centers. The Company provides these services through
Company furnished revenue equipment and drivers.
Each of the Company's two regional operations centers is
linked to the Company's Phoenix headquarters by the IBM AS/400 computer system.
The capabilities of this system enhance the Company's operating efficiency by
providing cost effective access to detailed information concerning equipment and
shipment status and specific customer requirements, and also permit the Company
to respond promptly and accurately to customer requests. The system also assists
the Company in matching available equipment and loads. The Company provides
electronic data interchange ("EDI") services to shippers requiring such service.
Drivers, Other Employees, and Independent Contractors
The recruitment, training and retention of qualified drivers
is essential to support the Company's continued growth and to meet the service
requirements of the Company's customers. Drivers are selected in accordance with
specific objective Company quality guidelines relating primarily to safety
history, driving experience, road test evaluations, and other personal
evaluations, including physical examinations and mandatory drug and alcohol
testing.
The Company seeks to maintain a qualified driver force by
providing attractive and comfortable equipment, direct communication with senior
management, competitive wages and benefits, and other incentives designed to
encourage driver retention and long-term employment. Many drivers are assigned
to dedicated or semi-dedicated fleet operations, thereby enhancing job
predictability. Drivers are recognized for providing superior service and
developing good safety records.
Knight's drivers are compensated on the basis of miles driven
and length of haul. Drivers also are compensated for additional flexible
services provided to the Company's customers. Drivers participate in Knight's
401(k) program and in Company-sponsored health, life and dental plans. Knight's
drivers and other employees who meet eligibility criteria also participate in a
stock option plan and an employee incentive program.
As of December 31, 1996, Knight employed 614 persons including
467 drivers and 23 maintenance personnel. None of the Company's employees is
represented by a labor union.
During 1994, the Company initiated an independent contractor
program. Because independent contractors provide their own tractors, the
independent contractor program provides the Company an alternative method of
obtaining additional revenue equipment. The Company intends to
-3-
continue to increase its use of independent contractors. As of December 31,
1996, the Company had 158 tractors owned and operated by independent
contractors. Each independent contractor enters into a contract with the Company
pursuant to which it is required to furnish a tractor and a driver exclusively
to transport, load and unload goods carried by the Company. Independent
contractors are paid a fixed level of compensation based on total of trip-loaded
and empty miles and are obligated to maintain their own tractors and pay for
their own fuel. The Company provides trailers for each independent contractor.
The Company also provides maintenance services for its independent contractors
for a charge.
Revenue Equipment
The Company operates a fleet of 53-foot long, high cube
trailers, including 45 refrigerated trailers in its fleet as of March 10, 1997.
The efficiency and flexibility provided by its fleet configurations permit the
Company to handle both high volume and high weight shipments. Knight's fleet
configuration also allows the Company to move freight on a "drop-and-hook"
basis, increasing asset utilization and providing better service to customers.
Knight maintains a high trailer to tractor ratio, targeting a ratio of 2.7 to 1.
Management believes this ratio promotes efficiency and allows it to serve a
large variety of customers' needs without significantly changing or modifying
equipment.
Levels of growth in the Company's tractor and trailer fleets
are determined based on market conditions, and the Company's experience and
expectations regarding equipment utilization. In acquiring revenue equipment,
the Company considers a number of factors, including economy, price, technology,
warranty terms, manufacturer support, driver comfort and resale value. As of
December 31, 1996, the Company operated 417 company tractors with an average age
of 1.3 years and 1529 trailers with an average age of 2.2 years. The Company
also had under contract, as of December 31, 1996, 158 tractors, operated by
independent contractors.
The Company seeks to minimize the operating costs of its
tractors and trailers by maintaining a relatively new fleet featuring cost
saving technologies. The Company's current policy is to replace most of its
tractors within 36 months after the date of purchase and replace its trailers
over a five-to- seven year period. Actual replacement depends upon the condition
of particular equipment, its resale value and other factors. The Company employs
a continuous preventive maintenance program designed to minimize equipment down
time, facilitate customer service, and enhance trade value when equipment is
replaced. The Company believes that its equipment acquisition program allows it
to meet the needs of a wide range of customers in the dry van truckload market
while, at the same time, controlling costs relating to maintenance, driver
training and operations.
Safety and Risk Management
The Company is committed to ensuring the safety of its
operations. The Company regularly communicates with drivers to promote safety
and instill safe work habits through Company media and safety review sessions.
The Company conducts quarterly safety training meetings for its drivers and
independent contractors. In addition, the Company has an innovative recognition
program for driver safety performance,
-4-
and emphasizes safety through its equipment specifications and maintenance
programs. The Company's Safety Director is involved in the review of all
accidents.
The Company requires prospective drivers to meet higher
qualification standards than those required by the United States Department of
Transportation ("DOT"). The DOT requires the Company's drivers to obtain
national commercial drivers' licenses pursuant to regulations promulgated by the
DOT. The DOT also requires that the Company implement a drug and alcohol testing
program in accordance with DOT regulations. The Company's program includes
pre-employment, random, post-accident and post-injury drug testing.
The Company's Chief Financial Officer and Director of Safety
are responsible for securing appropriate insurance coverages at cost effective
rates. The primary claims arising in the Company's business consist of cargo
loss and damage, and auto liability (personal injury and property damage). The
Company is self-insured for personal injury and property damage up to a maximum
limit of $100,000 per occurrence, for collision, comprehensive, and cargo
liability up to a combined limit of $25,000 per occurrence, and for workers'
compensation up to $250,000 per occurrence. The Company maintains insurance to
cover liabilities in excess of these amounts. The Company's insurance policies
provide for general liability coverage up to $1,000,000 per occurrence and
$2,000,000 in the aggregate, automobile liability coverage up to $1,000,000 per
occurrence, cargo insurance up to $2,500,000 per occurrence, and additional
umbrella liability coverage up to $14,000,000. The Company also maintains
primary and excess coverage for employee medical expenses and hospitalization,
and damage to physical properties. The Company carefully monitors claims and
participates actively in claims estimates and adjustments. The estimated costs
of the Company's self-insured claims, which include estimates for incurred but
unreported claims, are accrued as liabilities on the Company's balance sheet.
Management believes that the Company's insurance coverages are adequate to
protect the Company from significant losses.
Competition
The entire trucking industry is highly competitive and
fragmented. The Company competes primarily with other regional short-to-medium
haul truckload carriers, logistics providers and national carriers. Railroads
and air freight also provide competition, but to a lesser degree. Competition
for the freight transported by the Company is based on freight rates, service,
and efficiency. The Company also competes with other motor carriers for the
services of drivers and independent contractors. A number of the Company's
competitors have greater financial resources, own more equipment, and carry a
larger volume of freight than the Company. The Company believes that the
principal competitive factors in its business are service, pricing (rates), and
the availability and configuration of equipment that meets a variety of
customers' needs. Knight, in addressing its markets, believes that its principal
competitive strength is its ability to provide timely, flexible and
cost-efficient service to shippers. As a result, freight rates were soft or
declined and competition was increased. Historically, increased competition has
created downward pressure on rates and increased competition to provide higher
levels of service.
-5-
Regulation
Historically, the Interstate Commerce Commission ("ICC") and
various state agencies regulated truckload carriers' operating rights,
accounting systems, rates and charges, safety, mergers and acquisitions,
periodic financial reporting and other matters. In 1995, federal legislation was
passed that preempted state regulation of prices, rates, and services of motor
carriers and eliminated the ICC. Several ICC functions were transferred to the
Department of Transportation ("DOT"), but a lack of implementing regulations
currently prevents the Company from assessing the full impact of this action.
Generally, the trucking industry is subject to regulatory and legislative
changes that can have a materially adverse effect on operations.
Interstate motor carrier operations are subject to safety
requirements prescribed by the DOT. Such matters as weight and dimensions of
equipment are also subject to federal and state regulation. In 1988, the DOT
began requiring national commercial drivers' licenses for interstate truck
drivers.
The Company's motor carrier operations are also subject to
environmental laws and regulations, including laws and regulations dealing with
underground fuel storage tanks, the transportation of hazardous materials and
other environmental matters. The Company has initiated programs to comply with
all applicable environmental regulations. As part of its safety and risk
management program, the Company periodically performs an internal environmental
review so that the Company can achieve environmental compliance and avoid
environmental risk. The Company's Phoenix facility was designed, after
consultation with environmental advisors, to contain and properly dispose of
hazardous substances and petroleum products used in connection with the
Company's business. The Company has rarely transported environmentally hazardous
substances and, to date, has experienced no significant claims for hazardous
substance shipments. In the event the Company should fail to comply with
applicable regulations, the Company could be subject to substantial fines or
penalties and to civil or criminal liability.
The State of Arizona has enacted laws that provide for a water
quality assurance revolving fund ("WQARF"). The purpose of these laws is to
identify and remediate areas of groundwater contamination resulting from the
release of hazardous substances. Once an area of contamination is identified,
the Arizona Department of Environmental Quality ("ADEQ") designates the area as
a WQARF Study Area in order to determine the extent of contamination and to
identity potentially responsible parties. Responsible parties are liable for the
cost of remediating contamination. In December 1987, ADEQ designated a 25 square
mile area in West Phoenix, which includes the Company's Phoenix, Arizona
location, as a WQARF Study Area. To date, ADEQ has not identified the Company as
a potentially responsible party or the Company's facility as a facility
warranting further investigation with respect to the WQARF Study Area. The
Company has been located at its present Phoenix facility since 1990. Neither the
Company nor its predecessors maintained underground petroleum storage tanks at
the Company's Phoenix location. Prior to 1974, the property upon which the
Company's Phoenix, Arizona facilities are located was farm land.
There are two underground storage tanks located on the
Company's Indianapolis property. The tanks are subject to regulation under both
federal and state law and are currently being leased to and operated by an
independent, third party fuel distributor. The Company assumed the lease as part
of its purchase of the property. The lessee has agreed to carry environmental
impairment liability insurance, naming the Company, as lessor, as an insured,
covering the spillage, seepage or other loss of petroleum products, hazardous
wastes, or similar materials onto the leased premises and has agreed to
indemnify the Company, as lessor, against damage from such occurrences. The
Indianapolis property is located
-6-
approximately 0.1 mile east of Reilly Tar and Chemical Corporation ("Reilly"), a
federal superfund site listed on the National Priorities List. The Reilly site
has known soil and groundwater contamination. There are also other sites in the
general vicinity of the Company's Indianapolis property that have known
contamination. Environmental reports obtained by the Company have disclosed no
evidence that activities on the Company's Indianapolis property have caused or
contributed to the area contamination.
The Company believes it is currently in material compliance
with applicable laws and regulations and that the cost of compliance has not
materially affected results of operations. See "Legal Proceedings" for
additional information regarding certain regulatory matters.
Item 2. Properties
The Company's headquarters and principal place of business is
located at 5601 West Buckeye Road, Phoenix, Arizona on approximately 43 acres.
The Company owns approximately 35 of the 43 acres and the remaining eight acres
are leased from Mr. L. Randy Knight, an officer and director of the Company and
one of its principal shareholders. See "Certain Relationships and Related
Transactions," below, for additional information.
In early 1997, the Company began construction of a bulk fuel
storage facility and fueling islands based at its Phoenix headquarters to obtain
greater operating efficiencies. The Company also commenced expansion of its
headquarters facilities. The Company estimates the construction of its bulk fuel
and fueling island facility will be completed by September 1997, and that the
expansion of the Company's headquarters facilities will be completed by October
1997.
During 1996, the Company purchased 9.5 acres in Indianapolis
to establish a regional operating facility. The facility includes a truck
terminal, administrative offices, and dispatching and maintenance services, as
well as room for future expansion, and will serve as a base for the Company's
operations in the Midwest. The Company's operations near Houston are currently
located on the premises of one of the Company's significant customers, for whom
it provides dedicated services. These facilities also support the Company's
non-dedicated operations in the Texas and Louisiana regions.
The Company leases office facilities in California, Oklahoma
and Utah, which it uses for fleet maintenance, record keeping and general
operations. The Company also leases space in various locations for temporary
trailer storage. Management believes that replacement space comparable to these
facilities is readily obtainable, if necessary.
As of December 31, 1996, the Company's aggregate monthly rent
for all leased properties was approximately $16,000.
The Company believes that its current facilities and those
under expansion are suitable and adequate for its present needs. The Company
periodically seeks to improve its facilities or identify favorable locations.
The Company has not encountered any significant impediments to the location or
addition of new facilities.
-7-
Item 3. Legal Proceedings
The Company is a party to ordinary, routine litigation and
administrative proceedings incidental to its business. These proceedings
primarily involve personnel matters including EEO claims and claims for personal
injury or property damage incurred in the transportation of freight. The Company
maintains insurance to cover liabilities arising from the transportation of
freight in amounts in excess of self-insured retentions. See "Business -- Safety
and Risk Management. It is the Company's policy to comply with applicable equal
employment opportunity laws and the Company periodically reviews its policies
and practices for equal employment opportunity compliance.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its
security holders during the fourth quarter of 1996.
PART II
Item 5. Market For Company's Common Equity and Related Shareholder Matters
Since the initial public offering of the Company's common
stock in October 1994, the common stock has been traded on the NASDAQ National
Market tier of The NASDAQ Stock Market under the symbol KNGT. The following
table sets forth, for the period indicated, the high and low bid information per
share of the Company's common stock as quoted through the NASDAQ-NMS. Such
quotations reflect inter-dealer prices, without retail markups, markdowns or
commissions and, therefore, may not necessarily represent actual transactions.
The Company's common stock was not publicly traded prior to October 25, 1994.
High Low
---- ---
1995
----
First Quarter $16.13 $11.44
Second Quarter $13.75 $11.63
Third Quarter $16.88 $13.50
Fourth Quarter $15.63 $13.00
1996
----
First Quarter $16.25 $13.13
Second Quarter $20.50 $15.00
Third Quarter $22.50 $18.25
Fourth Quarter $24.88 $18.63
As of March 10, 1997, the Company had 60 shareholders of
record and approximately 1,000 individual participants in security position
listings of its common stock.
-8-
The Company has never paid cash dividends on its common stock,
and it is the current intention of management to retain earnings to finance the
growth of the Company's business. Future payment of cash dividends will depend
upon financial condition, results of operations, cash requirements, and certain
corporate law requirements, as well as other factors deemed relevant by the
Board of Directors.
Item 6. Selected Financial Data
The selected consolidated financial data presented below for,
and as of the end of, each of the years in the five-year period ended December
31, 1996, are derived from the Company's Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," below, and the Consolidated Financial Statements and
Notes thereto included in Item 8 of this Form 10-K.
Years Ended December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollar amounts in thousands, except per share amounts
and operating data)
Statements of Income Data:
- --------------------------
Operating revenue $ 77,504 $ 56,170 $ 37,543 $ 26,381 $ 19,579
Operating expenses 64,347 45,569 29,431 21,255 16,213
Income from operations 13,157 10,601 8,112 5,126 3,366
Net interest expense and other (346) (196) (734) (844) (847)
Income before income taxes 12,810 10,406 7,378 4,282 2,519
Net income 7,510 5,806 4,094 2,447 1,399
Net income per share .78 .64 .49 .30 .17
Dividends per share -- -- -- -- --
Balance Sheet Data (at End of Period):
- --------------------------------------
Working capital (deficit) 4,141 $ (293) $ 1,761 $ (787) $ (1,327)
Total assets 64,118 43,099 32,588 24,651 18,724
Long-term obligations, net of current 53 981 2,117 9,208 7,334
Shareholders' equity 45,963 24,732 18,903 5,179 2,733
Operating Data:
- ---------------
Operating ratio 1/ 83.0% 81.1% 78.4% 80.6% 82.8%
Average revenue per mile $ 1.24 $ 1.26 $ 1.29 $ 1.22 $ 1.17
Average length of haul (miles) 489 494 482 472 464
Empty mile factor 9.6% 10.3% 10.1% 11.8% 14.3%
Tractors operated at end of period 2/ 575 425 291 199 147
Trailers operated at end of period 1,529 1,044 639 489 323
- --------
1/Operating expenses as a percentage of operating revenue.
2/Includes 158 independent contractor operated vehicles at December 31, 1996,
115 independent contractor operated vehicles at December 31, 1995, and 29
independent contractor operated vehicles at December 31, 1994.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction.
Except for the historical information contained herein, the
discussion in this Annual Report contains forward-looking statements that
involve risks, assumptions and uncertainties which are difficult to predict.
Words such as "believe," may," "could" and "likely" and variations of these
words, and similar expressions, are intended to identify such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in the section entitled
"Factors That May Affect Future Results," as well as those discussed in this
Item and elsewhere in this Annual Report.
General
The following discussion analyzes the Company's financial
condition and results of operations for the three-year period ended December 31,
1996, and should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto contained elsewhere in this report.
Knight was incorporated in 1989 and commenced operations in July 1990. For the
five-year period ended December 31, 1996, the Company's operating revenue grew
at a 41.8% compounded annual rate, while net income increased at a 54.2%
compounded annual rate.
During 1996, the Company commenced operations in Indianapolis,
Indiana and Katy, Texas. The Company's operations in Indianapolis were intended
to allow the Company to serve customers in the Midwest and on the East Coast and
to provide a platform for the expansion of the Company's operations in the
Midwest and on the East Coast. The Company's operations in Katy, Texas were
undertaken to provide dedicated service to a large customer and to provide a
base for the expansion of operations in the Texas and Louisiana regions.
The Company initiated an independent contractor program in
1994. As of December 31, 1996, the Company had 158 tractors owned and operated
by independent contractors. As a result of the increase in the use of
independent contractors, the Company has experienced a decrease in salaries,
wages and benefits, fuel and maintenance, and other expenses as a percentage of
operating revenue and a corresponding increase in purchased transportation as a
percentage of operating revenue. Purchased transportation represents the amount
an independent contractor is paid to haul freight for the Company on a mutually
agreed to per-mile basis. The Company's decision to focus fleet expansion on
independent contractors was based on such factors as the Company's reduced
capital requirements, since the independent contractors provide their own
tractors, the lower turnover rate that the Company has experienced with
independent contractors, and the Company's success in attracting qualified
independent contractors.
Results of Operations
The following table sets forth the percentage relationships of
the Company's expense items to operating revenue for the three-year period
indicated below:
-10-
Years ended December 31,
1996 1995 1994
------ ------ ------
Operating revenue ................................. 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and benefits ................... 28.7 29.1 33.8
Fuel ........................................... 10.2 10.9 12.7
Operations and maintenance ..................... 5.2 6.6 6.2
Insurance and claims ........................... 3.6 3.7 4.9
Operating taxes and licenses ................... 3.9 3.8 4.9
Communications ................................. .6 .5 .5
Depreciation and amortization .................. 9.7 9.7 10.9
Purchased transportation ....................... 18.6 14.0 1.8
Miscellaneous operating expenses ............... 2.5 2.8 2.7
------ ------ ------
Total operating expenses ................. 83.0 81.1 78.4
------ ------ ------
Income from operations ............................ 17.0 18.9 21.6
------ ------ ------
Net interest expense .............................. .4 .4 2.0
------ ------ ------
Income before income taxes ........................ 16.5 18.5 19.6
Income taxes ...................................... 6.8 8.2 8.7
------ ------ ------
Net Income ........................................ 9.7% 10.3% 10.9%
====== ====== ======
Fiscal 1996 Compared to Fiscal 1995
Operating revenue increased by 38.0% to $77.5 million in 1996 from
$56.2 million in 1995. This increase resulted from expansion of the Company's
customer base and increased volume from existing customers and was facilitated
by a substantial increase in the Company's tractor and trailer fleet, including
an increase in the Company's independent contractor fleet, during 1996 compared
to 1995. The Company's fleet increased by 35.3% to 575 tractors (including 158
owned by independent contractors) as of December 31, 1996 from 425 tractors
(including 115 owned by independent contractors) as of December 31, 1995.
Average revenue per mile declined to $1.24 per mile for the year ended December
31, 1996 from $1.26 per mile for the same period in 1995. Equipment utilization
averaged 121,960 miles per tractor in 1996, compared to an average of 120,714
miles per tractor in 1995. The decrease in revenue per mile was the result of
increased competition in the western United States, coupled with increased
competition in the Company's new operating regions in Texas and Indiana.
Salaries, wages and benefits expense decreased as a percentage of
operating revenue to 28.7% for 1996 from 29.1 % for 1995 primarily as the result
of the increase in the ratio of independent contractors to Company drivers. The
Company records accruals for workers' compensation as a component of its claim
accrual, and the related expense is reflected in salaries, wages and benefits
expenses in its consolidated statements of income.
-11-
Fuel expense decreased as a percentage of operating revenue to
10.2% for 1996 from 10.9% in 1995. Although the Company's gross fuel costs
increased during 1996, the Company was able to recoup the majority of the
incremental increase with the implementation of a fuel surcharge. Additionally,
an increase in the Company's independent contractor fleet contributed to the
decrease in the Company's cost of fuel as a percentage of revenue. Independent
contractors are required to pay their own fuel costs.
Operations and maintenance expense decreased as a percentage
of operating revenue to 5.2% for 1996 from 6.6% in 1995. This decrease was the
result of eliminating the use of leased trailers through the purchase of new
trailers and from the rapid growth of the Company's independent contractor
program.
Insurance and claims expense remained relatively constant as a
percentage of operating revenue for the years ended December 31, 1996 and 1995
as the result of premium costs and claims remaining steady during the period.
Operating taxes and license expense increased slightly as a
percentage of operating revenue to 3.9% for the year ended December 31, 1996
from 3.8% for the year ended December 31, 1995. The increase resulted primarily
from the increased cost associated with the licensing of new trailers, which was
partially offset by the growth in the Company's independent contractor program.
Independent contractors are required to pay for their own fuel and mileage
taxes.
Communications expenses remained constant, with no significant
change taking place in 1996 compared to 1995.
Depreciation and amortization expense increased slightly for
the year ended December 31, 1996, but remained constant as a percentage of
operating revenue at 9.7% compared to the same period in 1995. Although the
Company added a significant number of trailers to its fleet, the incremental
cost was offset by the growth in the Company's independent contractor program.
Purchased transportation expense increased to 18.6% in 1996
from 14.0% in 1995 due to an increase in the Company's use of independent
contractor tractors to 158 as of December 31, 1996 from 115 as of December 31,
1995.
Miscellaneous operating expenses remained steady, with no
significant change taking place in 1996.
As a result of the above factors, the Company's operating
ratio (operating expenses as a percentage of operating revenue) for 1996 was
83.0% as compared to 81.1% for 1995.
Net interest expense remained constant as a percentage of
operating revenue at 0.4% for the year ended December 31, 1996 and for the same
period in 1995 as a result of the application of the proceeds from the Company's
initial and secondary stock offerings, respectively, to reduce debt and to
purchase revenue equipment.
Income taxes have been provided at the statutory federal and
state rates, adjusted for certain permanent differences in income for tax
purposes. Income tax expense decreased as a percentage of
-12-
revenue to 6.8% for the year ended December 31, 1996 from 8.2% for the year
ended December 31, 1995 primarily due to the Company discontinuing
reimbursements to drivers for non-deductible meals and other expenses. The
reduction in reimbursed expenses to drivers was offset by an increase in driver
compensation.
As a result of the preceding changes, the Company's net income
as a percentage of operating revenue was 9.7% in 1996 compared to 10.3% for
1995.
Fiscal 1995 Compared to Fiscal 1994
Operating revenue increased by 49.9% to $56.2 million in 1995
from $37.5 million in 1994. This increase resulted from expansion of the
Company's customer base and increased volume from existing customers and was
facilitated by a substantial increase in the Company's tractor and trailer
fleet, including an increase in the Company's independent contractor fleet,
during 1995 compared to 1994. The Company's fleet increased by 46.0% to 425
tractors (including 115 owned by independent contractors) as of December 31,
1995, from 291 tractors (including 29 owned by independent contractors) as of
December 31, 1994. Average revenue per mile declined to $1.26 per mile for the
year ended December 31, 1995 from $1.29 per mile for the same period in 1994 and
equipment utilization declined to an average of 120,714 miles per tractor in
1995 from an average of 128,994 miles per tractor in 1994 due to weakness in the
domestic freight market.
Salaries, wages and benefits expense decreased as a percentage
of operating revenue to 29.1% for 1995 from 33.8% for 1994 as a result of the
increase in the ratio of independent contractors to Company drivers. The Company
records accruals for workers' compensation as a component of its claims accrual,
and the related expense is reflected in salaries, wages and benefits expense in
its consolidated statements of income.
Fuel expense decreased as a percentage of operating revenue to
10.9% for 1995 from 12.7% in 1994. Though fuel costs per mile in 1995 remained
consistent with 1994 fuel costs per mile, the decrease was due to the growth of
the Company's independent contractor program. Independent contractors are
required to pay their own fuel costs.
Operations and maintenance expense increased slightly as a
percentage of operating revenue to 6.6% for 1995 from 6.2% in 1994. This change
resulted from the Company's need to lease trailers on a short term basis to
ensure an adequate trailer pool. The Company's need for additional trailers
resulted from the rapid growth of its independent contractor program.
Insurance and claims expense decreased as a percentage of
operating revenue to 3.7% for the year ended December 31, 1995 from 4.9% for the
same period in 1994. This decrease was due to a reduction in insurance premium
costs and a lower than expected level of actual claims costs during the period.
The claims accrual represents accruals for the estimated uninsured portion of
pending claims, including the potential for adverse development of known claims
and incurred but unreported claims.
Operating taxes and license expense decreased as a percentage
of operating revenue to 3.8% in 1995 from 4.9% in 1994. This decrease resulted
primarily from growth in the independent contractor program. Independent
contractors are required to pay their own mileage taxes.
-13-
Depreciation and amortization expense declined as a percentage
of operating revenue to 9.7% for 1995 from 10.9% for 1994. This change resulted
from the continued growth of the Company's independent contractor program and
the Company's increased use of leased trailers.
Purchased transportation expense increased to 14.0% in 1995
from 1.8% in 1994 due to an increase in the Company's use of independent
contractor tractors to 115 as of December 31, 1995 from 29 as of December 31,
1994.
Communications and miscellaneous operating expenses remained
steady, with no significant change taking place in 1995.
As a result of the above figures, the Company's operating
ratio (operating expenses as a percentage of operating revenue) for 1995 was
81.1% as compared to 78.4% for 1994.
Net interest expense declined as a percentage of operating
revenue to 0.4% for 1995 from 2.0% for 1994. This change resulted from a
decrease in the Company's debt. The decrease also reflects the full year effect
of the application of the proceeds from the Company's initial public offering to
reduce the Company's debt.
Income taxes have been provided at the statutory federal and
state rates, adjusted for certain permanent differences in income for tax
purposes. Income tax expenses decreased as a percentage of revenue to 8.2% for
the year ended 1995 from 8.7% for the year ended 1994, primarily due to the
Company discontinuing the non-deductible portion of reimbursements to drivers
for meals and other expenses.
As a result of the preceding changes, the Company's net income
as a percentage of operating revenue was 10.3% in 1995 as compared to 10.9% in
1994.
Liquidity and Capital Resources
The growth of the Company's business has required a
significant investment in new revenue equipment. The Company's primary source of
liquidity has been funds provided by operations, term borrowings to finance
equipment purchases and the Company's line of credit, and the Company's initial
and secondary public offerings in 1994 and 1996, respectively. Net cash provided
by operating activities totaled approximately $14.3 million, $10.7 million and
$10.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Capital expenditures for the purchase of revenue equipment,
office equipment and leasehold improvements totaled approximately $24.8 million,
$13.4 million and $8.2 million for the years ended December 31, 1996, 1995 and
1994, respectively. The Company anticipates that capital expenditures, net of
trade-ins, will be approximately $22.0 million for 1997, to be used primarily to
acquire new revenue equipment to expand the Company's fleet, to upgrade existing
facilities, and to acquire additional facilities.
Net cash provided by financing activities and net direct
equipment financing was approximately $8.3 million for the year ended December
31, 1996 and net cash used in financing activities and net direct
-14-
equipment financing was $0.7 million and $0.8 million for the years ended
December 31, 1995, and 1994, respectively. This change was due to the Company's
ability to offset the cost of purchasing revenue equipment with the proceeds of
the Company's secondary stock offering.
The Company maintains a $15 million revolving line of credit
with its lender and uses that line to finance the acquisition of revenue
equipment and other corporate purposes to the extent the cost of such
acquisitions is not provided by funds from operations. Under the Company's line
of credit, the Company is obligated to comply with certain financial covenants.
The rate of interest on borrowings against the line of credit will vary
depending upon the interest rate election made by the Company, based on either
the London Interbank Offered Rate (LIBOR plus .75%), the prime rate, or the
lender's certificate of deposit rate plus 2.15%. At December 31, 1996 and March
10, 1997, the Company had no borrowings under its revolving line of credit.
Management believes that the cash flow from operating
activities and available borrowing will be sufficient to meet the Company's
capital needs through the next 18 months. The Company will continue to have
significant capital requirements over the long term, which may require the
Company to incur debt or seek additional equity capital in the future. The
availability of this capital will depend upon prevailing market conditions, the
market price of the Common Stock and other factors over which the Company has no
control, as well as the Company's financial condition and results of operations.
Seasonality
To date, the Company's revenue has not shown any significant
seasonal pattern. Because the Company operates primarily in Arizona, California
and the western United States, winter weather generally has not adversely
affected the Company's business. Expansion of the Company's operations in the
Midwest, on the East Coast, and in the Texas and Louisiana regions could expose
the Company to greater operating variances due to seasonal weather in these
regions.
Inflation
Many of the Company's operating expenses, including fuel costs
and fuel taxes, are sensitive to the effects of inflation, which could result in
higher operating costs. The effects of inflation on the Company's business
during 1996, 1995 and 1994 generally were not significant.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement
of Accounting Financial Standard No. 128, (SFAS No. 108) Earnings Per Share,
which established a new accounting principle for accounting for earnings per
share. The standard is effective for fiscal year ended December 31, 1997. When
adopted, SFAS no. 128 will require restatement of prior years earnings per
share. The Company has not yet determined the impact SFAS No. 128 will have on
its financial position or results of operations.
Factors That May Affect Future Results
The Company anticipates an increase in licensing costs of
between one-half expected to one percent due primarily to increased licensing
expenses in California and expected increases in the Company's revenue
equipment. The Company believes that these increased costs will be partially
offset by other items.
A number of factors over which the Company has little or no
control may affect the Company's future results. Fuel prices, insurance costs,
liability claims, interest rates, the availability of qualified drivers,
fluctuations in the resale value of revenue equipment and customers' business
cycles and shipping demands are economic factors over which the Company has
little or no control. Significant increases or rapid fluctuations in fuel
prices, interest rates or increases in insurance costs or liability claims, to
the extent not offset by increases in freight rates, would reduce the Company's
profitability. Although the Company's independent contractors are responsible
for paying for their own equipment, fuel and other operating costs, significant
increases in these costs could cause them to seek higher compensation from the
Company or other contractual opportunities. Difficulty in attracting or
retaining qualified drivers or a downturn in customers' business cycles or
shipping demands also could have a material adverse effect on the growth and
profitability of the Company. If a shortage of drivers should occur in the
future the Company could be required to adjust its driver compensation package,
which could affect the Company's profitability if not offset by an increase in
rates. The Company's growth has been made possible through the
-15-
addition of new revenue equipment. Difficulty in financing or obtaining new
revenue equipment (for example, delivery delays) could restrict future growth.
If the resale value of the Company's revenue equipment were to decline, the
Company could be forced to retain some of its equipment longer, with a resulting
increase in operating expenses for maintenance and repairs.
The Company has experienced significant and rapid growth in
revenue and profits since the inception of its business in 1990. There can be
no assurance that the Company's business will continue to grow in a similar
fashion in the future or that the Company can effectively adapt its management,
administrative and operational systems to respond to any future growth. Further,
there can be no assurance that the Company's operating margins will not be
adversely affected by future changes in and expansion of the Company's business
or by changes in economic conditions.
At this time a significant portion of the Company's business
is concentrated in the Arizona and California markets and a general economic
decline or a natural disaster in either of these markets could have a material
adverse effect on the growth and profitability of the Company. If the Company is
successful in deriving a significant portion of its revenues from markets in the
Texas and Louisiana regions and the Midwest and on the East Coast in the near
future, its growth and profitability could be materially adversely affected by
general economic declines or natural disasters in those markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"; and "Business -- Operations and Marketing and Customers."
The Company has recently established operations near Houston,
Texas to provide dedicated services to one of its larger customers and to
commence regional service in the Texas and Louisiana regions and recently
initiated operations in Indianapolis, Indiana, in order to access markets in the
Midwest and on the East Coast. These operations will require the commitment of
additional revenue equipment and personnel, as well as management resources, for
future development. These initiatives represent the first established operations
of the Company in markets outside of its primary regional operations in the
western United States. Should the growth in the Company's operations near
Houston, Texas or in Indianapolis, Indiana slow or stagnate, the results of
Company operations could be adversely affected. The Company may encounter
operating conditions in these new markets that differ substantially from those
previously experienced in its Western United States markets. There can be no
assurance that the Company's regional operating strategy as employed in the
Western United States can be duplicated successfully or that it will not take
longer than expected or require a more substantial financial commitment than
anticipated in order for the Company to generate positive operating results in
these new markets.
Item 8. Financial Statements and Supplementary Data
The Consolidated Balance Sheets of Knight Transportation, Inc.
and Subsidiaries as of December 31, 1996 and 1995 and the related Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 1996, together with the related notes and
report of Arthur Andersen LLP, independent public accountants, are set forth at
pages 22 through 35, below.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
-16-
PART III
Item 10. Directors And Executive Officers of The Company
The Company hereby incorporates by reference the information
contained under the heading "Election of Directors" from its definitive
Information Statement to be delivered to shareholders of the Company in
connection with the 1997 Annual Meeting of Shareholders to be held May 14, 1997.
Item 11. Executive Compensation
The Company incorporates by reference the information
contained under the heading "Executive Compensation" from its definitive
Information Statement to be delivered to shareholders of the Company in
connection with the 1997 Annual Meeting of Shareholders to be held May 14, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company incorporates by reference the information
contained under the heading "Security Ownership of Certain Beneficial Owners and
Management" from its definitive Information Statement to be delivered to
shareholders of the Company in connection with the 1997 Annual Meeting of
Shareholders to be held May 14, 1997.
Item 13. Certain Relationships and Related Transactions
The Company incorporates by reference the information
contained under the heading "Certain Relationships and Related Transactions"
from its definitive Information Statement to be delivered to shareholders of the
Company in connection with the 1997 Annual Meeting of Shareholders to be held
May 14, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report on Form 10-K
at pages 22 through 35, below.
1. Consolidated Financial Statements:
Knight Transportation, Inc. and Subsidiaries
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
-17-
2. Consolidated Financial Statement Schedules required to be
filed by Item 8 and Paragraph (d) of Item 14:
Schedules not listed have been omitted because of the absence
of conditions under which they are required or because the required material
information is included in the Consolidated Financial Statements or Notes to the
Consolidated Financial Statements included herein.
3. Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed
at paragraph (c), below, and at the Exhibit Index beginning at
page 36.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report on Form 10-K.
(c) Exhibits:
The following exhibits are filed with this Form 10-K or incorporated
herein by reference to the document set forth next to the exhibit
listed below:
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.)
3.2* Amended and Restated Bylaws of the Company.
4.1 Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by reference
to Exhibit 3.1 to this Report on Form 10-K.)
4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company.
(Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.)
10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March
1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona.
(Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement
on Form S-1 No. 33-83534.)
10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow
Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 No. 33-83534.)
10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 No. 33-83534.)
-18-
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.)
10.3 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).
10.5 Restated Knight Transportation, Inc. 1994 Stock Option Plan, dated as of February
21, 1996. (Incorporated by reference to Exhibit 10.5 to the Company's report on
Form 10-K for the period ended December 31, 1995.)
10.6* Amended Indemnification Agreements between the Company, Don Bliss, Clark A.
Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G.D. Madden,
Minor Perkins and Keith Turley, and dated as of February 5, 1997.
10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company
and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the
Company's report on Form 10-K for the period ended December 31, 1995.)
10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the
Company, Swift Transportation Co., Inc. and United Title Agency of Arizona.
(Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K
for the period ended December 31, 1995.)
10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by
reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period
ended December 31, 1995.)
10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and
RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's
report on Form 10-K for the period ended December 31, 1995.)
21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to the
Company's report on Form 10-K for the period ending December 31, 1995.)
27* Financial Data Schedule
- -------------------------
* Filed herewith.
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Knight Transportation, Inc. has duly caused
this report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
By /s/ Kevin P. Knight
--------------------------------------
Kevin P. Knight,
Chief Executive Officer
Date: March 28, 1997.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ Randy Knight
- ---------------------------------- March 28, 1997
Randy Knight
Chairman of the Board, Director
/s/ Kevin P. Knight
- ---------------------------------- March 28, 1997
Kevin P. Knight
Chief Executive Officer, Director
/s/ Gary J. Knight
- ---------------------------------- March 28, 1997
Gary J. Knight
President, Director
/s/ Keith T. Knight
- ---------------------------------- March 28, 1997
Keith T. Knight
Executive Vice President, Director
-20-
/s/ Clark A. Jenkins
- ---------------------------------- March 28, 1997
Clark A. Jenkins
Chief Financial Officer, Secretary, Director
/s/ Keith L. Turley
- ---------------------------------- March 28, 1997
Keith L. Turley
Director
/s/ Donald A. Bliss
- ---------------------------------- March 28, 1997
Donald A. Bliss
Director
- ---------------------------------- March __, 1997
G.D. Madden
Director
- ---------------------------------- March __, 1997
Minor Perkins
Director
-21-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Knight Transportation, Inc.:
We have audited the accompanying consolidated balance sheets of KNIGHT
TRANSPORTATION, INC. (an Arizona corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Knight Transportation, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 23, 1997.
-22-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,244,745 $ 623,656
Accounts receivable, net of allowance for bad debts of approximately
$318,000 and $295,000 at December 31, 1996 and 1995, respectively (Note 3) 10,414,133 7,375,038
Inventories and supplies 328,825 422,589
Prepaid expenses 509,085 937,304
Deferred tax asset (Note 2) 1,319,400 1,420,000
---------------- ----------------
Total current assets 13,816,188 10,778,587
---------------- ----------------
PROPERTY AND EQUIPMENT:
Land and improvements 4,297,837 2,104,394
Buildings and improvements 970,963 246,384
Furniture and fixtures 1,837,844 1,158,140
Shop and service equipment 859,592 367,900
Revenue equipment 55,172,272 38,557,223
Leasehold improvements 575,015 469,854
---------------- ----------------
63,713,523 42,903,895
Less: accumulated depreciation (14,186,781) (10,926,067)
----------------- ----------------
PROPERTY AND EQUIPMENT, net (Note 3) 49,526,742 31,977,828
OTHER ASSETS (Note 6) 775,526 343,079
---------------- ----------------
$ 64,118,456 $ 43,099,494
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,954,286 $ 3,202,258
Accrued liabilities (Note 8) 2,286,099 1,773,293
Current portion of long-term debt (Note 3) 394,191 1,002,150
Line of credit (Note 3) - 2,000,000
Claims accrual (Note 5) 3,040,672 3,093,513
---------------- ----------------
Total current liabilities 9,675,248 11,071,214
LONG-TERM DEBT, less current portion (Note 3) 53,491 980,787
DEFERRED INCOME TAXES (Note 2) 8,426,558 6,315,200
---------------- ----------------
18,155,297 18,367,201
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY (Notes 7 and 8):
Preferred stock - -
Common stock 99,045 91,020
Additional paid-in capital 23,474,531 9,761,747
Retained earnings 22,389,583 14,879,526
---------------- ----------------
Total shareholders' equity 45,963,159 24,732,293
---------------- ----------------
$ 64,118,456 $ 43,099,494
================ ================
The accompanying notes are an integral
part of these consolidated balance sheets.
-23-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------------- ---------------- ---------------
OPERATING REVENUE $ 77,503,786 $ 56,170,279 $ 37,542,888
--------------- ---------------- ---------------
OPERATING EXPENSES:
Salaries, wages and benefits 22,217,900 16,359,957 12,676,306
Fuel 7,890,607 6,101,460 4,767,153
Operations and maintenance 4,017,698 3,727,240 2,315,991
Insurance and claims 2,820,086 2,097,361 1,842,192
Operating taxes and licenses 3,018,999 2,154,739 1,834,348
Communications 509,411 286,469 185,821
Depreciation and amortization 7,520,905 5,416,390 4,105,079
Purchased transportation 14,378,518 7,831,506 690,824
Miscellaneous operating expenses 1,973,131 1,593,711 1,013,008
--------------- ---------------- ---------------
64,347,255 45,568,833 29,430,722
--------------- ---------------- ---------------
Income from operations 13,156,531 10,601,446 8,112,166
--------------- ---------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 51,730 36,620 105,335
Interest expense (398,204) (232,371) (839,948)
---------------- ---------------- ---------------
(346,474) (195,751) (734,613)
---------------- ---------------- ---------------
Income before income taxes 12,810,057 10,405,695 7,377,553
INCOME TAXES (Note 2) (5,300,000) (4,600,000) (3,283,000)
---------------- ---------------- ---------------
Net income $ 7,510,057 $ 5,805,695 $ 4,094,553
=============== ================ ===============
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENT (Note 1) $ .78 $ .64 $ .49
====== ====== ======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 9,585,165 9,141,176 8,375,356
=============== ================ ===============
The accompanying notes are an integral
part of these consolidated financial statements.
-24-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock Additional
------------ Paid-in Retained
Shares Amount Capital Earnings Total
----------- ---------- ------------ ------------ -------------
BALANCE, December 31, 1993 8,200,000 $ 82,000 $ 118,000 $ 4,979,278 $ 5,179,278
Issuance of 900,000 shares of
common stock, net of offering
costs of $1,171,233 (Note 7) 900,000 9,000 9,619,767 - 9,628,767
Net income - - - 4,094,553 4,094,553
----------- ---------- ------------ ------------ -------------
BALANCE, December 31, 1994 9,100,000 91,000 9,737,767 9,073,831 18,902,598
Exercise of stock options 2,000 20 23,980 - 24,000
Net income - - - 5,805,695 5,805,695
----------- ---------- ------------ ------------ -------------
BALANCE, December 31, 1995 9,102,000 91,020 9,761,747 14,879,526 24,732,293
Exercise of stock options 2,500 25 29,975 - 30,000
Issuance of 800,000 shares of
common stock, net of offering
costs of $1,109,191 (Note 7) 800,000 8,000 13,682,809 - 13,690,809
Net income - - - 7,510,057 7,510,057
----------- ---------- ------------ ------------ -------------
BALANCE, December 31, 1996 9,904,500 $ 99,045 $ 23,474,531 $ 22,389,583 $ 45,963,159
=========== ========== ============ ============ =============
The accompanying notes are an integral
part of these consolidated financial statements.
-25-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,510,057 $ 5,805,695 $ 4,094,553
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,520,905 5,416,390 4,105,079
Allowance for doubtful accounts 23,131 162,045 83,179
Deferred income taxes, net 2,211,958 1,403,200 1,316,447
Changes in assets and liabilities-
Increase in receivables (3,062,225) (2,720,821) (1,642,985)
(Decrease) increase in inventories and supplies 93,764 (115,673) (75,410)
Decrease (increase) in prepaid expenses 428,219 (771,741) 172,223
(Increase) decrease in other assets (652,693) (370,499) 25,258
Decrease (increase) in accounts payable (250,046) 479,426 (126,068)
Increase in accrued liabilities and claims accrual 459,965 1,364,536 2,150,661
------------ ------------ ------------
Net cash provided by operating activities 14,283,035 10,652,558 10,102,937
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (21,919,774) (11,360,029) (3,087,876)
Purchase of temporary investment - real estate -- -- (588,296)
Increase in related party receivable -- -- (598,929)
Proceeds from temporary investment - real estate -- -- 588,296
------------ ------------ ------------
Net cash used in investing activities (21,919,774) (11,360,029) (3,686,805)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on line of credit 16,309,210 8,000,000 --
Payments on line of credit (18,309,210) (6,000,000) --
Borrowing of debt 759,200 -- --
Payments of debt (2,294,455) (1,311,348) (13,717,117)
Payment of notes payable - officers -- -- (365,625)
Decrease in accounts payable - equipment (1,927,726) (1,528,322) --
Proceeds from sale of common stock 13,690,809 -- 9,628,767
Proceeds from exercise of stock options 30,000 24,000 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 8,257,828 (815,670) (4,453,975)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 621,089 (1,523,141) 1,962,157
CASH AND CASH EQUIVALENTS, beginning of year 623,656 2,146,797 184,640
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,244,745 $ 623,656 $ 2,146,797
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing transactions:
Equipment acquired by direct financing $ -- $ 127,115 $ 3,616,298
Equipment acquired by accounts payable 2,929,800 1,927,726 1,528,322
Land acquired by retirement of shareholder advance -- -- 1,110,504
Cash Flow Information:
Income taxes paid $ 2,459,144 $ 3,368,373 $ 2,139,906
Interest paid 408,138 228,681 873,362
The accompanying notes are an integral part of
these consolidated financial statements.
-26-
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Knight Transportation, Inc. and Subsidiaries (the Company) is a short to
medium-haul, truckload carrier of general commodities operating primarily in the
western United States. The operations are centered in Phoenix, Arizona, where
the Company has its corporate offices, truck terminal, and dispatching and
maintenance services. During 1996, the Company expanded its operations by
opening new facilities in Katy, Texas and Indianapolis, Indiana. The Company
operates predominantly in one industry, road transportation, which is subject to
regulation by the Department of Transportation and various state regulatory
authorities.
The Company continues to develop its owner-operator program. Owner-operators are
independent contractors who provide their own tractors. The Company views
owner-operators as an alternative method of obtaining additional revenue
equipment. The Company had 158 and 115 owner-operators at December 31, 1996 and
1995, respectively.
Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the parent company Knight Transportation, Inc., and its wholly owned
subsidiaries, Quad-K Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc.,
and Knight Dedicated Services Ltd. Partnership. All material intercompany items
and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid instruments purchased
with original maturities of three months or less to be cash equivalents.
Inventories and Supplies - Inventories and supplies consist of tires and spare
parts which are stated at the lower of cost, using the first-in, first-out
(FIFO) method, or net realizable value.
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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
-----
Buildings and improvements 20-30
Furniture and fixtures 5
Shop and service equipment 5-10
Revenue equipment 5-7
Leasehold improvements 10
Land improvements 5
The Company expenses repairs and maintenance. For the years ended December 31,
1996, 1995 and 1994, repairs and maintenance expense totaled approximately
$1,883,000, $1,375,000 and $1,014,000, respectively and is included in operating
and maintenance expense in the accompanying consolidated statements of income.
Revenue equipment is depreciated to a salvage value of 15% for all tractors.
Trailers are depreciated to salvage values of 10% to 40%. The company
periodically reviews its estimates related to useful lives and salvage values
for revenue equipment.
Tires - Tires on revenue equipment purchased are capitalized as a part of the
equipment cost and depreciated over the life of the vehicle. Replacement tires
and recapping costs are expensed when placed in service.
Revenue Recognition - The Company's typical customer delivery is completed one
day after pickup. The Company recognizes operating revenues when the freight is
picked up for delivery and accrues the estimated direct costs to complete the
delivery. This method of revenue recognition is not materially different from
recognizing revenue based on completion of delivery.
Income Taxes - The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to credit risk consist principally of trade receivables. The
Company's three largest customers for each of the years 1996, 1995 and 1994,
represent 17%, 11% and 19% of operating revenues, respectively. The single
largest customer's revenues represent 9%, 4% and 9% of operating revenues for
the years 1996, 1995 and 1994, respectively.
-28-
Net Income Per Common Share and Common Share Equivalent - Net income per common
share and common share equivalent is computed by dividing net income by the
weighted average number of common stock and common stock equivalents assumed
outstanding during the year. Fully diluted net income per share is considered
equal to primary net income per share in all periods presented.
Fair Value of Financial Instruments - Cash, accounts receivable and payable,
accruals and line of credit borrowings approximate fair value because of their
short maturities.
The fair value of long-term debt, including current portion, is estimated based
on current rates offered to the Company for debt of the same maturities and
approximates the carrying amounts of long-term debt.
Recently Adopted Accounting Standards - The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, which established a new accounting principle for accounting for
the impairment of long-lived assets that will be held and used including certain
identifiable intangibles and goodwill related to those assets, and long-lived
assets and certain identifiable intangibles to be disposed of. The
implementation of SFAS No. 121 did not have a material impact on the Company's
financial position or results of operations.
(2) INCOME TAXES:
Income tax expense consists of the following:
1996 1995 1994
---------- ---------- ----------
Current income taxes:
Federal $2,429,100 $2,500,500 $1,464,800
State 658,900 696,300 501,753
---------- ---------- ----------
3,088,000 3,196,800 1,966,553
---------- ---------- ----------
Deferred income taxes:
Federal 1,805,300 1,173,300 1,142,700
State 406,700 229,900 173,747
---------- ---------- ----------
2,212,000 1,403,200 1,316,447
---------- ---------- ----------
Total income tax expense $5,300,000 $4,600,000 $3,283,000
========== ========== ==========
-29-
The effective income tax rate is different than the amount which would be
computed by applying statutory corporate income tax rates to the income before
income taxes. The differences are summarized as follows:
1996 1995 1994
---------- ---------- ----------
Tax at the statutory rate (34%) $4,355,400 $3,537,900 $2,508,400
State income taxes, net of federal
benefit 703,300 611,300 446,000
Other 241,300 450,800 328,600
---------- ---------- ----------
$5,300,000 $4,600,000 $3,283,000
========== ========== ==========
The net effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995, are as follows:
1996 1995
---------- ----------
Short-term deferred tax assets:
Claims accrual $1,216,300 $1,237,400
Other 103,100 182,600
---------- ----------
Total short-term deferred tax assets $1,319,400 $1,420,000
========== ==========
Long-term deferred tax liabilities:
Property and equipment depreciation $8,218,200 $6,072,500
Prepaid expenses deducted for tax purposes 208,358 242,700
---------- ----------
Total long-term deferred tax liabilities $8,426,558 $6,315,200
========== ==========
(3) LINE OF CREDIT AND LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1996 1995
----------- -----------
Notes payable to a commercial lending institution with varying monthly
payments from approximately $4,000 to $6,000 through 1998; collateralized
by tractors and trailers, fixed interest rates from 6.4% to 7.0%. $ 385,549 $ 1,687,177
Note payable to a financial institution with varying monthly payments from
approximately $8,900 to $9,200 through 1997; collateralized by trailers,
fixed interest rate of 7%. 62,133 168,645
Asset under capital lease. -- 127,115
----------- -----------
447,682 1,982,937
Less- Current portion (394,191) (1,002,150)
----------- -----------
$ 53,491 $ 980,787
=========== ===========
-30-
Maturities of long-term debt as of December 31, 1996, are as follows:
Years Ending
December 31, Amount
------------ --------
1997 $394,191
1998 53,491
--------
$447,682
========
The Company has a $15,000,000 revolving line of credit (see Note 5) with
principal due at maturity, July 1997, and interest payable monthly at three
options (Prime, LIBOR plus .75%, or Certificate of Deposit plus 2.15%).
Borrowings under the line of credit are limited to 80% of eligible accounts
receivable, as defined, and 50% of net fixed assets, as defined and amounted to
$2,000,000 at December 31, 1995. There were no outstanding borrowings under the
line of credit at December 31, 1996.
Under the terms of the line of credit, the Company is required to maintain
certain financial ratios. These ratios include: total liabilities to net worth
ratio, current ratio, and certain debt service ratios. The Company is also
required to maintain certain other financial conditions relating to corporate
structure, ownership and management.
The weighted average interest rate on these notes payable is 6.76% and 7.50% at
December 31, 1996 and 1995, respectively.
(4) COMMITMENTS AND CONTINGENCIES:
Purchase Commitments
As of December 31, 1996, the Company had purchase commitments for additional
tractors and trailers with an estimated purchase price of approximately
$14,250,000.
Although the Company expects to take delivery of this revenue equipment, delays
in the availability of equipment could occur due to factors beyond the Company's
control. Any delay or interruption in the availability of equipment in the
future could have a material adverse effect on the Company.
Disability Plan
The Company has a disability plan for certain of its key employees. The plan
provides disability benefits of $75,000 annually for five years if a key
employee terminates by reason of disability. The plan is subject to termination
at any time by the Board of Directors.
Other
The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Company's potential
exposure under the pending proceedings is adequately provided for in the
accompanying consolidated financial statements.
-31-
(5) CLAIMS ACCRUAL:
Under an agreement with its insurance underwriter, the Company acts as a
self-insurer for bodily injury and property damage claims up to $100,000 per
occurrence. The Company is self-insured for workers' compensation claims up to
$250,000 per occurrence for 1996 and 1995. The Company is also self-insured for
cargo liability up to $25,000 per occurrence. Liability in excess of these
amounts is assumed by the underwriter.
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. The agreements with the underwriters are collateralized by letters of
credit totaling $650,000. These letters of credit reduce the available
borrowings under the Company's line of credit (see Note 3).
(6) RELATED PARTY TRANSACTIONS:
The Company leased facilities from Total Warehousing, Inc. (Total) under a
32-month lease that was terminated in 1994. Terms of the lease called for rent
of $7,500 per month until June 1992, and $5,000 per month from July 1992 until
the end of the lease. Total is owned by a shareholder of the Company. In March
1994, the Company leased approximately eight acres and facilities from a
shareholder and officer, "the Shareholder", under a five year lease, with an
option to extend for two additional five-year terms. The lease terms include
base rent of $4,828 per month for the initial three years of the lease, and
increases of 3% on the third anniversary of the commencement date, the first day
of each option term, and the third anniversary of the commencement date of each
option term. In addition to base rent, the lease requires the Company to pay its
share of all expenses, utilities, taxes and other charges. The rent expense paid
to Total under the former lease was $10,000 for the year ended December 31,
1994. Rent expense paid to the Shareholder was approximately $59,000, $54,800
and $50,000 during 1996, 1995 and 1994, respectively.
The Company paid approximately $80,000 each year for certain of its key
employees' life insurance premiums during 1996, 1995 and 1994. The total
premiums paid are included in other assets in the accompanying consolidated
balance sheets. The life insurance premiums provide for distributions to the
beneficiaries of the policyholders. The Company is to receive the total premiums
paid into the policies at distribution prior to any beneficiary distributions.
In September 1994, the Company purchased for $1,285,000 approximately 20 acres
of property from a Shareholder.
The Company provided maintenance and shipping for Total of approximately
$16,000, $62,000 and $154,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Total provided general warehousing services to the Company
in the amount of approximately $14,000, $60,000 and $18,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
-32-
(7) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 100,000,000 shares of $.01
par value common stock; 9,904,500 and 9,102,000 shares of common stock were
issued and outstanding at December 31, 1996 and 1995, respectively. In addition,
the Company has authorized 50,000,000 shares of $.01 par value preferred stock,
none of which was outstanding at December 31, 1996 and 1995.
In October 1994, the Company issued 900,000 shares of common stock at $12.00 per
share in its initial public offering. The offering consisted of 1,800,000 shares
comprised of 900,000 newly-issued Company shares and 900,000 shares from
existing shareholders.
In July 1996, the Company issued 800,000 shares of common stock at $18.50 per
share (the Offering). The Offering consisted of 1,600,000 shares of common stock
comprised of 800,000 newly-issued Company shares and 800,000 shares from
existing shareholders.
(8) EMPLOYEE BENEFIT PLANS:
1994 Stock Option Plan
The Company established the 1994 Stock Option Plan (1994 Plan) with 650,000
shares of common stock reserved for issuance thereunder. The Plan will terminate
on August 31, 2004. The Compensation Committee of the Board of Directors
administers the stock incentive plan, and has the discretion to determine the
employees, officers and independent directors who receive awards, the type of
awards to be granted (incentive stock options, nonqualified stock options and
restricted stock grants) and the term, vesting and exercise price. Incentive
stock options are designed to comply with the applicable provisions of the
Internal Revenue Code (the Code) and are subject to restrictions contained in
the Code, including a requirement that exercise prices are equal to at least
100% of the fair market value of the common shares on the grant date and a
ten-year restriction on the option term.
Independent directors are not permitted to receive incentive stock options.
Non-qualified stock options may be granted to directors, including independent
directors, officers, and employees and provide for the right to purchase common
stock at a specified price, which may not be less than 85% of the fair market
value on the date of grant, and usually become exercisable in installments after
the grant date. Non-qualified stock options may be granted for any reasonable
term. The 1994 Plan provides that each independent director may receive, on the
date of appointment to the Board of Directors, non-qualified options to purchase
not less than 2,500 nor more than 5,000 shares of common stock, at an exercise
price equal to the fair market value of the common stock on the date of the
grant.
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS No.
123), Accounting for Stock-Based Compensation, the Company has elected to
account for stock transactions with employees pursuant to the provisions of
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees,
under which no compensation cost is recognized in the
-33-
accompanying consolidated financial statements. Had compensation cost for the
1994 Plan been recorded consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
1996 1995
------------- -------------
Net Income: As Reported $ 7,510,057 $ 5,805,695
Pro Forma 7,338,132 5,793,757
Earnings per share: As Reported .78 .64
Pro Forma .77 .63
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995 and 1996; risk free interest rate of 6.73%,
expected life of six years and expected volatility of 36%.
Because SFAS No. 123 has not been applied to options granted prior to January 1,
1995, the pro forma compensation cost disclosed above may not be representative
of that had such options been considered.
1996 1995
---------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------- ------- --------- ------
Outstanding at beginning of year 262,250 $ 12.06 251,250 $12.01
Granted 139,250 $ 13.98 25,000 $12.52
Exercised (2,500) $ 12.00 (2,000) $12.00
Forfeited (39,000) $ 12.48 (12,000) $12.00
Expired - $ - - $ -
--------- ---------
Outstanding at end of year 360,000 262,250
========= =========
Exercisable at end of year 7,500 $ 12.57 5,000 $12.27
========= =========
Weighted Average fair value of
options granted $ 6.65 $ 5.96
========= =========
Options outstanding at December 31, 1996 have exercise prices between $12.00 and
$18.75, with a weighted average remaining contractual life of 2.3 years.
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan (the Plan) for all employees who
are 19 years of age or older and have completed one year of service. The Plan as
amended in 1995 provides for a mandatory matching contribution equal to 50%, 50%
and 40% in 1996, 1995 and 1994, respectively, of the amount of the employee's
salary deduction not to exceed $625, $625 and $500 annually per employee in
1996, 1995 and 1994, respectively. The Plan also provides for a discretionary
matching contribution not limited to the amount permitted under the Internal
Revenue Code as deductible expenses. In 1996, 1995 and 1994, there were no
discretionary
-34-
contributions. Employees' rights to employer contributions vest after five years
from their date of employment. The Company's matching contribution, included in
accrued liabilities in the accompanying consolidated balance sheets, was
approximately $69,000, $60,000 and $40,300 for 1996, 1995 and 1994,
respectively.
-35-
EXHIBITS TO
KNIGHT TRANSPORTATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
-36-
KNIGHT EXHIBIT INDEX
--------------------
Exhibit Sequentially
Number Description Numbered Page 1/
------ ----------- ----------------
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. 40
4.1 Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by reference
to Exhibit 3.1 to this Report on Form 10-K.)
4.2 Sections 2 and 5 of the Amended and Restated Bylaws of
the Company. (Incorporated by reference to Exhibit 3.2
to this Report on Form 10-K.)
10.1 Purchase and Sale Agreement and Escrow Instructions
(All Cash) dated as of March 1, 1994, between Randy
Knight, the Company, and Lawyers Title of Arizona.
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 No.
33-83534.)
10.1.1 Assignment and First Amendment to Purchase and Sale
Agreement and Escrow Instructions. (Incorporated by
reference to Exhibit 10.1.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 No.
33-83534.)
10.1.2 Second Amendment to Purchase and Sale Agreement and
Escrow Instructions. (Incorporated by reference to
Exhibit 10.1.2 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 No. 33-83534.)
10.2 Net Lease and Joint Use Agreement between Randy
Knight and the Company dated as of March 1, 1994.
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 No.
33-83534.)
-37-
Exhibit Sequentially
Number Description Numbered Page 1/
------ ----------- ----------------
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 50
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).
10.5 Restated Knight Transportation, Inc. 1994 Stock Option
Plan, dated as of February 21, 1996. (Incorporated by
reference to Exhibit 10.5 to the Company's report on
Form 10-K for the period ended December 31, 1995.)
10.6* Amended Indemnification Agreements between the 99
Company, Don Bliss, Clark A. Jenkins, Gary J. Knight,
Keith Knight, Kevin P. Knight, Randy Knight, G.D.
Madden, Minor Perkins and Keith Turley, and dated as of
February 5, 1997. (Incorporated by reference to Exhibit
10.6 to the Company's report on Form 10-K for the
period ended December 31, 1995.)
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.)
-38-
Exhibit Sequentially
Number Description Numbered Page 1/
------ ----------- ----------------
10.9 Purchase and Sale Agreement dated as of February 13,
1996, between the Company and RR-1 Limited
Partnership. (Incorporated by reference to Exhibit 10.9 to
the Company's report on Form 10-K for the period ended
December 31, 1995.)
21.1 Subsidiaries of the Company. (Incorporated by reference
to Exhibit 21.1 to the Company's report on Form 10-K for
the period ended December 31, 1995.)
27* Financial Data Schedule
1/ The page numbers where exhibits (other than those incorporated by reference)
may be found are indicated only on the manually signed Report.
- -----------------------
* Filed herewith.
-39-