-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AOlvFoAyXU9FDhEmov54kZ4ui2MhTHNmsHT43cMb7RrKKXusDTjxBMAKF65byO1o ud9xNsIcdQEPUH9+GnVqSw== 0000950147-02-000446.txt : 20020415 0000950147-02-000446.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950147-02-000446 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNIGHT TRANSPORTATION INC CENTRAL INDEX KEY: 0000929452 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 860649974 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24946 FILM NUMBER: 02581318 BUSINESS ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 BUSINESS PHONE: 6022692000 MAIL ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 10-K 1 e-8261.txt ANNUAL REPORT FOR THE FISCAL YR ENDED 12/31/2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File No. 0-24946 KNIGHT TRANSPORTATION, INC. (Exact name of registrant as specified in its charter) Arizona 86-0649974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5601 West Buckeye Road, Phoenix, Arizona 85043 (Address of principal executive offices) (Zip Code) (602) 269-2000 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Title of Each Class Name of Exchange On Which Registered ------------------- ------------------------------------ Common Stock, $0.01 par value NASDAQ-NMS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 4, 2002, was $756,739,303 (based upon $20.49 per share being the closing sale price on that date as reported by the National Association of Securities Dealers Automated Quotation System-National Market System ("NASDAQ-NMS")). In making this calculation, the issuer has assumed, without admitting for any purpose, that all executive officers and directors of the company, and no other persons, are affiliates. The number of shares outstanding of the registrant's common stock as of March 4, 2002 was approximately 36,932,128. The Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2002 is incorporated into this Form 10-K Part III by reference. PART I ITEM 1. BUSINESS EXCEPT FOR CERTAIN HISTORICAL INFORMATION CONTAINED HEREIN, THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE STATEMENTS THAT COULD BE DEEMED FORWARD-LOOKING STATEMENTS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR OTHER FINANCIAL ITEMS; ANY STATEMENT OF PLANS, STRATEGIES, AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS; ANY STATEMENTS CONCERNING PROPOSED NEW SERVICES OR DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR PERFORMANCE; AND ANY STATEMENTS OF BELIEF AND ANY STATEMENT OF ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. WORDS SUCH AS "BELIEVE," "MAY," "COULD," "EXPECTS," "HOPES," "ANTICIPATES," AND "LIKELY," AND VARIATIONS OF THESE WORDS, OR SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS," SET FORTH BELOW. WE DO NOT ASSUME, AND SPECIFICALLY DISCLAIM, ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS ANNUAL REPORT. REFERENCES IN THIS ANNUAL REPORT TO "WE," "US," "OUR" OR THE "COMPANY" OR SIMILAR TERMS REFER TO KNIGHT TRANSPORTATION, INC. AND ITS SUBSIDIARIES. GENERAL We are a short-to-medium haul, dry van truckload carrier based in Phoenix, Arizona. We transport general commodities, including consumer goods, packaged foodstuffs, paper products, beverage containers and imported and exported commodities. We provide regional truckload carrier services from our facilities located in Phoenix, Arizona; Katy, Texas; Indianapolis, Indiana; Charlotte, North Carolina; Salt Lake City, Utah; Gulfport, Mississippi; and Kansas City, Kansas. Our stock has been publicly traded since October 1994. We have achieved substantial growth in revenue and income over the past five years. We have increased our operating revenue, before fuel surcharge, at a compounded annual growth rate of approximately 25.7%, from $99.4 million in 1997 to $241.7 million in 2001. During the same period, we have increased our net income at a compounded annual growth rate of approximately 20.9%, from $10.3 million to $19.0 million, including a one-time, pre-tax, write-off recorded during 2001 of $5.7 million for an investment made in a communications technology company. Net income, excluding this write-off, increased at a compounded annual growth rate of 24.7% to $22.4 million. This growth resulted from expansion of our customer base and increased volume from existing customers, and was facilitated by the continued expansion of our fleet, including an increase in our independent contractor fleet. SEE "GROWTH STRATEGY," below. OPERATIONS Our operating strategy is to achieve a high level of asset utilization while maintaining strict controls over our cost structure. To achieve these goals, we operate primarily in high-density, predictable traffic lanes in select geographic regions, and attempt to develop and expand our customer base around each of our terminal operations. This operating strategy allows us to take advantage of the large amount of freight traffic transported in regional markets, realize the operating efficiencies associated with regional hauls, and offer more flexible service to our customers than rail, intermodal, and smaller regional competitors. In addition, shorter hauls provide an attractive alternative to drivers in the truckload sector by reducing the amount of time spent away from home. We believe this improves driver retention, decreases recruitment and training costs, and reduces insurance claims and other costs. We operate a modern fleet that contributes to our operating efficiencies and driver retention. We employ technology in a cost-effective manner where it assists us in controlling operating costs and enhancing revenue. Our goal is to increase our market presence significantly, both in existing operating regions and in 2 other areas where we believe the freight environment meets our operating strategy, while seeking to achieve industry-leading operating margins and returns on investment. Our operating strategy includes the following important elements: REGIONAL OPERATIONS. We presently operate seven regional terminals which are located in Phoenix, Arizona; Katy, Texas; Indianapolis, Indiana; Charlotte, North Carolina; Gulfport, Mississippi; Salt Lake City, Utah; and Kansas City, Kansas. We concentrate our freight operations in an approximately 750-mile radius around each of our terminals, with an average length of haul of approximately 500 miles. We believe that these regional operations offer several advantages, including: * obtaining greater freight volumes, because approximately 80% of all truckload freight moves in short-to-medium lengths of haul; * achieving higher revenue per mile by focusing on high density traffic lanes to minimize non-revenue miles and offer our customers a high level of service and consistent capacity; and * enhancing safety and driver recruitment and retention, because our drivers travel familiar routes and return home more frequently. OPERATING EFFICIENCIES. Our company was founded on a philosophy of maintaining operating efficiencies and controlling costs. We maintain a simplified operation that focuses on operating dry-vans in particular geographical and shipping markets. This approach allows us to concentrate our marketing efforts to achieve higher penetration of our targeted service areas and to achieve higher equipment utilization in dense traffic areas. We maintain a modern tractor and trailer fleet in order to obtain fuel and other operating efficiencies and attract and retain drivers. A generally compatible fleet of tractors and trailers simplifies our maintenance procedures, reduces parts supplies, and facilitates our ability to serve a broad range of customer needs, thereby maximizing equipment utilization and available freight capacity. We also regulate vehicle speed in order to maximize fuel efficiency, reduce wear and tear, and minimize claims expenses. CUSTOMER SERVICE. We offer a high level of service to customers in lanes and regions that complement our other operations, and we seek to establish ourselves as a preferred or "core carrier" for many of our customers. By concentrating revenue equipment close to customers in high-density lanes and regions, we can provide shippers with a consistent supply of capacity and are better able to match our equipment to customer needs. Our services include multiple pick-ups and deliveries, dedicated equipment and personnel, on-time pickups and deliveries within narrow time frames, specialized driver training, and other services tailored to meet our customers' needs. We price our services commensurately with the level of service our customers require. By providing customers a high level of service, we believe we avoid competing solely on price. USING TECHNOLOGY THAT ENHANCES OUR BUSINESS. We purchase and deploy technology when we believe that it will allow us to operate more efficiently and the investment is cost-justified. We use a satellite-based tracking and communication system to communicate with our drivers, to obtain load position updates, and to provide our customers with freight visibility. The majority of our trailers are equipped with Terion trailer-tacking technology, which allows us to manage our trailers more effectively, reduce the number of trailers per tractor in our fleet, enhance revenue through detention fees, and minimize cargo loss. We have installed Qualcomm's satellite based tracking technology in substantially all of our tractors, which allows us to rapidly respond to customer needs and allows our drivers efficient communications with our regional terminals. We have automated many of our back-office functions, and we continue to invest in technology where it allows us to better serve our customers and reduce our costs. 3 GROWTH STRATEGY We believe that industry trends, our strong operating results and financial position, and the proven operating model replicated in our regional operations offer us significant opportunities to grow. We intend to take advantage of these growth opportunities by focusing on three key areas: OPENING NEW REGIONS AND EXPANDING EXISTING REGIONAL OPERATIONS. We currently operate in seven regions. We believe there are significant opportunities to further increase our business in the short-to-medium haul market by opening new regional operations, while expanding our existing regional operations. To take advantage of these opportunities, we are developing relationships with existing and new customers in each region that we believe will permit us to develop transportation lanes within these regions that should allow us to achieve high equipment utilization and resulting operating efficiency. STRENGTHENING OUR CUSTOMER AND CORE CARRIER RELATIONSHIPS. We market our services to both existing and new customers in traffic lanes that complement our existing operations and will support high equipment utilization. We seek customers who will diversify our freight base and target financially-stable high volume shippers for whom we are not currently providing services. We also offer a high level of service to customers who use us as a core carrier. OPPORTUNITIES TO MAKE SELECTED ACQUISITIONS. We are continuously evaluating acquisition opportunities. Since 1998, we have acquired two short-to-medium haul truckload carriers - John Fayard Fast Freight, Inc., renamed Knight Transportation Gulf Coast, Inc., and Action Delivery Service, Inc. We believe economic trends are driving further consolidation in our industry, and we will consider additional acquisitions that meet our financial and operating criteria. MARKETING AND CUSTOMERS Our sales and marketing functions are led by members of our senior management team, who are assisted by other sales professionals. Our marketing team emphasizes our high level of service and ability to accommodate a variety of customer needs. Our marketing efforts are designed to take advantage of the trend among shippers to outsource transportation requirements, use core carriers, and seek arrangements for dedicated equipment and drivers. We have a diversified customer base. For the year ended December 31, 2001, our top 25 customers represented 43.8% of operating revenue; our top 10 customers represented 27.8% of operating revenue; and our top 5 customers represented 16.8% of our operating revenue. We believe that a substantial majority of our top 25 customers regard us as a preferred or "core carrier." Most of our truckload carriage contracts are cancelable on 30 days notice. We seek to provide consistent, timely, flexible and cost efficient service to shippers. Our objective is to develop and service specified traffic lanes for customers who ship on a consistent basis, thereby providing a sustained, predictable traffic flow and ensuring high equipment utilization. The short-to-medium haul segment of the truckload carrier market demands timely pickup and delivery and, in some cases, response on short notice. We seek to obtain a competitive advantage by providing high quality service to customers at competitive prices. To be responsive to customers' and drivers' needs, we often assign particular drivers and equipment to prescribed routes, providing better service to customers, while obtaining higher equipment utilization. Our dedicated fleet services also provide a significant part of a customer's transportation operations. Under a dedicated carriage service agreement, we provide drivers, equipment and maintenance, and, in some instances, transportation management services that supplement the customer's in-house transportation department. We furnish these services through Company provided revenue equipment and drivers, and independent contractors. 4 Each of our seven regional operations centers is linked to our Phoenix headquarters by an IBM AS/400 computer system. The capabilities of this system enhance our operating efficiency by providing cost effective access to detailed information concerning equipment and shipment status and specific customer requirements, and also permit us to respond promptly and accurately to customer requests. The system also assists us in matching available equipment and loads. We also provide electronic data interchange ("EDI") services to shippers requiring such service. DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS As of December 31, 2001, we employed 2,432 persons, including 2,088 drivers. None of our employees are represented by a labor union. The recruitment, training and retention of qualified drivers are essential to support our continued growth and to meet the service requirements of our customers. Drivers are selected in accordance with specific, objective Company quality guidelines relating primarily to safety history, driving experience, road test evaluations, and other personal evaluations, including physical examinations and mandatory drug and alcohol testing. We seek to maintain a qualified driver force by providing attractive and comfortable equipment, direct communication with senior management, competitive wages and benefits, and other incentives designed to encourage driver retention and long-term employment. Many drivers are assigned to dedicated or semi-dedicated fleet operations, enhancing job predictability. Drivers are recognized for providing superior service and developing good safety records. Our drivers are compensated on the basis of miles driven and length of haul. Drivers also are compensated for additional flexible services provided to our customers. Drivers participate in our 401(k) program and in Company-sponsored health, life and dental plans. Our drivers and other employees who meet eligibility criteria also participate in our Stock Option Plan. We also maintain an independent contractor program. Because independent contractors provide their own tractors, the independent contractor program provides us an alternate method of obtaining additional revenue equipment. We intend to continue our use of independent contractors. As of December 31, 2001, we had agreements for 200 tractors owned and operated by independent contractors. Each independent contractor enters into a contract with us pursuant to which the independent contractor is required to furnish a tractor and a driver exclusively to transport, load and unload goods we haul. Competition for independent contractors among transportation companies is strong. Independent contractors are paid a fixed level of compensation based on the total of trip-loaded and empty miles and are obligated to maintain their own tractors and pay for their own fuel. We provide trailers for each independent contractor. We also provide maintenance services for our independent contractors for a charge. We provide financing at market interest rates to independent contractors to assist them in acquiring revenue equipment. Our loans are secured by a lien on the independent contractor's revenue equipment. As of December 31, 2001, we had outstanding loans of approximately $3.9 million to independent contractors. During 2000, we sold approximately $10.1 million in loans made to independent contractors to an unaffiliated lending institution, on a recourse basis, which requires that we repurchase a loan if it should default. The remaining balance for these recourse loans was approximately $2.9 million at December 31, 2001. REVENUE EQUIPMENT As of December 31, 2001, we operated a fleet of 4,898 53-foot long, high cube trailers with an average age of 3.1 years. As of December 31, 2001, we operated 1,697 Company tractors with an average age of 1.6 years. We also had under contract, as of December 31, 2001, 200 tractors owned and operated by independent contractors. 5 The efficiency and flexibility provided by our fleet configurations permit us to handle both high volume and high weight shipments. Our fleet configuration also allows us to move freight on a "drop-and-hook" basis, increasing asset utilization and providing better service to customers. We currently maintain a trailer to tractor ratio of approximately 2.6 to 1. Management believes maintaining this ratio promotes efficiency and allows us to serve a large variety of customers' needs without significantly changing or modifying equipment. Growth of our tractor and trailer fleets is determined by market conditions, and our experience and expectations regarding equipment utilization. In acquiring revenue equipment, we consider a number of factors, including economy, price, rate environment, technology, warranty terms, manufacturer support, driver comfort and resale value. We have predominantly acquired standardized tractors manufactured by Freightliner and trailers manufactured by Wabash. We have adopted an equipment configuration that meets a wide variety of customer needs and facilitates customer shipping flexibility. We use light weight tractors and high cube trailers to handle both high weight and high volume shipments. Standardization of our fleet allows us to operate with a minimum spare parts inventory, enhances our maintenance program and simplifies driver training. We adhere to a comprehensive maintenance program that minimizes downtime and optimizes the resale value of our equipment. We perform routine servicing and maintenance of our equipment at most of our regional terminal facilities, thus avoiding costly on-road repairs and out-of-route trips. We have been upgrading our trailer fleet to use Wabash Duraplate(TM) trailers, which reduce wear and tear and increase the estimated useful life of our trailers. Our current policy is to replace most of our tractors within 38 to 44 months after purchase and to replace our trailers over a six to ten year period. This replacement policy enhances our ability to attract drivers, increases our fuel economy by capitalizing on improvements in both engine efficiency and vehicle aerodynamics, stabilizes maintenance expense, and maximizes equipment utilization. Changes in the current market for used tractors, and difficult market conditions faced by tractor manufacturers may result in price increases that would cause us to retain our equipment for a longer period. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. We have installed Terion's trailer-tracking system in the majority of our trailers. We believe that this technology has generated operating efficiencies and allowed us to reduce the ratio of trailers to tractors in our fleet through better awareness of each trailer's location. We also have increased our revenue from customers by improving our ability to substantiate trailer detention charges. We have replaced our Terion in-cab communication units with Qualcomm's satellite-based mobile communication and position-tracking system in substantially all of our tractors. The Qualcomm in-cab communication system is a proven system that links drivers to regional terminals and corporate headquarters, allowing us to rapidly alter our routes in response to customer requirements and to eliminate the need for driver stops to report problems or delays. This system allows drivers to inform dispatchers and driver managers of the status of routing, loading and unloading or the need for emergency repairs and provides shippers with supply chain visibility. We believe the Qualcomm communications system will allow us to improve fleet control and the quality of customer service. We have financed our equipment acquisition through operating cash, lines of credit and leasing agreements. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," below. TECHNOLOGY During 1998 and 1999, through a limited liability company subsidiary, we made a minority investment in Terion, Inc. ("Terion"), a communications company that provides two-way digital wireless communication services which enabled us to communicate with manned and unmanned transportation assets via the Internet. Terion also manufactures and sells a trailer-tracking technology. While we have installed Terion trailer tracking technology in the majority of our trailers, we have replaced Terion technology with Qualcomm's satellite based 6 tracking technology in substantially all of our tractors. SEE "REVENUE EQUIPMENT," above. During the third quarter, we recorded a non-recurring charge of $5.7 million to write-off our entire investment in Terion. We owned less than four percent of Terion and did not derive any revenue from our investment. As a result of Terion's decision to discontinue its in-cab communications business, we replaced the Terion in-cab units with Qualcomm in-cab satellite-based communications systems. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," below. SAFETY AND RISK MANAGEMENT We are committed to ensuring the safety of our operations. We regularly communicate with drivers to promote safety and instill safe work habits through Company media and safety review sessions. We conduct monthly safety training meetings for our drivers and independent contractors. In addition, we have an innovative recognition program for driver safety performance, and emphasize safety through our equipment specifications and maintenance programs. Our Vice President of Safety is involved in the review of all accidents. We require prospective drivers to meet higher qualification standards than those required by the United States Department of Transportation ("DOT"). The DOT requires our drivers to obtain national commercial drivers' licenses pursuant to regulations promulgated by the DOT. The DOT also requires that we implement a drug and alcohol testing program in accordance with DOT regulations. Our program includes pre-employment, random, and post-accident drug testing. Our Chief Financial Officer and Vice President of Safety are responsible for securing appropriate insurance coverages at cost effective rates. The primary claims arising in our business consist of cargo loss and damage and auto liability (personal injury and property damage). During 2001, we were self-insured for personal injury and property damage liability, cargo liability, collision and comprehensive, and for worker's compensation up to a maximum limit of $500,000 per occurrence. We establish reserves to cover these self-insured liabilities and maintain insurance to cover liabilities in excess of those amounts. Subsequent to December 31, 2001, we increased our self-insurance levels for personal injury and property damage liability, cargo liability, collision and comprehensive from $500,000 to a maximum of $1,750,000 per occurrence. Our worker's compensation self-insurance level remains at $500,000. Our insurance policies provide for excess personal injury and property damage liability, cargo liability, collision and comprehensive coverage up to a total of $30,000,000 per occurrence. We also maintain primary and excess coverage for employee medical expenses and hospitalization, and damage to physical properties. We carefully monitor claims and participate actively in claims estimates and adjustments. The estimated costs of our self-insured claims, which include estimates for incurred but unreported claims, are accrued as liabilities on our balance sheet. INDUSTRY The U.S. Market for truck-based transportation services approximates $500 billion in annual revenue and is growing in line with the overall U.S. economy. We believe truckload services, such as those we provide, approximate $65 billion of for-hire revenue and approximately $80 billion of private fleet revenue. The truckload industry is highly fragmented and the 10 largest dry van truckload carriers, as measured by revenue, currently make up less than 20%, or approximately $12.7 billion, in annual for-hire revenue. As the cost and complexity of operating truck fleets increase, and as economic and competitive pressure force smaller, lower-margin competitors and private fleets to consolidate or exit the industry, we believe that better capitalized and efficiently operating companies, like Knight Transportation, will have increased opportunities to expand their business and make strategic acquisitions. COMPETITION We compete primarily with other regional short-to-medium haul truckload carriers, logistics providers and national carriers. Railroads and air freight also provide competition, but to a lesser degree. Competition for the freight 7 transported by us is based on freight rates, service, efficiency, size and technology. We also compete with other motor carriers for the services of drivers, independent contractors and management employees. A number of our competitors have greater financial resources, own more equipment, and carry a larger volume of freight than we do. We believe that the principal competitive factors in our business are service, pricing (rates), and the availability and configuration of equipment that meets a variety of customers' needs. In addressing our markets, we believe that our principal competitive strength is our ability to provide timely, flexible and cost-efficient service to shippers. In general, increased competition has created downward pressure on rates and increased the need to provide higher levels of service to customers. REGULATION Generally, the trucking industry is subject to regulatory and legislative changes that can have a materially adverse effect on operations. Historically, the Interstate Commerce Commission ("ICC") and various state agencies regulated truckload carriers' operating rights, accounting systems, rates and charges, safety, mergers and acquisitions, periodic financial reporting and other matters. In 1995, federal legislation was passed that preempted state regulation of prices, rates, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the DOT, but a lack of regulations implementing such transfers currently prevents us from assessing the full impact of this action. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Matters such as weight and dimensions of equipment are also subject to federal and state regulation. In 1988, the DOT began requiring national commercial drivers' licenses for interstate truck drivers. Our motor carrier operations are also subject to environmental laws and regulations, including laws and regulations dealing with underground fuel storage tanks, the transportation of hazardous materials and other environmental matters. We have established programs to comply with all applicable environmental regulations. As part of our safety and risk management program, we periodically perform internal environmental reviews so that we can achieve environmental compliance and avoid environmental risk. Our Phoenix, Indianapolis and Katy facilities were designed, after consultation with environmental advisors, to contain and properly dispose of hazardous substances and petroleum products used in connection with our business. We transport a minimum amount of environmentally hazardous substances and, to date, have experienced no significant claims for hazardous substance shipments. If we should fail to comply with applicable regulations, we could be subject to substantial fines or penalties and to civil and criminal liability. Our operations involve certain inherent environmental risks. We maintain bulk fuel storage and fuel islands at several of our facilities. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We have instituted programs to monitor and control environmental risks and assure compliance with applicable environmental laws. Our Phoenix facility is located on land identified as potentially having groundwater contamination resulting from the release of hazardous substances by persons who have operated in the general vicinity. The area has been classified as a state superfund site. We have been located at our Phoenix facility since 1990 and, during such time, have not been identified as a potentially responsible party with regard to the groundwater contamination, and we do not believe that our operations have been a source of groundwater contamination. Our Indianapolis property is located approximately 0.1 of a mile east of Reilly Tar and Chemical Corporation ("Reilly"), a federal superfund site listed on the National Priorities List for clean-up. The Reilly site has known soil and groundwater contamination. There are also other sites in the general vicinity of our Indianapolis property that have known contamination. Environmental reports obtained by us have disclosed no evidence that activities on our Indianapolis property have caused or contributed to the area's contamination. 8 Company operations conducted in industrial areas, where truck terminals and other industrial activities are conducted, and where groundwater or other forms of environmental contamination have occurred, potentially expose us to claims that we contributed to the environmental contamination. We believe we are currently in material compliance with applicable laws and regulations and that the cost of compliance has not materially affected results of operations. SEE "LEGAL PROCEEDINGS," for additional information regarding certain regulatory matters. OTHER INFORMATION We periodically examine investment opportunities in areas related to the truckload carrier business. Our investment strategy is to add to shareholder value by investing in industry related businesses that will assist us in strengthening our overall position in the transportation industry, minimize our exposure to start-up risk and provide us with an opportunity to realize a substantial return on our investment. Our two investments to date have been in Terion Inc. ("Terion") and Concentrek, Inc. Terion is currently in bankruptcy reorganization and we have written off our entire investment. Terion's trailer tracking technology, however, has assisted us in lowering our trailer to tractor ratio and thus reduced our capital expenditures. In April 1999, we acquired a 17% interest in Concentrek, Inc. ("Concentrek"), formerly known as KNGT Logistics, Inc., with the intent of investing in the non-asset transportation business. Through a limited liability company, we have agreed to lend up to a maximum of $2,335,000 to Concentrek on a secured basis. Of the total loan amount, $935,000 is evidenced by a promissory note that is convertible into Concentrek's Class A Preferred Stock and is secured by a lien on Concentrek's assets, and $1,400,000 is evidenced by a promissory note that is secured by a lien on Concentrek's assets. These loans are on a parity with respect to their security. SEE our Proxy Statement issued in connection with the May 8, 2002, Annual Meeting of Shareholders for additional information. In November 2000, we acquired a 19% interest in Knight Flight Services, LLC ("Knight Flight") which acquired and operates a Cessna Citation 560 XL jet aircraft. The aircraft is leased to Pinnacle Air Charter, L.L.C., an unrelated entity, which operates the aircraft on behalf of Knight Flight. SEE our Proxy Statement issued in connection with the May 8, 2002, Annual Meeting of Shareholders for additional information. ITEM 2. PROPERTIES The following table provides information regarding the Company's terminals and/or offices: COMPANY LOCATION OWNED OR LEASED PROPERTIES - ---------------- -------------------------- Charlotte, North Carolina Owned Corsicana, Texas Leased Fontana, California Owned Gulfport, Mississippi Leased Indianapolis, Indiana Owned Kansas City, Kansas Leased Katy, Texas Owned Mobile, Alabama Leased Phoenix, Arizona Owned Salt Lake City, Utah Leased Our headquarters and principal place of business is located at 5601 West Buckeye Road, Phoenix, Arizona on approximately 65 acres. We own approximately 57 acres and approximately 8 acres are leased from Mr. Randy Knight, a director of the Company and one of our principal shareholders. SEE our Proxy Statement issued in connection with the May 8, 2002, Annual Meeting of Shareholders for additional information. We have constructed a bulk fuel storage facility and fueling islands based at our Phoenix headquarters to obtain greater operating efficiencies. 9 We own and operate a 9.5-acre regional facility in Indianapolis, Indiana. The facility includes a truck terminal, administrative offices, and dispatching and maintenance services, as well as room for future expansion, and serves as a base for our operations in the Midwest and the East Coast. We completed our initial expansion of this facility in October 1998. We own and operate a 12-acre regional terminal facility in Katy, Texas, near Houston, which was completed in June 2000. This facility includes a truck terminal, administrative offices, dispatching and maintenance services, a bulk fuel storage facility and fuel island. In March 1999, we entered into a lease for terminal facilities in Corsicana, Texas, from which we provide dedicated services to one of our larger customers. Our operations in Corsicana, Texas are coordinated through our regional headquarters located in Katy, Texas. We own and operate a 21-acre regional facility in Charlotte, North Carolina, which serves the East Coast and Southeast regions. This facility was acquired in February 2000, and includes an existing terminal facility. In connection with our acquisition of John Fayard Fast Freight, Inc., renamed Knight Transportation Gulf Coast, Inc., we operate a regional facility in Gulfport, Mississippi, under a long-term lease agreement. This facility includes a truck terminal, administrative offices, dispatching and maintenance services, a bulk fuel storage facility and fuel island, and supports our operations in the South and Southeast regions. In 1999, we opened a regional facility in Salt Lake City, Utah to serve the western, central and Rocky Mountain regions. We currently lease our Salt Lake City terminal facility. We also own approximately 14 acres of land that is available for future expansion in this region. We also lease office facilities in California and Oklahoma which we use for fleet maintenance, record keeping, and general operations. We purchased 14 acres of property in Fontana, California and in November 2000 completed construction of a facility to serve as a trailer drop and dispatching facility to support our operations in California. We also lease excess trailer drop space to other carriers. We also lease space in various locations for temporary trailer storage. Management believes that replacement space comparable to these facilities is readily obtainable, if necessary. In March 2001, we opened a regional facility in Kansas City, Kansas to serve the central, Rocky Mountain and Midwest regions. We lease our Kansas City terminal facility. As of December 31, 2001, our aggregate monthly rent for these terminals and/or offices was approximately $38,500. We believe that our facilities are suitable and adequate for our present needs. We periodically seek to improve our facilities or identify new favorable locations. We have not encountered any significant impediments to the location or addition of new facilities. ITEM 3. LEGAL PROCEEDINGS We are a party to ordinary, routine litigation and administrative proceedings incidental to our business. These proceedings primarily involve claims for personal injury or property damage incurred in the transportation of freight and for personnel matters. We maintain insurance to cover liabilities arising from the transportation of freight in amounts in excess of self-insured retentions. SEE "BUSINESS -- SAFETY AND RISK MANAGEMENT." It is our policy to comply with applicable equal employment opportunity laws and we periodically review our policies and practices for equal employment opportunity compliance. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matter to a vote of our security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock is traded on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol KNGT. The following table sets forth, for the periods indicated, the high and low bid information per share of our common stock as quoted through the NASDAQ-NMS. Such quotations reflect inter-dealer prices, without retail markups, markdowns or commissions and, therefore, may not necessarily represent actual transactions. HIGH LOW ------- ------- 2000 First Quarter $ 8.444 $ 6.970 Second Quarter $ 8.750 $ 5.944 Third Quarter $ 8.500 $ 6.275 Fourth Quarter $ 9.000 $ 6.389 2001 First Quarter $11.306 $ 8.222 Second Quarter $14.053 $10.400 Third Quarter $16.390 $10.967 Fourth Quarter $20.733 $12.420 As of March 4, 2002, we had 70 shareholders of record and approximately 4,930 beneficial owners in security position listings of our common stock. We have never paid cash dividends on our common stock, and it is the current intention of management to retain earnings to finance the growth of our business. Future payment of cash dividends will depend upon financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below as of the end of, and for each of the years in the five-year period ended December 31, 2001, are derived from our Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports. THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," BELOW, AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN ITEM 8 OF THIS FORM 10-K. CERTAIN RISKS AND OTHER FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS AND FUTURE PERFORMANCE RESULTS ARE SET FORTH BELOW. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." 11
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) STATEMENTS OF INCOME DATA: Revenue, before fuel surcharge $ 241,679 $ 207,406 $ 151,490 $ 125,030 $ 99,428 Operating expenses 211,267 184,835 125,580 102,049 81,948 Income from operations 39,551 32,023 25,910 22,981 17,480 Net interest expense and other (7,485) (3,418) (296) (259) (18) Income before income taxes 32,067 28,605 25,614 22,722 17,462 Net income 19,017 17,745 15,464 13,346 10,252 Diluted earnings per share(1) .54 .53 .45 .39 .30 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 51,729 $ 27,513 $ 15,887 $ 6,995 $ 4,044 Total assets 241,114 206,984 164,545 116,958 82,690 Long-term obligations, net of current 2,715 14,885 11,736 7,920 -- Shareholders' equity 167,696 105,121 82,814 70,899 56,798 OPERATING DATA (UNAUDITED): Operating ratio(2) 83.6% 84.6% 82.9% 81.6% 82.4% Average revenue per total mile(3) $ 1.28 $ 1.28 $ 1.23 $ 1.24 $ 1.22 Average length of haul (miles) 527 530 491 489 500 Empty mile factor 10.9% 10.5% 10.5% 10.0% 9.6% Tractors at end of period(4) 1,897 1,694 1,212 933 772 Trailers at end of period 4,898 4,627 3,350 2,809 2,112 PRO FORMA DATA (UNAUDITED): Income from operations $ 39,551 $ 32,023 $ 25,910 $ 22,981 $ 17,480 Net interest expense and other(5) (1,806) (3,418) (296) (259) (18) Income before income taxes(5) 37,745 28,605 25,614 22,722 17,462 Net income (5) 22,400 17,745 15,464 13,346 10,252 Diluted earnings per share(1)(5) .64 .53 .45 .39 .30
- ---------- (1) Net income per share for all periods presented has been restated to reflect the stock splits on December 28, 2001, June 1, 2001, and May 28, 1998. (2) Operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge. (3) Average transportation revenue per mile based upon total revenue, inclusive of fuel surcharge. (4) Includes 200 independent contractor operated vehicles at December 31, 2001; includes 239 independent contractor operated vehicles at December 31, 2000; includes 281 independent contractor operated vehicles at December 31, 1999; includes 231 independent contractor operated vehicles at December 31, 1998; includes 192 independent contractor operated vehicles at December 31, 1997. (5) Excluding a one-time, pre-tax, non-cash write-off of $5,679,000 relating to an investment in Terion, Inc. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION EXCEPT FOR CERTAIN HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTIONS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE STATEMENTS THAT COULD BE DEEMED FORWARD-LOOKING STATEMENTS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR OTHER FINANCIAL ITEMS, ANY STATEMENT OF PLANS, STRATEGIES, AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS; ANY STATEMENTS CONCERNING PROPOSED NEW SERVICES OR DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR PERFORMANCE; AND ANY STATEMENTS OF BELIEF AND ANY STATEMENT OF ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. WORDS SUCH AS "BELIEVE," "MAY," "COULD," "EXPECTS," "HOPES," "ANTICIPATES," AND "LIKELY," AND VARIATIONS OF THESE WORDS, OR SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS," SET FORTH BELOW. WE DO NOT ASSUME, AND SPECIFICALLY DISCLAIM, ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS ANNUAL REPORT. GENERAL The following discussion of our financial condition and results of operations for the three-year period ended December 31, 2001, should be read in conjunction with our Consolidated Financial Statements and Notes thereto contained elsewhere in this report. We were incorporated in 1989 and commenced operations in July 1990. For the five-year period ended December 31, 2001, our operating revenue, before fuel surcharge, grew at a 25.7% compounded annual rate, while net income increased at a 20.9% compounded annual rate, including a one-time, pre-tax, write-off recorded during 2001 of $5.7 million for an investment made in a communications technology company. The compounded annual net income growth rate for 2001, excluding this write-off, was 24.7%. 13 RESULTS OF OPERATIONS The following table sets forth the percentage relationships of our expense items to revenue, before fuel surcharge, for the three-year periods indicated below: 2001 2000 1999 ------ ------ ------ REVENUE, BEFORE FUEL SURCHARGE 100% 100.0% 100.0% Operating expenses: Salaries, wages and benefits 33.8 33.4 29.5 Fuel (1) 12.3 12.9 10.4 Operations and maintenance 5.7 5.4 5.8 Insurance and claims 4.2 2.3 2.6 Operating taxes and licenses 2.9 3.6 3.7 Communications 1.0 .8 .9 Depreciation and amortization 7.6 9.2 9.4 Lease expense - revenue equipment 3.5 1.8 -- Purchased transportation 9.7 12.5 18.2 Miscellaneous operating expenses 2.9 2.7 2.4 ------ ------ ------ Total operating expenses 83.6 84.6 82.9 ------ ------ ------ Income from operations 16.4 15.4 17.1 Net interest and other expense 3.1 1.6 .2 ------ ------ ------ Income before income taxes 13.3 13.8 16.9 Income taxes 5.4 5.2 6.7 ------ ------ ------ Net Income 7.9% 8.6% 10.2% ====== ====== ====== PRO FORMA DATA (UNAUDITED): Income from operations 16.4 15.4 17.1 Net interest and other expense (2) .7 1.6 .2 ------ ------ ------ Income before income taxes (2) 15.7 13.8 16.9 Income taxes (2) 6.3 5.2 6.7 ------ ------ ------ Net Income (2) 9.4% 8.6% 10.2% ====== ====== ====== - ---------- (1) Net of fuel surcharge. (2) Excluding a one-time, pre-tax, non-cash write-off of $5,679,000 relating to a minority investment in a communications technology company, in 2001. FISCAL 2001 COMPARED TO FISCAL 2000 Revenue, before fuel surcharge, increased by 16.5% to $241.7 million in 2001 from $207.4 million in 2000. This increase resulted from expansion of our customer base and increased volume from existing customers, that was facilitated by an increase in our tractor and trailer fleet, which increased by 12.0% to 1,897 tractors (including 200 owned by independent contractors) as of December 31, 2001, from 1,694 tractors (including 239 owned by independent contractors) as of December 31, 2000. The April 2000 acquisition of John Fayard Fast Freight, Inc., renamed Knight Transportation Gulf Coast, Inc., which then operated approximately 225 tractors, contributed to the increase in revenue for 2001, compared to 2000. Average revenue per mile (exclusive of fuel surcharge) increased slightly to $1.227 per mile for the year ended December 31, 2001, from $1.225 per mile for the same period in 2000. Salaries, wages and benefits expense increased as a percentage of revenue, before fuel surcharge, to 33.8% in 2001 from 33.4% in 2000, primarily due to the increase in the ratio of Company drivers to independent contractors. As of December 31, 2001, 89.5% of our fleet was operated by Company drivers, compared to 85.9% as of December 31, 2000. For our drivers, we record accruals for 14 workers' compensation benefits as a component of our claims accrual, and the related expense is reflected in salaries, wages and benefits in our consolidated statements of income. Fuel expense, net of fuel surcharge, decreased, as a percentage of revenue, before fuel surcharge, to 12.3% for 2001 from 12.9% in 2000, due mainly to lower average fuel prices during 2001 compared to 2000. We believe that higher fuel prices may continue to adversely impact operations throughout 2002. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. During 2000, we implemented a fuel surcharge program to assist us in recovering a portion of increased fuel costs. For the year ended December 31, 2001, fuel surcharge was $9.1 million, compared to $9.5 million for 2000. Operations and maintenance expense increased, as a percentage of revenue, before fuel surcharge, to 5.7% for 2001 from 5.4% in 2000. This increase was primarily the result of the increase in the ratio of Company operated vehicles to independent contractor operated vehicles. Independent contractors pay for the maintenance on their own vehicles Insurance and claims expense increased, as a percentage of revenue, before fuel surcharge, to 4.2% for 2001, compared to 2.3% for 2000, primarily as a result of the increase in insurance premiums and the higher self-insurance retention levels assumed by the Company. We anticipate that casualty insurance rates will continue to increase in the future and for 2002 we will retain a larger portion of our claims risks, in response to the increased insurance premiums. See "BUSINESS-SAFETY RISK MANAGEMENT", above, and "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. Operating taxes and license expense, as a percentage of revenue, before fuel surcharge, decreased to 2.9% for 2001 from 3.6% for 2000. The decrease resulted primarily from a relative increase in miles run in lower tax rate states for the 12 month period ended December 31, 2001. Communications expenses increased slightly as a percentage of revenue, before fuel surcharge, in 2001 compared to 2000, primarily due to the purchase and utilization of new tractor and trailer communication technology. During 2001 we purchased new Qualcomm in-cab communications systems to replace the in-cab communication system that was discontinued by Terion. (See non-recurring charge below). Depreciation and amortization expense, as a percentage of revenue, before fuel surcharge, decreased to 7.6% for 2001 from 9.2% in 2000. This decrease was primarily related to the increase in lease expenses incurred for revenue equipment under operating lease agreements. Lease expense, which is the expense for leased revenue equipment as a percentage of revenue, before fuel surcharge, was 3.5% for 2001, compared to 1.8% for 2000. Several lease agreements have variable payment terms which are amortized on a straight-line basis. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. Purchased transportation expense, as a percentage of revenue, before fuel surcharge, decreased to 9.7% in 2001 from 12.5% in 2000, primarily as a result of a decrease in the ratio of independent contractors to Company drivers. As of December 31, 2001, 10.5% of our fleet was operated by independent contractors, compared to 14.1% at December 31, 2000. We have utilized independent contractors as part of our fleet expansion because independent contractors provide their own tractors. As of December 31, 2001, the Company had 200 tractors owned and operated by independent contractors. As our Company-owned fleet has expanded, purchased transportation has decreased as a percentage of revenue, before fuel surcharge. Purchased transportation represents the amount an independent contractor is paid to haul freight for us on a mutually agreed per-mile basis. To assist us in continuing to attract independent contractors, we provide financing to qualified independent contractors to assist them in acquiring revenue equipment. As of December 31, 2001, we had $3.9 million in loans outstanding to independent contractors to purchase revenue equipment. These loans are secured by liens on the revenue equipment we finance. 15 Miscellaneous operating expenses, as a percentage of revenue, before fuel surcharge, increased to 2.9% for 2001 from 2.7% in 2000, primarily due to increases in bad debt reserves and increased travel expenses. As a result of the above factors, our operating ratio (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge) was 83.6% for 2001, compared to 84.6% for 2000. Net interest expense, as a percentage of revenue, before fuel surcharge, decreased to 0.7% for 2001 from 1.5% for 2000. This decrease was primarily the result of our ability to reduce our outstanding debt to approximately $18.1 million at December 31, 2001, compared to $54.4 million at December 31, 2000. Debt reduction was facilitated, in part, by proceeds obtained from the offering of our Common Stock that closed November 7, 2001. During the third quarter of 2001, we recorded a non-recurring charge of $5.7 million to record the write-off of our entire investment in Terion, Inc. ("Terion"), a communications technology company, made during 1998 and 1999. We owned less than four percent of Terion and did not derive any revenue from our investment. We elected to write-off our investment after Terion announced that it would cease operating its in-cab communications system. In January, Terion filed for protection under Chapter 11 of the Federal Bankruptcy Code. The impact on earnings per diluted share was $0.10 for the year ended December 31, 2001. This write-off resulted in a reduction of net income, as a percentage of revenue before fuel surcharge, of 1.5% for the fiscal year ended December 31, 2001. As a result of Terion's decision to discontinue its in-cab communications business, we replaced the Terion in-cab units with Qualcomm in-cab satellite-based communications systems. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense, as a percentage of revenue, before fuel surcharge, increased to 5.4% for the year ended December 31, 2001, from 5.2% for the year ended December 31, 2000, primarily due to a change in the mix of State tax liabilities. As a result of the preceding changes, our net income, as a percentage of revenue, before fuel surcharge, was 7.9% for 2001, compared to 8.6% in 2000. This percentage was 9.4% for 2001, excluding the write-off of our investment in Terion, as discussed above. FISCAL 2000 COMPARED TO FISCAL 1999 Revenue, before fuel surcharge, increased by 36.9% to $207.4 million in 2000 from $151.5 million in 1999. This increase resulted from expansion of our customer base and increased volume from existing customers. This was facilitated by a continued increase in our tractor and trailer fleet, including approximately 225 tractors acquired in the April 2000 acquisition of John Fayard Fast Freight, Inc., renamed Knight Transportation Gulf Coast, Inc., and 50 tractors acquired in the March, 1999 acquisition of Action Delivery Services, Inc. Our fleet increased by 39.8% to 1,694 tractors (including 239 owned by independent contractors) as of December 31, 2000, from 1,212 tractors (including 281 owned by independent contractors) as of December 31, 1999. Average revenue per mile (exclusive of fuel surcharge) decreased to $1.225 per mile for the year ended December 31, 2000, from $1.227 per mile for the same period in 1999. Equipment utilization averaged 115,300 miles per tractor in 2000, down slightly when compared to an average of 116,500 miles per tractor in 1999 primarily due to the increase in fuel costs that we passed on to our customers. These changes reflect increased competition in the short-to-medium truckload sector of the transportation business. Salaries, wages and benefits expense increased, as a percentage of revenue before fuel surcharge, to 33.4% in 2000 from 29.5% in 1999, primarily due to the increase in the ratio of Company drivers to independent contractors and increased compensation to non-driving staff. As of December 31, 2000, 85.9% of 16 our fleet was operated by Company drivers, compared to 76.8% at December 31, 1999. For our drivers, we record accruals for workers' compensation benefits as a component of our claim accrual, and the related expense is reflected in salaries, wages and benefits in its consolidated statements of income. Fuel expense, net of fuel surcharge, increased as a percentage of revenue before fuel surcharge, to 12.9% for 2000 from 10.4% in 1999, due mainly to higher average fuel prices during 2000 compared to 1999. We believe that higher fuel prices will continue to adversely impact operations throughout most of 2001. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS," below. Also, the increase in the ratio of Company drivers to independent contractors in 2000 compared to 1999 contributed to this increase. Independent contractors pay for their own fuel. During 2000, we implemented a fuel surcharge program to assist us in recovering a portion of increased fuel costs. For the 12 month period ended December 31, 2000, fuel surcharge was $9,452,816, compared to $968,669 for 1999. Operations and maintenance expense decreased, as a percentage of revenue before fuel surcharge, to 5.4% for 2000 from 5.8% in 1999. This decrease was the result of improvements experienced in our equipment maintenance programs. Insurance and claims expense decreased, as a percentage of revenue before fuel surcharge, to 2.3% for 2000, compared to 2.6% for 1999 as a result of the reduction in both the frequency and severity of claims activity incurred, and favorable casualty insurance rates. We anticipate that casualty insurance rates will increase in the future and we are retaining a larger portion of our claims risks, in response to increased insurance expense. Operating taxes and license expense, as a percentage of revenue before fuel surcharge, decreased to 3.6% for 2000 from 3.7% for 1999. The decrease resulted primarily from a relative increase in miles run in lower tax rate states for the 12 month period ended December 31, 2000. Communications expenses decreased slightly, as a percentage of revenue before fuel surcharge, in 2000 compared to 1999. Depreciation and amortization expense, as a percentage of revenue before fuel surcharge, decreased to 9.2% for 2000 from 9.4% in 1999. This decrease was related to the increase in lease expenses incurred for revenue equipment under operating lease agreements. This decrease was also related to certain dedicated opportunities which do not require the use of certain Company revenue equipment. Lease expense, which is the expense for leased revenue equipment as a percentage of revenue, before fuel surcharge, was 1.8% for 2000, compared to 0% for 1999, due to our initiation of a leasing program in 2000 to obtain additional revenue equipment. Several lease agreements have variable payment terms which are amortized on a straight-line basis. Purchased transportation expense, as a percentage of revenue before fuel surcharge, decreased to 12.5% in 2000 from 18.2% in 1999, primarily as a result of a decrease in the ratio of independent contractors to Company drivers. As of December 31, 2000, 14.1% of our fleet was operated by independent contractors, compared to 23.2% at December 31, 1999. We have utilized independent contractors as part of our fleet expansion because independent contractors provide their own tractors. As of December 31, 2000, the Company had 239 tractors owned and operated by independent contractors. As the Company-owned fleet has expanded, purchased transportation has decreased as a percentage of revenue, before fuel surcharge. Purchased transportation represents the amount an independent contractor is paid to haul freight for us on a mutually agreed per-mile basis. To assist us in continuing to attract independent contractors, we provide financing to qualified independent contractors to assist them in acquiring revenue equipment. As of December 31, 2000, we had $1.5 million in loans outstanding to independent contractors to purchase revenue equipment. The loans are secured by liens on the revenue equipment we finance. 17 Miscellaneous operating expenses, as a percentage of revenue before fuel surcharge, increased to 2.7% for 2000 from 2.4% in 1999, primarily due to decreases in utilization of Company equipment. As a result of the above factors, our operating ratio (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge) was 84.6% for 2000, compared to 82.9% for 1999. Net interest expense, as a percentage of revenue before fuel surcharge, increased to 1.6% for 2000 from 0.2% for 1999. This increase was due to the increase in our average borrowings to $48.9 million for 2000 from $20.7 million for 1999. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense decreased as a percentage of revenue, before fuel surcharge, to 5.2% for the year ended December 31, 2000, from 6.7% for the year ended December 31, 1999, primarily due to a change in the mix of State tax liabilities, as well as the increase in our operating ratio to 84.6% for 2000, compared to 82.9% for 1999. As a result of the preceding changes, our net income as a percentage of revenue, before fuel surcharge, was 8.6% for 2000, compared to 10.2% in 1999. LIQUIDITY AND CAPITAL RESOURCES The growth of our business has required a significant investment in new revenue equipment. Our primary source of liquidity has been funds provided by operations and our lines of credit with our primary lender. During the fourth quarter of 2001, we registered with the Securities and Exchange Commission and sold 2,678,907 shares of our common stock through a public offering, which resulted in net proceeds to us of $41,249,460. SEE our Registration Statements on Form S-3 filed with the SEC on October 24, 2001 (File No. 333-72130), and November 2, 2001 (File No. 333-72688). The proceeds we received from this offering were used for the repayment of indebtedness and for general corporate purposes. Net cash provided by operating activities was approximately $46.2 million, $34.5 million and $25.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. Capital expenditures for the purchase of revenue equipment, net of trade-ins, office equipment, land and leasehold improvements, totaled $30.3 million, $35.0 million and $41.5 million, for the years ended December 31, 2001, 2000, and 1999, respectively. We expect that capital expenditures, net of trade-ins, of approximately $45 million for 2002, will be applied primarily to acquire new revenue equipment. Net cash provided by financing activities was approximately $5.9 million, $3.2 million and $22.6 million for the years ended December 31, 2001, 2000, and 1999, respectively. The change from 2000 to 2001 was the result of the proceeds from the sale of common stock discussed previously, which were used primarily to reduce outstanding debt. The change from 1999 to 2000 was primarily the result of the proceeds from the sale of notes receivable and new borrowings on the line of credit. We maintain a line of credit totaling $50 million with our lenders and use this line to finance the acquisition of revenue equipment and other corporate purposes to the extent our need for capital is not provided by funds from operations or otherwise. Under the line of credit, we are obligated to comply with certain financial covenants. The rate of interest on borrowings against the line of credit will vary depending upon the interest rate election made by us, based on either the London Interbank Offered Rate ("LIBOR") plus an adjustment factor, or the prime rate. At December 31, 2001, and March 4, 2002, we had $12.2 18 million in borrowings under our revolving line of credit, all of which was under an interest rate swap agreement that expires in February 2004. The line of credit expires in July 2003. In October 1998, we entered into a $10 million term loan with our primary lender which will mature in September 2003. The interest is at a fixed rate of 5.75%. The note is unsecured and had an outstanding balance of $4.0 million as of December 31, 2001, $2.1 million of which is due in the next 12 months. Through our subsidiaries, we have entered into lease agreements under which we lease revenue equipment. The total amount outstanding under these agreements as of December 31, 2001, was $23.7 million, with interest rates from 5.2% to 8.2%, and with $8.7 million due in the next 12 months. Management believes we have adequate liquidity to meet our current needs. We will continue to have significant capital requirements over the long term, which may require us to incur debt or seek additional equity capital. The availability of capital will depend upon prevailing market conditions, the market price of our common stock, and several other factors over which we have limited control, as well as our financial condition and results of operations. SEASONALITY In the transportation industry, results of operations frequently show a seasonal pattern. Seasonal variations may result from weather or from customer's reduced shipments after the busy winter holiday season. To date, our revenue has not shown any significant seasonal pattern. Because we operate primarily in Arizona, California and the western United States, winter weather generally has not adversely affected our business. Expansion of our operations in the Midwest, Rocky Mountain area, East Coast, and the Southeast could expose us to greater operating variances due to seasonal weather in these regions. Recent shortages of energy and related issues in California, and elsewhere in the western United States, could result in an adverse effect on our operations and demand for our services should these shortages continue or increase. This risk may exist in other regions in which we operate, depending upon availability of energy. SELECTED QUARTERLY FINANCIAL DATA The following tables set forth certain unaudited information about our revenue and results of operations on a quarterly basis for 2000 and 2001 (in thousands, except per share data): 2001 --------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 ------- ------- ------- ------- Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148 Income from operations 7,808 9,086 10,963 11,694 Net Income 4,237 5,060 2,886 6,834 Earnings per common share: Basic $ 0.12 $ 0.15 $ 0.08 $ 0.19 ------- ------- ------- ------- Diluted $ 0.12 $ 0.15 $ 0.08 $ 0.19 ------- ------- ------- ------- 19 Pro Forma Data (unaudited): 2001 --------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 ------- ------- ------- ------- Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148 Income from operations 7,808 9,086 10,963 11,694 Net Income 4,237 5,060 6,265(1) 6,834 Earnings per common share: Basic $ 0.12 $ 0.15 $ 0.18(1) $ 0.19 ------- ------- ------- ------- Diluted $ 0.12 $ 0.15 $ 0.18(1) $ 0.19 ------- ------- ------- ------- - ---------- (1) Excludes one-time, pre-tax, non-cash write-off of $5,679,000 relating to an investment in Terion, Inc. 2000 --------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 ------- ------- ------- ------- Revenue, before fuel surcharge $43,569 $51,676 $55,770 $56,391 Income from operations 6,874 8,072 8,433 8,644 Net Income 3,873 4,596 4,616 4,660 Earnings per common share: Basic $ 0.12 $ 0.14 $ 0.14 $ 0.14 ------- ------- ------- ------- Diluted $ 0.12 $ 0.14 $ 0.14 $ 0.14 ------- ------- ------- ------- RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS Recently Adopted and to be Adopted Accounting Pronouncements - In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. This statement also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that we identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement is required to be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires us to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption. We had $7,504,067 in net book value recorded for goodwill at December 31, 2001. The current amortization of this goodwill was $46,782 per month. At present, we are currently assessing but have not yet determined the complete impact the adoption of SFAS No. 141 and SFAS No. 142 will have on our financial position and results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS Our future results may be affected by a number of factors over which we have little or no control. Fuel prices, insurance and claims costs, liability claims, interest rates, the availability of qualified drivers, fluctuations in the resale value of revenue equipment, economic and customer business cycles and 20 shipping demands are economic factors over which we have little or no control. Significant increases or rapid fluctuations in fuel prices, interest rates, insurance costs or liability claims, to the extent not offset by increases in freight rates, and the resale value of revenue equipment could reduce our profitability. Weakness in the general economy, including a weakness in consumer demand for goods and services, could adversely affect our customers and our growth and revenues, if customers reduce their demand for transportation services. Weakness in customer demand for our services or in the general rate environment may also restrain our ability to increase rates or obtain fuel surcharges. It is also not possible to predict the medium or long term affects of the September 11, 2001, terrorist attacks and subsequent events on the economy or on customer confidence in the United States, or the impact, if any, on our future results of operations. The following issues and uncertainties, among others, should be considered in evaluating our growth outlook. OUR GROWTH MAY NOT CONTINUE AT HISTORIC RATES. We have experienced significant and rapid growth in revenue and profits since the inception of our business in 1990. There can be no assurance that our business will continue to grow in a similar fashion in the future or that we can effectively adapt our management, administrative, and operational systems to respond to any future growth. Further, there can be no assurance that our operating margins will not be adversely affected by future changes in and expansion of our business or by changes in economic conditions. ONGOING INSURANCE AND CLAIMS EXPENSES COULD SIGNIFICANTLY REDUCE OUR EARNINGS. Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. We are self-insured for personal injury and property damage liability, cargo liability, collision and comprehensive, and for worker's compensation up to a maximum limit of $500,000 per occurrence. Subsequent to December 31, 2001, we increased our self-insurance levels for personal injury and property damage liability, cargo liability, collision and comprehensive from $500,000 to $1,750,000 per occurrence. Our worker's compensation self-insurance level remains at $500,000. If the number of claims for which we are self-insured increases, our operating results could be adversely affected. Also, we maintain insurance with licensed insurance companies above the amounts for which we self-insure. After several years of aggressive pricing, insurance carriers have raised premiums which has increased our insurance and claims expense. The terrorist attacks of September 11, 2001, in the United States, and subsequent events, will likely result in additional increases in our insurance expenses. If these expenses continue to increase, and we are unable to offset the increase with higher freight rates, our earnings could be materially and adversely affected. INCREASED PRICES FOR NEW REVENUE EQUIPMENT AND DECREASES IN THE VALUE OF USED REVENUE EQUIPMENT MAY MATERIALLY AND ADVERSELY AFFECT OUR EARNINGS AND CASH FLOW. Our growth has been made possible through the addition of new revenue equipment. Difficulty in financing or obtaining new revenue equipment (for example, delivery delays from manufacturers or the unavailability of independent contractors) could restrict future growth. In the past, we have acquired new tractors and trailers at favorable prices, and have entered into agreements with the manufacturers to repurchase the tractors at agreed prices. Current developments in the secondary tractor resale market have resulted in a large supply of used tractors on the market. This has depressed the market value of used equipment to levels below the prices at which the manufacturers have agreed to repurchase the equipment. Accordingly, some manufacturers may refuse or be financially unable to keep their commitments to repurchase equipment according to their repurchase agreement terms. We understand that tractor manufacturers have communicated to customers their intention to significantly increase new equipment prices in 2002 and eliminate or sharply reduce the price of repurchase commitments. We are currently in 21 discussions with one of our major tractor suppliers concerning new equipment purchase prices and repurchase commitments previously made to us and whether that supplier will honor its contractual commitments to us. Our business plan and current contract take into account new equipment price increases due to engine design requirements imposed effective October 1, 2002, by the Environmental Protection Agency. If new equipment prices were to increase otherwise, or if the price of repurchase commitments were to decrease or contractual commitments are not honored by our current suppliers, we may be required to increase our depreciation and financing costs, write down the value of used equipment, and/or retain some of our equipment longer, with a resulting increase in operating expenses. If our resulting cost of revenue equipment were to increase and/or the prices of used revenue equipment were to decline, our operating costs could increase, which could materially and adversely affect our earnings and cash flow, if we are unable to offset these increases through rate increases or cost savings. FUEL PRICES MAY INCREASE SIGNIFICANTLY, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. We are also subject to risk with respect to purchases of fuel. Prices and availability of petroleum products are subject to political, economic and market factors that are generally outside our control. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition if we are unable to pass increased costs on to customers through rate increases or fuel surcharges. Historically, we have sought to recover a portion of our short-term fuel price increases from customers through fuel surcharges. Fuel surcharges that can be collected do not always offset the increase in the cost of diesel fuel. IF THE GROWTH IN OUR REGIONAL OPERATIONS THROUGHOUT THE UNITED STATES SLOWS OR STAGNATES, OR IF WE ARE UNABLE TO COMMIT SUFFICIENT RESOURCES TO OUR REGIONAL OPERATIONS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. Currently, a significant portion of our business is concentrated in the Arizona and California markets. A general economic decline or a natural disaster in either of these markets could have a material adverse effect on our growth and profitability. In addition, we have established regional operations in Katy, Texas; Indianapolis, Indiana; Charlotte, North Carolina; Gulfport, Mississippi; Salt Lake City, Utah; and Kansas City, Kansas in order to serve markets in these regions. We are planning additional regional operations for 2002. These regional operations require the commitment of additional revenue equipment and personnel, as well as management resources, for future development. Should the growth in our regional operations throughout the United States slow or stagnate, the results of our operations could be adversely affected. We may encounter operating conditions in these new markets that differ substantially from those previously experienced in our western United States markets. There can be no assurance that our regional operating strategy, as employed in the western United States, can be duplicated successfully in the other areas of the United States or that it will not take longer than expected or require a more substantial financial commitment than anticipated. DIFFICULTY IN DRIVER AND INDEPENDENT CONTRACTOR RETENTION MAY HAVE A MATERIALLY ADVERSE AFFECT ON OUR BUSINESS. Difficulty in attracting or retaining qualified drivers, including independent contractors, or a downturn in customer business cycles or shipping demands, could also have a material adverse effect on our growth and profitability. If a shortage of drivers should occur in the future, or if we were unable to continue to attract and contract with independent contractors, we could be required to adjust our driver compensation package, which could adversely affect our profitability if not offset by a corresponding increase in rates. 22 WE ARE HIGHLY DEPENDENT ON A FEW MAJOR CUSTOMERS, THE LOSS OF ONE OR MORE OF WHICH COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS. A significant portion of our revenue is generated from a few major customers. For the year ended December 31, 2001, our top 25 customers, based on revenue, accounted for approximately 43.8% of our revenue; our top 10 customers, approximately 27.8% of our revenue; and our top 5 customers, approximately 16.8% of our revenue. Generally, we do not have long term contractual relationships with our major customers, and we cannot assure you that our customer relationships will continue as presently in effect. A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and operating results. TERION TRAILER-TRACKING TECHNOLOGY MAY NOT BE AVAILABLE TO US, WHICH COULD REQUIRE US TO INCUR THE COST OF REPLACEMENT TECHNOLOGY, ADVERSELY AFFECT OUR TRAILER UTILIZATION AND OUR ABILITY TO ASSESS DETENTION CHARGES. We utilize Terion's trailer-tracking technology to assist with monitoring the majority of our trailers. Terion has filed for bankruptcy protection and is attempting a reorganization under Chapter 11 of the Federal Bankruptcy Code. If Terion ceases operations or abandons that technology, we would be required to incur the cost of replacing that technology or could be forced to operate without this trailer-tracking technology, which could adversely affect our trailer utilization and our ability to assess detention charges. OUR INVESTMENT IN CONCENTREK MAY NOT BE SUCCESSFUL AND WE MAY BE FORCED TO WRITE OFF PART OR ALL OF OUR INVESTMENT. We have invested $1 million and loaned approximately $1.6 million to Concentrek, Inc., ("Concentrek") a transportation logistics company and are comitted to loan up to an additional $760,500 on a secured basis. We own approximately 17% of Concentrek, and the remainder is owned by members of the Knight family and Concentrek's management. If Concentrek's financial position does not continue to improve, and if it is unable to raise additional capital, we could be forced to write down all or part of that investment. OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE OUR SHAREHOLDERS TO LOSE A SIGNIFICANT PORTION OF THEIR INVESTMENT. The market price of our common stock could be subject to significant fluctuations in response to certain factors, such as variations in our anticipated or actual results of operations or other companies in the transportation industry, changes in conditions affecting the economy generally, including incidents of terrorism, analyst reports, general trends in the industry, sales of common stock by insiders, as well as other factors unrelated to our operating results. Volatility in the market price of our common stock may prevent a shareholder from being able to sell his shares at or above the price paid for them. WE MAY NOT BE SUCCESSFUL IN OUR ACQUISITION STRATEGY, WHICH COULD LIMIT OUR GROWTH PROSPECTS. We may grow by acquiring other trucking companies or trucking assets. Acquisitions could involve the dilutive issuance of equity securities and/or the incurrence of additional debt. In addition, acquisitions involve numerous risks, including difficulties in assimilating the acquired company's operations, the diversion of our management's attention from other business concerns, risks of entering into markets in which we have had no or only limited direct experience, and the potential loss of customers, key employees and drivers of the acquired company, all of which could have a materially adverse effect on our business and operating results. If we were to make acquisitions in the future, we cannot assure our shareholders that we will be able to successfully integrate the acquired companies or assets into our business. 23 OUR OPERATIONS ARE SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND REGULATIONS, THE VIOLATION OF WHICH COULD RESULT IN SUBSTANTIAL FINES OR PENALTIES. We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. Two of our terminal facilities are located adjacent to superfund sites. Although we have not been named as a potentially responsible party in either case, we are potentially exposed to claims that we may have contributed to environmental contamination in the areas in which we operate. We also maintain bulk fuel storage and fuel islands at several of our facilities. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could have a materially adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability. The U.S. DOT and various state agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, rates and charges, operations, safety, and financial reporting. We may also become subject to new or more restrictive regulations relating to fuel emissions, drivers' hours in service, and ergonomics. Compliance with such regulations could substantially impair equipment productivity and increase our operating expenses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to market risk from changes in interest rate on debt and from changes in commodity prices. Under Financial Accounting Reporting Release Number 48, we are required to disclose information concerning market risk with respect to foreign exchange rates, interest rates, and commodity prices. We have elected to make such disclosures, to the extent applicable, using a sensitivity analysis approach, based on hypothetical changes in interest rates and commodity prices. Except as described below, we have not had occasion to use derivative financial instruments for risk management purposes and do not use them for either speculation or tracking. Because our operations are confined to the United States, we are not subject to foreign currency risk. INTEREST RATE RISK We are subject to interest rate risk to the extent we borrow against our line of credit or incur debt in the acquisition of revenue equipment. We attempt to manage our interest rate risk by managing the amount of debt we carry. An increase in short-term interest rates could have a material adverse effect on our financial condition if our debt levels increase and if the interest rate increases are not offset by freight rate increases or other items. We have entered into an interest rate swap agreement with our primary lender to better manage cash flow. Under this swap agreement a one percent (1%) increase or decrease in interest rates would result in a corresponding increase or decrease in annual interest expense of approximately $122,000. Management does not foresee or expect in the near future any significant changes in our exposure to interest rate fluctuations or in how that exposure is managed by us. We have not issued corporate debt instruments. COMMODITY PRICE RISK We are also subject to commodity price risk with respect to purchases of fuel. Prices and availability of petroleum products are subject to political, economic and market factors that are generally outside our control. Because our 24 operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition if we are unable to pass increased costs on to customers through rate increases or fuel surcharges. Historically, we have sought to recover a portion of our short-term fuel price increases from customers through fuel surcharges. Fuel surcharges that can be collected do not always offset the increase in the cost of diesel fuel. For the fiscal year ended December 31, 2001, fuel expense, net of fuel surcharge, represented 14.7% of our total operating expenses, net of fuel surcharge, compared to 15.3% for the same period ending in 2000. In August and September 2000, we entered into two agreements to obtain price protection to reduce a portion of our exposure to fuel price fluctuations. Under these agreements, we purchased 1,000,000 gallons of diesel fuel, per month, for a period of six months from October 1, 2000, through March 31, 2001. If during the 48 months following March 31, 2001, the price of heating oil on the New York Mercantile Exchange (NY MX HO) falls below $.58 per gallon, we are obligated to pay, for a maximum of 12 different months as selected by the contract holder during the 48-month period beginning after March 31, 2001, the difference between $.58 per gallon and NY MX HO average price for the minimum volume commitment. In July 2001, we entered into a similar agreement. Under this agreement, we are obligated to purchase 750,000 gallons of diesel fuel, per month, for a period of six months beginning September 1, 2001 through February 28, 2002. If during the 12-month period commencing January 2005 through December 2005, the price index discussed above falls below $.58 per gallon, we are obligated to pay the difference between $.58 and the stated index. Management estimates that any potential future payment under any of these agreements would be less than the amount of our savings for reduced fuel costs. For example, management estimates that a further reduction of $0.10 in the NY MX HO average price would result in a net savings, after making a payment on this agreement, to our total fuel expenses of approximately $1.0 million. Future increases in the NY MX HO average price would result in us not having to make payments under these agreements. Management's current valuation of the fuel purchase agreements indicates there was no material impact upon adoption of SFAS No. 133 on our results of operations and financial position and we have valued these items at fair value by recording accrued liabilities for these in the accompanying December 31, 2001, financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of Knight Transportation, Inc. and Subsidiaries, as of December 31, 2001 and 2000, and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 2001, together with the related notes and report of Arthur Andersen LLP, independent public accountants, are set forth at pages F-1 through F-20, below. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY We incorporate by reference the information contained under the heading "Election of Directors" from our definitive Proxy Statement to be delivered to our in connection with the 2002 Annual Meeting of Shareholders to be held May 8, 2002. 25 ITEM 11. EXECUTIVE COMPENSATION We incorporate by reference the information contained under the heading "Executive Compensation" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2002 Annual Meeting of Shareholders to be held May 8, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We incorporate by reference the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2002 Annual Meeting of Shareholders to be held May 8, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We incorporate by reference the information contained under the heading "Certain Relationships and Related Transactions" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2002 Annual Meeting of Shareholders to be held May 8, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report on Form 10-K at pages F-1 through F-20 , below. 1. Consolidated Financial Statements: KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Report of Arthur Andersen LLP, Independent Public Accountants Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules required to be filed by Item 8 and Paragraph (d) of Item 14: Valuation and Qualifying Accounts and Reserves Schedules not listed have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein. 3. Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed at paragraph (c), below, and at the Exhibit Index beginning at page 27. 26 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report on Form 10-K. (c) Exhibits: The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below: EXHIBIT NUMBER DESCRIPTIONS - ------ ------------ 3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 3.1.1 First Amendment to Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1.1 to the Company's report on Form 10-K for the period ending December 31, 2000). 3.1.2 Second Amendment to Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1.2 to the Company's Registration Statement on Form S-3 No. 333-72130). 3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the period ending December 31, 1996). 4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.) 4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.) 10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March 1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight Transportation, Inc. and certain other parties dated March 11, 1994 (assigning the lessor's interest to the R. K. Trust). (Incorporated by reference to Exhibit 10.2.1 to the Company's report on Form 10-K for the period ending December 31, 1997.) 27 10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight Transportation, Inc., dated as of September 1, 1997. (Incorporated by reference to Exhibit 10.2.2 to the Company's report on Form 10-K for the period ending December 31, 1997.) 10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of October 1994, between the Company and Knight Deer Valley, L.L.C., an Arizona limited liability company. (Incorporated by reference to Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.4 Loan Agreement and Revolving Promissory Note each dated March, 1996 between First Interstate Bank of Arizona, N.A. and Knight Transportation, Inc. and Quad K Leasing, Inc. (superseding prior credit facilities) (Incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-K for the period ending December 31, 1996). 10.4.1 Modification Agreement between Wells Fargo Bank, N.A., as successor by merger to First Interstate Bank of Arizona, N.A., and the Company and Quad-K Leasing, Inc. dated as of May 15, 1997. (Incorporated by reference to Exhibit 10.4.1 to the Company's report on Form 10-K for the period ending December 31, 1997.) 10.4.2 Loan Agreement and Revolving Line of Credit Note each dated November 24, 1999, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior revolving line of credit facilities) (Incorporated by reference to Exhibit 10.4.2 to the Company's report on Form 10-K for the period ending December 31, 1999.) 10.4.3 Term Note dated November 24, 1999, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facility) (Incorporated by reference to Exhibit 10.4.3 to the Company's report on Form 10-K for the period ending December 31, 1999.) 10.5 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the Company's Notice and Information Statement on Schedule 14(c) for the period ending December 31, 1997.) 10.6 Amended Indemnification Agreements between the Company, Don Bliss, Clark A. Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D. Madden, Mark Scudder and Keith Turley, and dated as of February 5, 1997 (Incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the period ending December 31, 1996). 10.6.1* Indemnification Agreements between the Company and Timothy M. Kohl, dated October 16, 2000, and Matt Salmon, dated May 9, 2001. 10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the Company, Swift Transportation Co., Inc. and United Title Agency of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period ended December 31, 1995.) 28 10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight Transportation, Inc., Knight Acquisition Corporation, Action Delivery Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis. (Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on March 25, 1999.) 10.11 Master Equipment Lease Agreement dated as of October 28, 1998, between Knight Transportation Midwest, Inc., formerly known as "Knight Transportation Indianapolis, Inc." and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.11 to the Company's report on Form 10-K for the period ending December 31, 1999.) 10.12 Consulting Agreement dated as of March 1, 2000 between Knight Transportation, Inc. and LRK Management, L.L.C. (Incorporated by reference to Exhibit 10.12 to the Company's report on Form 10-K for the period ending December 31, 1999.) 10.13 Stock Purchase Agreement dated April 19, 2000 by and among Knight Transportation, Inc., as Buyer, John R. Fayard, Jr., and John Fayard Fast Freight, Inc. (Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 4, 2000.) 21.1* Subsidiaries of the Company. 23* Consent of Arthur Andersen LLP - ---------- * Filed herewith. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Knight Transportation, Inc. has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. KNIGHT TRANSPORTATION, INC. By: /s/ Kevin P. Knight ------------------------------------ Kevin P. Knight, Date: March 15, 2002 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. SIGNATURE AND TITLE DATE ------------------- ---- /s/ Kevin P. Knight March 15, 2002 - -------------------------------------------- Kevin P. Knight, Chairman of the Board, Chief Executive Officer, Director /s/ Gary J. Knight March 15, 2002 - -------------------------------------------- Gary J. Knight, President, Director /s/ Keith T. Knight March 15, 2002 - -------------------------------------------- Keith T. Knight, Executive Vice President, Director /s/ Timothy M. Kohl March 15, 2002 - -------------------------------------------- Timothy M. Kohl, Chief Financial Officer, Secretary, Director /s/ Randy Knight March 15, 2002 - -------------------------------------------- Randy Knight, Director /s/ Mark Scudder March 15, 2002 - -------------------------------------------- Mark Scudder, Director /s/ Donald A. Bliss March 15, 2002 - -------------------------------------------- Donald A. Bliss, Director /s/ G.D. Madden March 15, 2002 - -------------------------------------------- G.D. Madden, Director /s/ Matt Salmon March 15, 2002 - -------------------------------------------- Matt Salmon, Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Knight Transportation, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of KNIGHT TRANSPORTATION, INC. (an Arizona corporation) AND SUBSIDIARIES (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Phoenix, Arizona January 16, 2002 F-1 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000
2001 2000 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 24,135,601 $ 6,151,383 Trade receivables, net of allowance for doubtful accounts of $1,131,682 and $1,121,375, respectively 31,693,074 33,923,878 Notes receivable, net of allowance for doubtful notes receivable of $66,181 and $80,645, respectively 777,218 143,576 Inventories and supplies 1,905,934 792,683 Prepaid expenses 7,964,109 5,018,559 Deferred tax assets 6,081,462 3,046,756 ------------- ------------- 72,557,398 49,076,835 ------------- ------------- Property and Equipment: Land and land improvements 13,112,344 11,309,547 Buildings and improvements 12,456,546 9,684,086 Furniture and fixtures 6,297,862 5,620,344 Shop and service equipment 1,789,903 1,435,818 Revenue equipment 169,630,340 156,429,863 Leasehold improvements 666,860 611,475 ------------- ------------- 203,953,855 185,091,133 Less: accumulated depreciation (50,258,826) (42,113,992) ------------- ------------- Property and Equipment, net 153,695,029 142,977,141 ------------- ------------- Notes Receivable, net of current portion 3,108,263 1,398,475 ------------- ------------- Other Assets, net of accumulated amortization of $929,833 and $277,046, respectively 11,753,359 13,531,568 ------------- ------------- $ 241,114,049 $ 206,984,019 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-2 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000
2001 2000 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,838,011 $ 6,125,474 Accrued liabilities 6,321,829 4,406,341 Current portion of long-term debt 3,159,162 5,477,868 Claims accrual 7,509,397 5,554,127 ------------- ------------- 20,828,399 21,563,810 Line of Credit 12,200,000 34,000,000 Long-Term Debt, net of current portion 2,714,526 14,885,268 Deferred Tax Liabilities 37,675,395 31,414,320 ------------- ------------- 73,418,320 101,863,398 ------------- ------------- Commitments and Contingencies Shareholders' Equity: Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 36,834,106 and 33,732,423 shares issued and outstanding at December 31, 2001 and 2000, respectively 368,341 337,324 Additional paid-in capital 69,846,990 25,586,963 Accumulated other comprehensive loss (732,470) -- Retained earnings 98,212,868 79,196,334 ------------- ------------- 167,695,729 105,120,621 ------------- ------------- $ 241,114,049 $ 206,984,019 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------- ------------- ------------- Revenue: Revenue, before fuel surcharge $ 241,679,351 $ 207,406,059 $ 151,489,829 Fuel surcharge 9,139,382 9,452,816 968,669 ------------- ------------- ------------- Total revenue 250,818,733 216,858,875 152,458,498 ------------- ------------- ------------- Operating Expenses: Salaries, wages and benefits 81,778,739 69,193,161 44,688,774 Fuel 38,934,360 36,256,884 16,769,280 Operations and maintenance 13,892,190 11,236,724 8,776,253 Insurance and claims 10,229,692 4,869,166 4,005,111 Operating taxes and licenses 7,037,838 7,514,597 5,646,079 Communications 2,057,222 1,510,153 1,190,164 Depreciation and amortization 18,416,513 19,131,183 14,179,613 Lease expense - revenue equipment 8,510,616 3,717,044 -- Purchased transportation 23,494,931 25,856,976 27,585,318 Miscellaneous operating expenses 6,915,149 5,549,612 3,707,892 ------------- ------------- ------------- 211,267,250 184,835,500 126,548,484 ------------- ------------- ------------- Income from operations 39,551,483 32,023,375 25,910,014 ------------- ------------- ------------- Other Income (Expense): Interest income 708,073 917,975 901,332 Other expense (5,679,000) (287,500) -- Interest expense (2,514,022) (4,048,664) (1,197,446) ------------- ------------- ------------- (7,484,949) (3,418,189) (296,114) ------------- ------------- ------------- Income before income taxes 32,066,534 28,605,186 25,613,900 Income Taxes (13,050,000) (10,860,000) (10,150,000) ------------- ------------- ------------- Net income $ 19,016,534 $ 17,745,186 $ 15,463,900 ============= ============= ============= Basic Earnings Per Share $ .55 $ .53 $ .46 ============= ============= ============= Diluted Earnings Per Share $ .54 $ .53 $ .45 ============= ============= ============= Weighted Average Shares Outstanding - Basic 34,275,107 33,409,660 33,727,858 ============= ============= ============= Weighted Average Shares Outstanding - Diluted 35,145,442 33,770,410 34,273,249 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ Net Income $ 19,016,534 $ 17,745,186 $ 15,463,900 Other Comprehensive Loss: Interest rate swap agreement fair market value adjustment (732,470) -- -- ------------ ------------ ------------ Comprehensive Income $ 18,284,064 $ 17,745,186 $ 15,463,900 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 2001, 2000, and 1999
Accumulated Common Stock Additional Other --------------------------- Paid-in Comprehensive Retained Shares Issued Amount Capital (Loss) Earnings Total ------------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 1998 33,708,335 $ 337,083 $ 24,574,745 $ -- $45,987,248 $ 70,899,076 Exercise of stock options 81,900 819 322,189 -- -- 323,008 Issuance of shares for business acquisition 219,512 2,195 1,830,732 -- -- 1,832,927 Issuance of common stock 1,152 12 9,988 -- -- 10,000 Tax benefit on stock option exercises -- -- 98,712 -- -- 98,712 Purchase of stock, at cost (1,117,800) (11,178) (5,802,804) -- -- (5,813,982) Net income -- -- -- -- 15,463,900 15,463,900 ----------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 1999 32,893,099 328,931 21,033,562 -- 61,451,148 82,813,641 Exercise of stock options 322,553 3,225 1,214,988 -- -- 1,218,213 Issuance of shares for business acquisition 514,773 5,148 2,944,072 -- -- 2,949,220 Issuance of common stock 1,998 20 14,980 -- -- 15,000 Tax benefit on stock option exercises -- -- 379,361 -- -- 379,361 Net income -- -- -- -- 17,745,186 17,745,186 ----------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 2000 33,732,423 337,324 25,586,963 -- 79,196,334 105,120,621 Exercise of stock options 421,576 4,216 1,994,250 -- -- 1,998,466 Issuance of shares in stock offering, net of offering costs of $2,517,091 2,678,907 26,789 41,202,671 -- -- 41,229,460 Issuance of common stock 1,200 12 14,988 -- -- 15,000 Tax benefit on stock option exercises -- -- 1,048,118 -- -- 1,048,118 Other comprehensive loss -- -- -- (732,470) -- (732,470) Net income -- -- -- -- 19,016,534 19,016,534 ----------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 2001 36,834,106 $ 368,341 $ 69,846,990 $ (732,470) $98,212,868 $167,695,729 =========== =========== ============ =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999 ------------ ------------ ------------ Cash Flows From Operating Activities: Net income $ 19,016,534 $ 17,745,186 $ 15,463,900 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 18,416,513 19,131,183 14,179,613 Write-off of investment in communications company 5,679,000 -- -- Non-cash compensation expense for issuance of common stock to certain members of board of directors 15,000 15,000 10,000 Provision for allowance for doubtful accounts and notes receivable 470,007 668,409 320,759 Deferred income taxes 3,226,369 5,815,361 5,051,072 Tax benefit on stock option exercises 1,048,118 379,361 98,712 Changes in assets and liabilities: (Increase) decrease in trade receivables 1,774,804 (4,954,286) (6,857,721) (Increase) decrease in inventories and supplies (1,113,251) (151,262) 778,426 (Increase) decrease in prepaid expenses (2,945,550) (3,448,536) 80,769 Increase in other assets (272,334) (2,028,902) (1,640,016) Increase (decrease) in accounts payable (2,287,463) 319,348 (1,086,359) Increase (decrease) in accrued liabilities and claims accrual 3,138,288 1,058,560 (897,123) ------------ ------------ ------------ Net cash provided by operating activities 46,166,035 34,549,422 25,502,032 ------------ ------------ ------------ Cash Flows From Investing Activities: Purchases of property and equipment, net (30,377,780) (33,965,304) (37,273,468) Investment in communications company -- -- (879,000) Investment in/advances to other companies (1,334,000) (1,720,000) (250,000) Cash received from business acquired -- 2,528,420 64,501 Increase in notes receivable (2,357,437) (1,735,218) (6,576,353) ------------ ------------ ------------ Net cash used in investing activities (34,069,217) (34,892,102) (44,914,320) ------------ ------------ ------------ Cash Flows From Financing Activities: (Payments) borrowings on line of credit, net (21,800,000) 4,963,030 25,536,970 Proceeds from sale of notes receivable -- 10,091,166 -- Borrowings of long-term debt -- -- 6,645,895 Payments of long-term debt (14,489,448) (9,862,592) (1,888,184) Payments of accounts payable - equipment (1,051,078) (3,210,581) (2,220,780) Proceeds from issuance of common stock 43,746,551 -- -- Payment of stock offering costs (2,517,091) -- -- Purchase of treasury stock, at cost -- -- (5,813,982) Proceeds from exercise of stock options 1,998,466 1,218,213 323,008 ------------ ------------ ------------ Net cash provided by financing activities 5,887,400 3,199,236 22,582,927 ------------ ------------ ------------ Net Increase in Cash and Cash Equivalents 17,984,218 2,856,556 3,170,639 Cash and Cash Equivalents, beginning of year 6,151,383 3,294,827 124,188 ------------ ------------ ------------ Cash and Cash Equivalents, end of year $ 24,135,601 $ 6,151,383 $ 3,294,827 ============ ============ ============ Supplemental Disclosures: Noncash investing and financing transactions: Equipment acquired by accounts payable $ -- $ 1,051,078 $ 4,261,659 Cash flow information: Income taxes paid $ 7,481,894 $ 6,264,157 $ 6,001,684 Interest paid 2,488,547 4,036,509 1,117,787
The accompanying notes are an integral part of these consolidated financial statements. F-7 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the Company) is a short to medium-haul, truckload carrier of general commodities. The operations are based in Phoenix, Arizona, where the Company has its corporate offices, fuel island, truck terminal, dispatching and maintenance services. The Company also has operations in Katy, Texas; Indianapolis, Indiana; Charlotte, North Carolina; Salt Lake City, Utah and Kansas City, Kansas. During 2000, the Company expanded its operations by acquiring the facilities of John Fayard Fast Freight, Inc., now Knight Transportation Gulf Coast, Inc., in Gulfport, Mississippi. The Company operates in one industry, road transportation, which is subject to regulation by the Department of Transportation and various state regulatory authorities. The Company has an owner-operator program. Owner-operators are independent contractors who provide their own tractors. The Company views owner-operators as an alternative method to obtaining additional revenue equipment. b. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the parent company Knight Transportation, Inc., and its wholly owned subsidiaries, Knight Administrative Services, Inc., Quad-K Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc., Knight Management Services, Inc., Knight Transportation Midwest, Inc., KTeCom, L.L.C., Knight Transportation South Central Ltd. Partnership and Knight Transportation Gulf Coast, Inc. All material intercompany items and transactions have been eliminated in consolidation. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. NOTES RECEIVABLE - Included in notes receivable are amounts due from independent contractors under a program whereby the Company finances tractor purchases for its independent contractors. These notes receivable are collateralized by revenue equipment and are due in monthly installments, including principal and interest at 14%, over periods generally ranging from three to five years. INVENTORIES AND SUPPLIES - Inventories and supplies consist of tires and spare parts which are stated at the lower of cost, using the first-in, first-out (FIFO) method, or net realizable value. F-8 PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation on property and equipment is calculated by the straight-line method over the following estimated useful lives: Years ----- Land improvements 5 Buildings and improvements 20-30 Furniture and fixtures 5 Shop and service equipment 5-10 Revenue equipment 5-10 Leasehold improvements 10 The Company expenses repairs and maintenance as incurred. For the years ended December 31, 2001, 2000, and 1999, repairs and maintenance expense totaled approximately $8,900,000, $6,100,000, and $4,240,000, respectively, and is included in operations and maintenance expense in the accompanying consolidated statements of income. Revenue equipment is depreciated to salvage values of 15% to 30% for all tractors. Trailers are depreciated to salvage values of 10% to 40%. The Company periodically reviews and adjusts its estimates related to useful lives and salvage values for revenue equipment. Tires on revenue equipment purchased are capitalized as a part of the equipment cost and depreciated over the life of the vehicle. Replacement tires and recapping costs are expensed when placed in service. OTHER ASSETS - Other assets include:
2001 2000 ------------ ------------ Investment in communications technology company $ -- $ 4,879,000 Investment in logistics company and related advances 1,774,500 720,200 Investment in aircraft company 1,717,700 1,450,000 Goodwill 8,433,900 5,798,179 Other 757,092 961,235 Accumulated amortization (929,833) (277,046) ------------ ------------ $ 11,753,359 $ 13,531,568 ============ ============
The Company's ownership percentage in each of the investments above is less than 20% at December 31, 2001 and 2000 and the Company does not have significant influence over the operating decisions of the entities; therefore, the investments are carried at cost. In 1998 and 1999 the Company invested in a communications technology company. The Company owned less than four percent of that technology company and did not derive any revenue from its investment. In August 2001, the investee announced changes to its strategic operations which caused the Company to evaluate the investment for impairment. During 2001, the Company elected to write-off this investment in accordance with its policy on evaluating the impairment of long-lived assets. The investee, subsequent to the Company writing-off the investment, filed for bankruptcy protection. This non-recurring charge is reflected in other expense in the accompanying consolidated financial statements. The logistics company and aircraft company are related parties. (see notes 5 and 7) Goodwill was being amortized over 15 years. On January 1, 2002, the Company adopted SFAS No. 141 and 142 which will impact future amortization. (See "Recently Adopted and to be Adopted Pronouncements" below in Note 1). F-9 IMPAIRMENT OF LONG-LIVED ASSETS - The Company assesses the recoverability of long-lived assets, including property and equipment and goodwill, by determining whether the assets can be recovered from undiscounted future cash flows. The amount of impairment, if any, is measured based on projected future cash flows (using a discount rate reflecting the Company's average cost of funds) compared to the carrying value of those assets. Recoverability of long-lived assets is dependent upon, among other things, the Company's ability to continue to achieve profitability, in order to meet its obligations when they become due. In the opinion of management, based upon current information, long-lived assets will be recovered over the period of benefit. REVENUE RECOGNITION - The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Generally, all of these conditions are met upon delivery. INCOME TAXES - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. STOCK-BASED COMPENSATION - The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion (APB) No. 25. In accordance with SFAS No. 123, a company is required to disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. See Note 9. FINANCIAL INSTRUMENTS - The Company's financial instruments include cash equivalents, trade receivables, notes receivable, accounts payable and notes payable. Due to the short-term nature of cash equivalents, trade receivables and accounts payable, the fair value of these instruments approximates their recorded value. In the opinion of management, based upon current information, the fair value of notes receivable and notes payable approximates market value. The Company does not have material financial instruments with off-balance sheet risk, with the exception of operating leases. See Note 5. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company's three largest customers for each of the years 2001, 2000 and 1999, aggregated approximately 11%, 15% and 16% of revenues, respectively. Revenue from the Company's single largest customers represent approximately 4%, 7% and 7% of revenues for the years 2001, 2000, and 1999, respectively. RECAPITALIZATION AND STOCK SPLIT - On May 9, 2001 the Board of Directors approved a three-for-two stock split, effected in the form of a 50 percent stock dividend. The stock split occurred on June 1, 2001, to all shareholders of record as of the close of business on May 18, 2001. Also on December 7, 2001 the Company's Board of Directors approved another three-for-two stock split, effected in the form of a 50 percent stock dividend. The stock split occurred on December 28, 2001, to all stockholders of record as of the close of business on December 7, 2001. These stock splits have been given retroactive recognition for all periods presented in the accompanying consolidated financial statements. All share amounts and earnings per share amounts have been retroactively adjusted to reflect the stock splits. EARNINGS PER SHARE - The Company accounts for its earnings per share (EPS) in accordance with SFAS No. 128, EARNINGS PER SHARE. A reconciliation of the numerators (net income) and denominators (weighted average number of shares outstanding) of the basic and diluted EPS computations for 2001, 2000, and 1999, are as follows: F-10
2001 2000 1999 ------------------------------------ ------------------------------------ ------------------------------------ Net Income Shares Per Share Net Income Shares Per Share Net Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------ Basic EPS $19,016,534 34,275,107 $ .55 $17,745,186 33,409,660 $ .53 $15,463,900 33,727,858 $ .46 ====== ====== ====== Effect of stock options -- 870,335 -- 360,750 -- 545,391 ----------- ---------- ----------- ---------- ----------- ---------- Diluted EPS $19,016,534 35,145,442 $ .54 $17,745,186 33,770,410 $ .53 $15,463,900 34,273,249 $ .45 =========== =========== ====== =========== =========== ====== =========== =========== ======
SEGMENT INFORMATION - Although the Company has eight operating segments, it has determined that it has one reportable segment. Seven of the segments are managed based on the regions of the United States in which each operates. Each of these segments have similar economic characteristics as they all provide short to medium haul truckload carrier service of general commodities to a similar class of customers. In addition, each segment exhibits similar financial performance, including average revenue per mile and operating ratio. The remaining segment is not reported because it does not meet the materiality thresholds in SFAS No. 131. As a result, the Company has determined that it is appropriate to aggregate its operating segments into one reportable segment consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its operating segments as the Company's consolidated financial statements present its one reportable segment. RECENTLY ADOPTED AND TO BE ADOPTED ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement, as amended, establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133. This statement deferred the effective date of SFAS No. 133 for the Company until January 1, 2001. In August and September 2000, the Company entered into two agreements to obtain price protection to reduce a portion of the Company's exposure to fuel price fluctuations. Under these agreements, the Company purchased 1,000,000 gallons of diesel fuel, per month, for a period of six months from October 1, 2000 through March 31, 2001. If during the 48 months following March 31, 2001, the price of heating oil on the New York Mercantile Exchange (NY MX HO) falls below $.58 per gallon, the Company is obligated to pay, for a maximum of 12 different months selected by the contract holder during the 48-month period beginning after March 31, 2001, the difference between $.58 per gallon and NY MX HO average price for the minimum volume commitment. In July 2001, the Company entered into a similar agreement. Under this agreement, the Company is obligated to purchase 750,000 gallons of diesel fuel, per month, for a period of six months beginning September 1, 2001 through February 28, 2002. If during the 12-month period commencing January 2005 through December 2005, the price index discussed above falls below $.58 per gallon, the Company is obligated to pay the difference between $.58 and the stated index. The Company adopted SFAS No. 133 on January 1, 2001. There was not a material impact on the Company's results of operations or financial position as a result of the adoption of SFAS No. 133. As of December 31, 2001, the three agreements described above are stated at their fair market value, based on an option provided by the issuer of the agreements to dissolve the agreements for $750,000, which expires on April 16, 2002, and are included in accrued liabilities in the accompanying consolidated financial statements. F-11 In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. This statement also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized finite-lived intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption. The Company had $7,504,067 in net book value recorded for goodwill at December 31, 2001. The current amortization of this goodwill was $46,782 per month. The Company adopted SFAS No. 141 and 142 on January 1, 2002. At present, the Company is currently assessing but has not yet determined the complete impact the adoption of SFAS No. 141 and SFAS No. 142 will have on its financial position and results of operations. The Company ceased amortization of its indefinite life intangibles as of January 1, 2002. In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 143 covers all legally enforceable obligations associated with the retirement of tangible long-lived assets and provides the accounting and reporting requirements for such obligations. SFAS No. 143 is effective for the Company beginning January 1, 2003. The Company has not assessed the impact of this new statement on its financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. This statement also amends ARB No. 51, CONSOLIDATED FINANCIAL STATEMENTS to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002 and there was not a material impact on the Company's results of operations or financial position. 2. ACQUISITIONS The Company acquired the assets of a Texas-based truckload carrier during the quarter ended March 31, 1999. The purchased assets and assumed liabilities were recorded at their estimated fair values at the acquisition date in accordance with APB No. 16, BUSINESS COMBINATIONS. In conjunction with the acquisition, the Company issued 219,512 shares of its common stock. The aggregate purchase price of the acquisition consisted of the following (in thousands): Common stock $ 1,833 Assumption of liabilities 331 -------- $ 2,164 ======== F-12 The fair value of the assets purchased has been allocated as follows (in thousands): Cash $ 65 Trade receivable 407 Property and equipment 1,492 Goodwill 200 -------- $ 2,164 ======== The Company acquired the stock of a Mississippi-based truckload carrier during the quarter ended June 30, 2000. The acquired assets and assumed liabilities were recorded at their estimated fair values at the acquisition date in accordance with APB No. 16, BUSINESS COMBINATIONS. In conjunction with the acquisition, the Company issued 514,773 shares (after effect of two stock splits discussed previously) of common stock. These shares were valued at fair market value less a discount due to the restricted nature of these shares. The Company has completed its allocation of the purchase price; adjustments to the purchase price allocations did not have a material impact on the accompanying consolidated financial statements. Terms of the purchase agreement set forth conditions upon which an earn-out adjustment to the purchase price based upon future earnings may be necessary over a two-year period. The first year earn-out period was from April 1, 2000 to March 31, 2001. At the end of that period, an adjustment in the form of additional shares of the Company's common stock up to a maximum of 45,000 shares was possible, but did not occur. Along with these shares of stock, a cash bonus up to $495,000 was possible, but did not occur. The second, and final, year for an earn-out is for the period of April 1, 2001 to March 31, 2002. At the end of this period, an adjustment in the form of additional shares of the Company's stock up to a maximum of 60,000 shares is possible. Along with these shares of stock, a cash bonus up to $660,000 is possible. The aggregate purchase price of the acquisition consisted of the following (in thousands): Cash $ 4,000 Issuance of common stock 2,949 Assumption of liabilities 20,830 -------- $ 27,779 ======== The fair value of the assets purchased has been allocated as follows (in thousands): Cash $ 2,528 Trade receivable 4,360 Property and equipment 11,764 Goodwill 8,234 Other assets 893 -------- $ 27,779 ======== F-13 The following unaudited pro forma information reflects the acquisitions previously discussed as if they occurred at the beginning of the periods presented, but may not be indicative of the actual results, which would have occurred had the acquisitions been consummated at the beginning of such periods or of future consolidated operations of the Company. The unaudited pro forma financial information is based on the purchase method of accounting and reflects an adjustment to amortize the excess purchase price over the underlying value of net assets acquired and to adjust income taxes for the unaudited pro forma adjustments. YEAR ENDED DECEMBER 31 ----------------------------- 2000 1999 -------------- ------------- (Unaudited) (Unaudited) Total revenues $ 226,603,099 $ 185,744,068 Net income 18,200,636 16,911,274 Basic earnings per share .54 .49 Diluted earnings per share .54 .49 Weighted average shares outstanding Basic 33,564,798 34,290,743 Diluted 33,925,547 34,836,134 3. LINE OF CREDIT AND LONG-TERM DEBT Long-term debt consists of the following at December 31: 2001 2000 ------------ ------------ Note payable to financial institution with monthly principal and interest payments of $192,558 through October 2003; the note is unsecured with interest at a fixed rate of 5.75% $ 4,008,688 $ 6,022,254 Notes payable to a third party with a payment totaling $1,025,679 due in 2002, and final payment of $839,321 due in 2003 The note is secured by real property of the Company 1,865,000 -- Notes payable to a commercial lender with monthly principal and interest payments of approximately $29,700 through $75,500 The notes were secured by certain revenue equipment with interest rates from 6.95% to 6.99% and were paid in 2001 -- 5,695,597 Notes payable to commercial lenders with monthly principal and interest payments of approximately $3,100 through $55,100 The notes were secured by certain revenue equipment with interest rates from 6.75% to 8.25% and were paid in 2001 -- 8,645,285 ------------ ------------ 5,873,688 20,363,136 Less - current portion (3,159,162) (5,477,868) ------------ ------------ $ 2,714,526 $ 14,885,268 ============ ============ Long-term debt maturities are as follows: 2002 $ 3,159,162 2003 2,714,526 ------------ $ 5,873,688 ============ The Company maintains a $50.0 million revolving line of credit (see Note 6) with principal due at maturity, July 2003, and interest payable monthly at two options (prime or LIBOR plus .625%). During 2001, the Company entered into an interest rate swap agreement on the $12.2 million outstanding under the revolving line of credit for purposes of better managing cash flow. At December F-14 31, 2001 the fair value of this agreement is included in other comprehensive loss on the Company's balance sheet. The available credit at December 31, 2001 under this line of credit is $33.4 million. Under the terms of the line of credit and certain notes payable, the Company is required to maintain certain financial ratios such as net worth and funded debt to earnings before income taxes, depreciation and amortization. The Company is also required to maintain certain other covenants relating to corporate structure, ownership and management. The Company was in compliance with its financial debt covenants at December 31, 2001. 4. INCOME TAXES Income tax expense consists of the following:
2001 2000 1999 ----------- ----------- ----------- Current income taxes: Federal $ 7,951,816 $ 4,118,681 $ 4,198,003 State 1,871,815 925,958 900,925 ----------- ----------- ----------- 9,823,631 5,044,639 5,098,928 ----------- ----------- ----------- Deferred income taxes: Federal 2,649,207 4,652,261 4,044,413 State 577,162 1,163,100 1,006,659 ----------- ----------- ----------- 3,226,369 5,815,361 5,051,072 ----------- ----------- ----------- $13,050,000 $10,860,000 $10,150,000 =========== =========== =========== The effective income tax rate is different than the amount which would be computed by applying statutory corporate income tax rates to income before income taxes. The differences are summarized as follows: 2001 2000 1999 ----------- ----------- ----------- Tax at the statutory rate (34%) $10,902,622 $ 9,725,764 $ 8,708,726 State income taxes, net of federal benefit 2,147,378 1,134,236 1,441,274 ----------- ----------- ----------- $13,050,000 $10,860,000 $10,150,000 =========== =========== =========== The net effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000, are as follows: 2001 2000 ----------- ----------- Short-term deferred tax assets: Claims accrual $ 3,157,449 $ 2,229,202 Capital loss carryforward 1,951,600 -- Other 972,413 817,554 ----------- ----------- $ 6,081,462 $ 3,046,756 =========== =========== Long-term deferred tax liabilities: Property and equipment depreciation $36,093,198 $30,341,574 Prepaid expenses deducted for tax purposes 1,582,198 1,072,746 ----------- ----------- $37,675,395 $31,414,320 =========== ===========
In management's opinion, it is more likely than not that the Company will be able to utilize its deferred tax assets in future periods. F-15 5. COMMITMENTS AND CONTINGENCIES a. PURCHASE COMMITMENTS As of December 31, 2001, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price, net of estimated trade-in values, of approximately $45,000,000 for delivery throughout 2002. Although the Company expects to take delivery of this revenue equipment, delays in the availability of equipment could occur due to factors beyond the Company's control. As of December 31, 2001, the Company had a commitment to purchase 2,250,000 gallons of fuel by February 28, 2002. Under the agreement, the price of fuel is set at a maximum of $0.80 per gallon. The Company will also receive a rebate of $0.04 per gallon for all gallons purchased during the agreement term. In the event that the Company fails to purchase the required quantities during any month of the agreement period, the Company will forfeit the rebate and favorable pricing for that month. Historically, the Company has purchased fuel in excess of the committed amount above. b. OTHER The Company is involved in certain legal proceedings arising in the normal course of business. In the opinion of management, the Company's potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements. c. OPERATING LEASES The Company leases certain revenue equipment under non-cancelable operating leases. Rent expense related to these lease agreements totaled approximately $8.5 million and $3.7 million, for the years ended December 31, 2001 and 2000, respectively. Future lease payments under non-cancelable operating leases are as follows: Year Ending December 31, Amount ------------ ----------- 2002 $ 8,723,210 2003 7,062,633 2004 4,318,435 2005 2,848,888 2006 788,748 ----------- $23,741,914 =========== d. RELATED PARTY LOGISTICS LINE OF CREDIT In April 1999, the Company acquired a 17% interest in a related party logistics company. Through a limited liability company, the Company has agreed to lend up to a maximum of $2,335,000 to the related party logistics company pursuant to two promissory notes. One note has a principal amount of $935,000 and is convertible into the related party logistic company's Class A Preferred Stock. The other note is not convertible and has an available principal amount of $1,400,000. Both notes are secured by a lien on substantially all of the logistic company's assets and these notes share first priority with respect to their security interests. Both notes are due in April, 2004. At December 31, 2001, the Company had advanced $1,574,500 under these promissory notes. The advances are included in other assets at December 31, 2001. F-16 6. CLAIMS ACCRUAL The primary claims arising for the Company consist of cargo loss and damage and auto liability (personal injury and property damage). The Company is self-insured for personal injury and property damage liability, cargo liability, collision and comprehensive, and for worker's compensation up to a maximum limit of $500,000 per occurrence. The Company establishes reserves to cover these self-insured liabilities and maintains insurance to cover liabilities in excess of those amounts. Subsequent to December 31, 2001, the Company increased its self-insurance levels for personal injury and property damage liability, cargo liability, collision and comprehensive up to $1,750,000. The worker's compensation self-insurance level remains at $500,000. The Company's insurance policies provide for excess personal injury and property damage liability, cargo liability, collision and comprehensive coverage up to a total of $30,000,000 per occurrence. The Company also maintains primary and excess coverage for employee medical expenses and hospitalization, and damage to physical properties. The claims accrual represents accruals for the estimated uninsured portion of pending claims including adverse development of known claims and incurred but not reported claims. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near term. Liabilities in excess of the self-insured amounts are collateralized by letters of credit totaling $4.4 million. These letters of credit reduce the available borrowings under the Company's line of credit (see Note 3). 7. RELATED PARTY TRANSACTIONS The Company leases land and facilities from a shareholder and director (the Shareholder), with monthly payments of $6,100. In addition to base rent, the lease requires the Company to pay its share of all expenses, utilities, taxes and other charges. Rent expense paid to the Shareholder under this lease was approximately $81,000 during each of 2001, 2000 and 1999, respectively. The Company paid approximately $90,000 annually for certain of its key employees' life insurance premiums during 2001, 2000, and 1999, respectively. A portion of the premiums paid is included in other assets in the accompanying consolidated balance sheets. The life insurance policies provide for cash distributions to the beneficiaries of the policyholders upon death of the key employee. The Company is entitled to receive the total premiums paid on the policies at distribution prior to any beneficiary distributions. During 2001 and 2000, the Company purchased approximately $1,061,447 and $2,092,000, respectively, of communications equipment from the communications technology company in which it has an investment (see Note 1). Additionally at December 31, 2001, the Company had a receivable included in trade receivables for approximately $27,000 related to the reimbursement of expenses. During 2001, the Company paid approximately $64,500 for legal services to a firm that employs a member of the Company's Board of Directors. During 2001, the Company paid approximately $620,000 for travel services for its employees to an aircraft company in which the Company has an investment (see Note 1). The Company has a consulting agreement with a former employee, shareholder and officer of the Company to provide services related to marketing and consulting and paid this former employee approximately $50,000 each for the years ended December 31, 2001 and 2000, respectively. Total Warehousing, Inc. (Total), a company owned by a shareholder and director of the Company provided general warehousing services to the Company in the amount of approximately $5,300, $33,000 and $64,000 for the years ended December 31, 2001, 2000 and 1999, respectively. F-17 8. SHAREHOLDERS' EQUITY In November 2001, the Company issued 2,678,907 shares of common stock at $16.33 (the Offering). The offering consisted of 4,928,907 shares of common stock comprised of 2,678,907 of newly issued Company shares and 2,250,000 shares from existing shareholders. The net proceeds from the offering were $41,229,460 after deducting offering costs of $2,517,091. The Company's Board of Directors have authorized the repurchase from time to time of up to 1,500,000 shares of the Company's common stock on the open market or in negotiated transactions depending upon market conditions and other factors. During 1999, the Company purchased 496,800 shares, prior to adjustment for the stock splits in 2001, under the repurchase program at a total cost of $5.8 million. During 2001, 2000 and 1999, certain non-employee Board of Director members received their director fees of $5,000 each through the issuance of common stock in equivalent shares. The Company issued a total of 1,200, 1,998 and 1,152 shares of common stock to certain directors during 2001, 2000 and 1999, respectively. 9. EMPLOYEE BENEFIT PLANS a. 1994 STOCK OPTION PLAN The Company established the 1994 Stock Option Plan (the Plan) with 3,375,000 shares of common stock reserved for issuance thereunder. The Plan will terminate on August 31, 2004. The Compensation Committee of the Board of Directors administers the 1994 Plan and has the discretion to determine the employees, officers and independent directors who receive awards, the type of awards to be granted (incentive stock options, nonqualified stock options and restricted stock grants) and the term, vesting and exercise price. Incentive stock options are designed to comply with the applicable provisions of the Internal Revenue Code (the Code) and are subject to restrictions contained in the Code, including a requirement that exercise prices are equal to at least 100% of the fair market value of the common shares on the grant date and a ten-year restriction on the option term. Independent directors are not permitted to receive incentive stock options. Non-qualified stock options may be granted to directors, including independent directors, officers, and employees and provide for the right to purchase common stock at a specified price, which may not be less than 85% of the fair market value on the date of grant, and usually become exercisable in installments after the grant date. Non-qualified stock options may be granted for any reasonable term. The Plan provides that each independent director may receive, on the date of appointment to the Board of Directors, non-qualified stock options to purchase not less than 2,500 or no more than 5,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of the grant. As permitted under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to account for stock transactions with employees and directors pursuant to the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Had compensation cost for the Plan been recorded consistent with SFAS No. 123, the Company's net income and EPS amounts would have been changed to the following pro forma amounts for the years ended December 31: 2001 2000 1999 ----------- ----------- ----------- Net income: As reported $19,016,534 $17,745,186 $15,463,900 Pro forma 19,150,571 17,327,911 15,192,844 Earnings per share: As reported - Diluted EPS $ .54 $ .53 $ .45 Pro forma - Diluted EPS .54 .51 .44 F-18 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999; risk free interest rate of 6.87%, expected life of six years, expected volatility of 48%, expected dividend rate of zero, and expected forfeitures of 3.75%. The following weighted average assumptions were used for grants in 2000; risk free interest rate of 7.25%, expected life of six years, expected volatility of 45%, expected dividend rate of zero, and expected forfeitures of 3.04%. The following weighted average assumptions were used for grants in 2001; risk free interest rate of 5.25%, expected life of six years, expected volatility of 52%, expected dividend rate of zero, and expected forfeitures of 3.83%.
2001 2000 1999 --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- ------- ---------- ------- ---------- ------- Outstanding at beginning of year 1,922,022 $ 6.16 1,822,918 $ 5.72 1,584,337 $ 5.20 Granted 643,573 9.89 495,900 6.42 457,988 7.53 Exercised (421,576) 5.02 (322,553) 3.92 (81,900) 3.93 Forfeited (203,449) 7.25 (74,243) 6.74 (137,507) 6.49 ---------- ------- ---------- ------- ---------- ------- Outstanding at end of year 1,940,570 $ 7.52 1,922,022 $ 6.16 1,822,918 $ 5.72 ========== ======= ========== ======= ========== ======= Exercisable at end of year 385,704 $ 8.55 591,485 $ 4.69 517,547 3.69 ========== ======= ========== ======= ========== ======= Weighted average fair value of options granted during the period $ 5.49 $ 3.50 $ 4.30 ======= ======= =======
Options outstanding at December 31, 2001, have exercise prices between $3.56 and $14.06. There are 312,553 options outstanding with exercise prices ranging from $3.56 to $5.98 with weighted average exercise prices of $4.63 and weighted average remaining contractual lives of 4.3 years. There are 1,143,818 options outstanding with exercise prices ranging from $6.55 to $7.65 with weighted average exercise prices of $7.08 and weighted average contractual lives of 7.5 years. There are 484,199 options outstanding with exercise prices ranging from $8.47 to $14.06 with weighted average exercise prices of $10.96 and weighted average contractual lives of 9.6 years. b. 401(K) PROFIT SHARING PLAN The Company has a 401(k) profit sharing plan (the Plan) for all employees who are 19 years of age or older and have completed one year of service with the Company. The Plan provides for a mandatory matching contribution equal to 50% of the amount of the employee's salary deduction not to exceed $625 annually per employee. The Plan also provides for a discretionary matching contribution. In 2001, 2000, and 1999, there were no discretionary contributions. Employees' rights to employer contributions vest after five years from their date of employment. The Company's matching contribution was approximately $125,000, $136,000 and $105,000 in 2001, 2000 and 1999, respectively. F-19 10. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following tables set forth certain unaudited information about the Company's revenue and results of operations on a quarterly basis for 2000 and 2001 (in thousands, except per share data):
2001 ------------------------------------------------- March 31, June 30, September 30 December 31, --------- -------- ------------ ------------ Revenue, before fuel surcharge $54,048 $58,698 $63,785 $65,148 Income from operations 7,808 9,086 10,963 11,694 Net income 4,237 5,060 2,886 6,834 Earnings per common share: Basic $ 0.12 $ 0.15 $ 0.08 $ 0.19 Diluted 0.12 0.15 0.08 0.19 2000 ------------------------------------------------- March 31, June 30, September 30 December 31, --------- -------- ------------ ------------ Revenue, before fuel surcharge $43,569 $51,676 $55,770 $56,391 Income from operations 6,874 8,072 8,433 8,644 Net income 3,873 4,596 4,616 4,660 Earnings per common share: Basic $ 0.12 $ 0.14 $ 0.14 $ 0.14 Diluted 0.12 0.14 0.14 0.14
F-20 SCHEDULE II KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves For the Years Ended December 31, 2001, 2000 and 1999
Balance at Balance at Beginning Expense End of Period Recorded Other of Period ----------- ----------- ----------- ----------- Allowance for doubtful accounts: Year ended December 31, 2001 $ 1,121,375 $ 456,000 $ (445,693)(1) $ 1,131,682 Year ended December 31, 2000 688,432 582,409 (149,466)(1) 1,121,375 Year ended December 31, 1999 662,700 219,759 (194,027)(1) 688,432 Allowance for doubtful notes receivable: Year ended December 31, 2001 80,645 14,007 (28,471)(1) 66,181 Year ended December 31, 2000 101,000 86,000 (106,355)(1) 80,645 Year ended December 31, 1999 -- 101,000 -- 101,000 Claims accrual: Year ended December 31, 2001 5,554,127 9,838,117 (7,882,847)(2) 7,509,397 Year ended December 31, 2000 4,639,993 4,056,658 (3,142,524)(2) 5,554,127 Year ended December 31, 1999 3,724,385 3,632,994 (2,717,386)(2) 4,639,993
- ---------- (1) Write-off of bad debts (2) Cash paid for claims and premiums S-1 EX-10.6.1 3 ex10-61.txt INDEMNIFICATION AGREEMENTS - SALMON & KOHL Exhibit 10.6.1 INDEMNITY AGREEMENT This INDEMNITY AGREEMENT dated as of October 16, 2000, is made by and between Knight Transportation, Inc. (the "Corporation"), and Timothy M. Kohl (the "Indemnitee"). RECITALS The Articles of Incorporation and By-Laws of the Corporation provide for indemnification by the Corporation of its directors to the fullest extent permitted by law. The Indemnitee has been serving and desires to continue to serve as a director of the Corporation in part in reliance on such indemnity provision. To provide the Indemnitee with additional contractual assurance of protection against personal liability in connection with certain proceedings described below, the Corporation desires to enter into this Agreement. In order to induce the Indemnitee to serve or continue to serve as a director of the Corporation, and in consideration of the Indemnitee's so serving, the Corporation desires to indemnify the Indemnitee and to make arrangements pursuant to which the Indemnitee may be advanced or reimbursed expenses incurred by Indemnitee in certain proceedings described below, according to the terms and conditions set forth below. AGREEMENT THEREFORE, in consideration of the foregoing recitals and of Indemnitee's serving or continuing to serve the Corporation as a director, the parties agree as follows: 1. INDEMNIFICATION. (a) In accordance with the provisions of subsection (b) of this Section 1, the Corporation shall hold harmless and indemnify the Indemnitee against any and all expenses, liabilities and losses (including, without limitation, investigation expenses and expert witnesses' and attorneys' fees and expenses, costs of court, judgments, penalties, fines, and amounts paid or to be paid in settlement) actually incurred by the Indemnitee (net of any related insurance proceeds or other amounts received by Indemnitee or paid by or on behalf of the Corporation on the Indemnitee's behalf), in connection with any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, to which the Indemnitee is a party or is threatened to be made a party (a "Proceeding") based upon, arising from, relating to, or by reason of the fact that Indemnitee is, was, shall be, or shall have been a director and/or officer of the Corporation or is or was serving, shall serve, or shall have served at the request of the Corporation as a director, officer, partner, trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign or domestic corporation or non-profit corporation, cooperative, partnership, joint venture, limited liability company, trust or other incorporated or unincorporated enterprise (each, a "Company Affiliate"). (b) Without limiting the generality of the foregoing, the Indemnitee shall be entitled to the rights of indemnification provided in this Section 1 for any expenses actually incurred in any Proceeding initiated by or in the right of the Corporation, unless indemnification is barred by A.R.S. ss.ss. 10-851.D or 10-856.A, or any other applicable law. (c) In providing the foregoing indemnification, the Corporation shall, with respect to any proceeding, hold harmless and indemnify the Indemnitee to the fullest extent not prohibited by the law of the State of Arizona, as in effect from time and time, and the Articles of Incorporation. For purposes of this Agreement, it is intended that the indemnification afforded hereby be mandatory and the broadest possible under any then existing statutory provision expressly authorizing the Corporation to indemnify directors or officers whether in effect on the date of this Agreement or hereafter, provided, however, that the indemnification provisions of this Agreement shall apply without regard to whether any provision set forth in the Articles or Bylaws of the Corporation authorizing or permitting indemnification shall be in force or effect. 2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and maintain insurance or furnish similar protection or make other arrangements, including, but not limited to, providing a trust fund, letter of credit, or surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against any liability asserted against him or her or incurred by or on behalf of him or her in such capacity as a director or officer of the Corporation or an Affiliated Indemnitee, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Agreement. The purchase, establishment, and maintenance of any such Indemnification Arrangement shall not in any way limit or affect the rights and obligations of the Corporation or of the Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Corporation and the Indemnitee shall not in any way limit or affect the rights and obligations of the Corporation or the other party or parties thereto under any such Indemnification Arrangement. All amounts payable by the Corporation pursuant to this Section 2 and Section 1 hereof are herein referred to as "Indemnified Amounts." To the extent the Corporation is able to obtain directors and officers liability insurance of a reasonable premium (as determined by the Corporation in its sole discretion); the Corporation shall use reasonable efforts to cause the Indemnitee to be covered by such insurance. 3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS. (a) The Indemnitee hereby is granted the right to receive in advance of a final, nonappealable judgment or other final adjudication of a Proceeding (a "Final Determination") the amount of any and all expenses, including, without limitation, investigation expenses, court costs, expert witnesses' and attorneys' fees and other expenses expended or incurred by the Indemnitee in connection with any Proceeding or otherwise expensed or incurred by the Indemnitee (such amounts so expended or incurred being hereinafter referred to as "Advanced Amounts"). (b) In making any written request for Advanced Amounts, the Indemnitee shall submit to the Corporation a schedule setting forth in reasonable detail the dollar amount expended or incurred and expected to be expended. Each such listing shall be supported by the bill, agreement, or other documentation -2- relating thereto, each of which shall be appended to the schedule as an exhibit. In addition, before the Indemnitee may receive Advanced Amounts from the Corporation, the Indemnitee shall provide to the Corporation (i) a written affirmation of the Indemnitee's good faith belief that the applicable standard of conduct required for indemnification by the Corporation has been satisfied by the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the Advanced Amount if it shall ultimately be determined that the Indemnitee has not satisfied any applicable standard of conduct. The written undertaking required from the Indemnitee shall be an unlimited general obligation of the Indemnitee but need not be secured. The Corporation shall pay to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by the Corporation of all information and documentation required to be provided by the Indemnitee pursuant to this paragraph. 4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS. (a) To obtain indemnification under this Agreement, the Indemnitee shall submit to the Corporation a written request for payment of the appropriate Indemnified Amounts, including with such requests such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification. (b) The Corporation shall pay the Indemnitee the appropriate Indemnified Amounts unless it is established that the Indemnitee engaged in one of the Prohibited Acts, and such Prohibited Act was the subject matter of the Proceeding. For purposes of determining whether the Indemnitee is entitled to Indemnified Amounts, in order to deny indemnification to the Indemnitee, the Corporation has the burden of proof in establishing (1) that the Indemnitee engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject matter of the Proceeding. In this regard, a termination of any Proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct; provided, however, that the termination of any criminal proceeding by conviction, or a pleading of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee engaged in a Prohibited Act. For purposes of this Agreement, a Prohibited Act shall mean any act, omission or condition (i) described in A.R.S. ss. 10-851.D or 10-856.A for which the Corporation may not indemnify the Indemnitee or (ii) any act, omission or condition for which indemnity is not available under any federal or state law or public policy. (c) Any determination that the Indemnitee has engaged in a Prohibited Act shall be made (i) either by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding; or (ii) by independent legal counsel (who may be the outside counsel regularly employed by the Corporation); provided that the manner in which (and, if applicable, the counsel by which) the right of indemnification is to be determined shall be approved in advance in writing by both the highest ranking executive officer of the Corporation who is not a party to such action (sometimes hereinafter referred to as "Senior Officer") and by the Indemnitee. In the event that such -3- parties are unable to agree on the manner in which any such determination is to be made, such determination shall be made by independent legal counsel retained by the Corporation especially for such purpose, provided that such counsel be approved in advance in writing by both the Senior Officer and the Indemnitee and, provided further, that such counsel shall not be outside counsel regularly employed by the Corporation. The fees and expenses of counsel in connection with making the determination contemplated hereunder shall be paid by the Corporation, and, if requested by such counsel, the Corporation shall give such counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may be reasonably requested by counsel. (d) The Corporation will use its best efforts to conclude as soon as practicable any required determination pursuant to subparagraph (c) above and promptly will advise the Indemnitee in writing with respect to any determination that the Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied. Payment of any applicable Indemnified Amounts will be made to the Indemnitee within ten (10) days after any determination of the Indemnitee's entitlement to indemnification. (e) Notwithstanding the foregoing, the Indemnitee may, at any time after sixty (60) days after a claim for Indemnified Amounts has been filed with the Corporation (or upon receipt of written notice that a claim for Indemnified Amounts has been rejected, if earlier) and before three (3) years after a claim for Indemnified Amounts has been filed, petition a court of competent jurisdiction to determine whether the Indemnitee is entitled to indemnification under the provisions of this Agreement, and such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such action without having made such determination. The court shall, as petitioned, make an independent determination of whether the Indemnitee is entitled to indemnification as provided under this Agreement, irrespective of any prior determination made by the Board of Directors or independent counsel. If the court shall determine that the Indemnitee is entitled to indemnification as to any claim, issue or matter involved in the Proceeding with respect to which there has been no prior determination pursuant to this Agreement or with respect to which there has been a prior determination that the Indemnitee was not entitled to indemnification hereunder, the Corporation shall pay all expenses (including attorneys' fees and court costs) actually incurred by the Indemnitee in connection with such judicial determination. 5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC. (a) This Agreement shall not be deemed exclusive of and shall not diminish any other rights the Indemnitee may have to be indemnified or insured or otherwise protected against any liability, loss, or expense by the Corporation, any subsidiary of the Corporation, or any other person or entity under any charter, bylaws, law, agreement, policy of insurance or similar protection, vote of stockholders or directors, disinterested or not, or otherwise, whether or not now in effect, both as to actions in the Indemnitee's official capacity, and as to actions in another capacity while holding such office. The Corporation's obligations to make payments of Indemnified Amounts -4- hereunder shall be satisfied to the extent that payments with respect to the same Proceeding (or part thereof) have been made to or for the benefit of the Indemnitee by reason of the indemnification of the Indemnitee pursuant to any other arrangement made by the Corporation for the benefit of the Indemnitee. (b) In the event the Indemnitee shall receive payment from any insurance carrier or from the plaintiff in any Proceeding against such Indemnitee in respect of Indemnified Amounts after payments on account of all or part of such Indemnified Amounts have been made by the Corporation pursuant hereto, such Indemnitee shall promptly reimburse to the Corporation the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Corporation or pursuant to arrangements made by the Corporation to Indemnitee exceeds such Indemnified Amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as deductible or co-insurance payments, shall not be deemed to be payments to the Indemnitee hereunder. In addition, upon payment of Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights of Indemnitee receiving such payments (to the extent thereof) against any insurance carrier (to the extent permitted under such insurance policies) or plaintiff in respect to such Indemnified Amounts and the Indemnitee shall execute and deliver any and all instruments and documents and perform any and all other acts or deeds which the Corporation deems necessary or advisable to secure such rights. Such right of subrogation shall be terminated upon receipt by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to the first sentence of this paragraph. 6. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director of the Corporation (or is serving at the request of the Corporation as an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee shall be subject to any possible Proceeding by reason of the fact that Indemnitee was a director, officer or employee of the Corporation or was serving in any other capacity referred to herein. 7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and shall inure to the benefit of and be enforceable by the Corporation's successors and assigns and by the Indemnitee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. The Corporation shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation, by written agreement in form and substance reasonably satisfactory to the Corporation and to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession or assignment had taken place. 8. ENFORCEMENT. The Corporation has entered into this Agreement and assumed the obligations imposed on the Corporation hereby in order to induce the Indemnitee to act as a director of the Corporation, and acknowledges that the Indemnitee is relying upon this Agreement in continuing in such capacity. In the event the Indemnitee is required to bring any action to enforce rights or to collect monies due under this Agreement and is successful in such action, the -5- Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and expenses in bringing and pursuing such action. The Indemnitee shall be entitled to the advancement of Indemnified Amounts to the full extent contemplated by Section 3 hereof in connection with such Proceeding. 9. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof, which other provisions shall remain in full force and effect. 10. MISCELLANEOUS. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing signed by Indemnitee and either the Chairman of the Board or the President of the Corporation or another officer of the Corporation specifically designated by the Board of Directors. No waiver by either party at any time of any breach by the other party of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Arizona, without giving effect to the principles of conflicts of laws thereof. The Indemnitee may bring an action seeking resolution of disputes or controversies arising under or in any way related to this Agreement in the state or federal court jurisdiction in which Indemnitee resides or in which his or her place of business is located, and in any related appellate courts, and the Corporation consents to the jurisdiction of such courts and to such venue. 11. NOTICES. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to Indemnitee: Timothy M. Kohl Knight Transportation, Inc. 5601 W. Buckeye Road Phoenix, Arizona 85043 If to Corporation: Knight Transportation, Inc. 5601 West Buckeye Road Phoenix, Arizona 85043 Attention: Secretary or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. -6- 12. COUNTERPART. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 13. EFFECTIVENESS. This Agreement shall be effective as of October 16, 2000. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the day and year first above written. KNIGHT TRANSPORTATION, INC. By: /s/ Kevin P. Knight ------------------------------------- Kevin P. Knight Its Chief Executive Officer INDEMNITEE /s/ Timothy M. Kohl ---------------------------------------- Timothy M. Kohl -7- INDEMNITY AGREEMENT This INDEMNITY AGREEMENT dated as of May 9, 2001, is made by and between Knight Transportation, Inc. (the "Corporation"), and Matt Salmon (the "Indemnitee"). RECITALS The Articles of Incorporation and By-Laws of the Corporation provide for indemnification by the Corporation of its directors to the fullest extent permitted by law. The Indemnitee has been serving and desires to continue to serve as a director of the Corporation in part in reliance on such indemnity provision. To provide the Indemnitee with additional contractual assurance of protection against personal liability in connection with certain proceedings described below, the Corporation desires to enter into this Agreement. In order to induce the Indemnitee to serve or continue to serve as a director of the Corporation, and in consideration of the Indemnitee's so serving, the Corporation desires to indemnify the Indemnitee and to make arrangements pursuant to which the Indemnitee may be advanced or reimbursed expenses incurred by Indemnitee in certain proceedings described below, according to the terms and conditions set forth below. AGREEMENT THEREFORE, in consideration of the foregoing recitals and of Indemnitee's serving or continuing to serve the Corporation as a director, the parties agree as follows: 1. INDEMNIFICATION. (a) In accordance with the provisions of subsection (b) of this Section 1, the Corporation shall hold harmless and indemnify the Indemnitee against any and all expenses, liabilities and losses (including, without limitation, investigation expenses and expert witnesses' and attorneys' fees and expenses, costs of court, judgments, penalties, fines, and amounts paid or to be paid in settlement) actually incurred by the Indemnitee (net of any related insurance proceeds or other amounts received by Indemnitee or paid by or on behalf of the Corporation on the Indemnitee's behalf), in connection with any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, to which the Indemnitee is a party or is threatened to be made a party (a "Proceeding") based upon, arising from, relating to, or by reason of the fact that Indemnitee is, was, shall be, or shall have been a director and/or officer of the Corporation or is or was serving, shall serve, or shall have served at the request of the Corporation as a director, officer, partner, trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign or domestic corporation or non-profit corporation, cooperative, partnership, joint venture, limited liability company, trust or other incorporated or unincorporated enterprise (each, a "Company Affiliate"). -1- (b) Without limiting the generality of the foregoing, the Indemnitee shall be entitled to the rights of indemnification provided in this Section 1 for any expenses actually incurred in any Proceeding initiated by or in the right of the Corporation, unless indemnification is barred by A.R.S. ss.ss. 10-851.D or 10-856.A, or any other applicable law. (c) In providing the foregoing indemnification, the Corporation shall, with respect to any proceeding, hold harmless and indemnify the Indemnitee to the fullest extent not prohibited by the law of the State of Arizona, as in effect from time and time, and the Articles of Incorporation. For purposes of this Agreement, it is intended that the indemnification afforded hereby be mandatory and the broadest possible under any then existing statutory provision expressly authorizing the Corporation to indemnify directors or officers whether in effect on the date of this Agreement or hereafter, provided, however, that the indemnification provisions of this Agreement shall apply without regard to whether any provision set forth in the Articles or Bylaws of the Corporation authorizing or permitting indemnification shall be in force or effect. 2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and maintain insurance or furnish similar protection or make other arrangements, including, but not limited to, providing a trust fund, letter of credit, or surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against any liability asserted against him or her or incurred by or on behalf of him or her in such capacity as a director or officer of the Corporation or an Affiliated Indemnitee, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Agreement. The purchase, establishment, and maintenance of any such Indemnification Arrangement shall not in any way limit or affect the rights and obligations of the Corporation or of the Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Corporation and the Indemnitee shall not in any way limit or affect the rights and obligations of the Corporation or the other party or parties thereto under any such Indemnification Arrangement. All amounts payable by the Corporation pursuant to this Section 2 and Section 1 hereof are herein referred to as "Indemnified Amounts." To the extent the Corporation is able to obtain directors and officers liability insurance of a reasonable premium (as determined by the Corporation in its sole discretion), the Corporation shall use reasonable efforts to cause the Indemnitee to be covered by such insurance. 3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS. (a) The Indemnitee hereby is granted the right to receive in advance of a final, nonappealable judgment or other final adjudication of a Proceeding (a "Final Determination") the amount of any and all expenses, including, without limitation, investigation expenses, court costs, expert witnesses' and attorneys' fees and other expenses expended or incurred by the Indemnitee in connection with any Proceeding or otherwise expensed or incurred by the Indemnitee (such amounts so expended or incurred being hereinafter referred to as "Advanced Amounts"). -2- (b) In making any written request for Advanced Amounts, the Indemnitee shall submit to the Corporation a schedule setting forth in reasonable detail the dollar amount expended or incurred and expected to be expended. Each such listing shall be supported by the bill, agreement, or other documentation relating thereto, each of which shall be appended to the schedule as an exhibit. In addition, before the Indemnitee may receive Advanced Amounts from the Corporation, the Indemnitee shall provide to the Corporation (i) a written affirmation of the Indemnitee's good faith belief that the applicable standard of conduct required for indemnification by the Corporation has been satisfied by the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the Advanced Amount if it shall ultimately be determined that the Indemnitee has not satisfied any applicable standard of conduct. The written undertaking required from the Indemnitee shall be an unlimited general obligation of the Indemnitee but need not be secured. The Corporation shall pay to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by the Corporation of all information and documentation required to be provided by the Indemnitee pursuant to this paragraph. 4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS. (a) To obtain indemnification under this Agreement, the Indemnitee shall submit to the Corporation a written request for payment of the appropriate Indemnified Amounts, including with such requests such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification. (b) The Corporation shall pay the Indemnitee the appropriate Indemnified Amounts unless it is established that the Indemnitee engaged in one of the Prohibited Acts, and such Prohibited Act was the subject matter of the Proceeding. For purposes of determining whether the Indemnitee is entitled to Indemnified Amounts, in order to deny indemnification to the Indemnitee, the Corporation has the burden of proof in establishing (1) that the Indemnitee engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject matter of the Proceeding. In this regard, a termination of any Proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct; provided, however, that the termination of any criminal proceeding by conviction, or a pleading of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee engaged in a Prohibited Act. For purposes of this Agreement, a Prohibited Act shall mean any act, omission or condition (i) described in A.R.S. ss. 10-851.D or 10-856.A for which the Corporation may not indemnify the Indemnitee or (ii) any act, omission or condition for which indemnity is not available under any federal or state law or public policy. (c) Any determination that the Indemnitee has engaged in a Prohibited Act shall be made (i) either by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such Proceeding; or (ii) by independent legal counsel (who may be the outside counsel regularly employed -3- by the Corporation); provided that the manner in which (and, if applicable, the counsel by which) the right of indemnification is to be determined shall be approved in advance in writing by both the highest ranking executive officer of the Corporation who is not a party to such action (sometimes hereinafter referred to as "Senior Officer") and by the Indemnitee. In the event that such parties are unable to agree on the manner in which any such determination is to be made, such determination shall be made by independent legal counsel retained by the Corporation especially for such purpose, provided that such counsel be approved in advance in writing by both the Senior Officer and the Indemnitee and, provided further, that such counsel shall not be outside counsel regularly employed by the Corporation. The fees and expenses of counsel in connection with making the determination contemplated hereunder shall be paid by the Corporation, and, if requested by such counsel, the Corporation shall give such counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may be reasonably requested by counsel. (d) The Corporation will use its best efforts to conclude as soon as practicable any required determination pursuant to subparagraph (c) above and promptly will advise the Indemnitee in writing with respect to any determination that the Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied. Payment of any applicable Indemnified Amounts will be made to the Indemnitee within ten (10) days after any determination of the Indemnitee's entitlement to indemnification. (e) Notwithstanding the foregoing, the Indemnitee may, at any time after sixty (60) days after a claim for Indemnified Amounts has been filed with the Corporation (or upon receipt of written notice that a claim for Indemnified Amounts has been rejected, if earlier) and before three (3) years after a claim for Indemnified Amounts has been filed, petition a court of competent jurisdiction to determine whether the Indemnitee is entitled to indemnification under the provisions of this Agreement, and such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such action without having made such determination. The court shall, as petitioned, make an independent determination of whether the Indemnitee is entitled to indemnification as provided under this Agreement, irrespective of any prior determination made by the Board of Directors or independent counsel. If the court shall determine that the Indemnitee is entitled to indemnification as to any claim, issue or matter involved in the Proceeding with respect to which there has been no prior determination pursuant to this Agreement or with respect to which there has been a prior determination that the Indemnitee was not entitled to indemnification hereunder, the Corporation shall pay all expenses (including attorneys' fees and court costs) actually incurred by the Indemnitee in connection with such judicial determination. -4- 5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC. (a) This Agreement shall not be deemed exclusive of and shall not diminish any other rights the Indemnitee may have to be indemnified or insured or otherwise protected against any liability, loss, or expense by the Corporation, any subsidiary of the Corporation, or any other person or entity under any charter, bylaws, law, agreement, policy of insurance or similar protection, vote of stockholders or directors, disinterested or not, or otherwise, whether or not now in effect, both as to actions in the Indemnitee's official capacity, and as to actions in another capacity while holding such office. The Corporation's obligations to make payments of Indemnified Amounts hereunder shall be satisfied to the extent that payments with respect to the same Proceeding (or part thereof) have been made to or for the benefit of the Indemnitee by reason of the indemnification of the Indemnitee pursuant to any other arrangement made by the Corporation for the benefit of the Indemnitee. (b) In the event the Indemnitee shall receive payment from any insurance carrier or from the plaintiff in any Proceeding against such Indemnitee in respect of Indemnified Amounts after payments on account of all or part of such Indemnified Amounts have been made by the Corporation pursuant hereto, such Indemnitee shall promptly reimburse to the Corporation the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Corporation or pursuant to arrangements made by the Corporation to Indemnitee exceeds such Indemnified Amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy, such as deductible or co-insurance payments, shall not be deemed to be payments to the Indemnitee hereunder. In addition, upon payment of Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights of Indemnitee receiving such payments (to the extent thereof) against any insurance carrier (to the extent permitted under such insurance policies) or plaintiff in respect to such Indemnified Amounts and the Indemnitee shall execute and deliver any and all instruments and documents and perform any and all other acts or deeds which the Corporation deems necessary or advisable to secure such rights. Such right of subrogation shall be terminated upon receipt by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to the first sentence of this paragraph. 6. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director of the Corporation (or is serving at the request of the Corporation as an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee shall be subject to any possible Proceeding by reason of the fact that Indemnitee was a director, officer or employee of the Corporation or was serving in any other capacity referred to herein. 7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and shall inure to the benefit of and be enforceable by the Corporation's successors and assigns and by the Indemnitee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. The Corporation shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation, by written agreement in form and substance reasonably satisfactory to the Corporation and -5- to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession or assignment had taken place. 8. ENFORCEMENT. The Corporation has entered into this Agreement and assumed the obligations imposed on the Corporation hereby in order to induce the Indemnitee to act as a director of the Corporation, and acknowledges that the Indemnitee is relying upon this Agreement in continuing in such capacity. In the event the Indemnitee is required to bring any action to enforce rights or to collect monies due under this Agreement and is successful in such action, the Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and expenses in bringing and pursuing such action. The Indemnitee shall be entitled to the advancement of Indemnified Amounts to the full extent contemplated by Section 3 hereof in connection with such Proceeding. 9. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof, which other provisions shall remain in full force and effect. 10. MISCELLANEOUS. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing signed by Indemnitee and either the Chairman of the Board or the President of the Corporation or another officer of the Corporation specifically designated by the Board of Directors. No waiver by either party at any time of any breach by the other party of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Arizona, without giving effect to the principles of conflicts of laws thereof. The Indemnitee may bring an action seeking resolution of disputes or controversies arising under or in any way related to this Agreement in the state or federal court jurisdiction in which Indemnitee resides or in which his or her place of business is located, and in any related appellate courts, and the Corporation consents to the jurisdiction of such courts and to such venue. 11. NOTICES. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: -6- If to Indemnitee: Matt Salmon Knight Transportation, Inc. 5601 W. Buckeye Road Phoenix, Arizona 85043 If to Corporation: Knight Transportation, Inc. 5601 West Buckeye Road Phoenix, Arizona 85043 Attention: Secretary or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. COUNTERPART. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 13. EFFECTIVENESS. This Agreement shall be effective as of May 9, 2001. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the day and year first above written. KNIGHT TRANSPORTATION, INC. By: /s/ Kevin P. Knight ------------------------------------ Kevin P. Knight Its Chief Executive Officer INDEMNITEE: /s/ Matt Salmon ---------------------------------------- Matt Salmon -7- EX-21.1 4 ex21-1.txt SUBSIDIARIES OF THE COMPANY Exhibit 21.1 KNIGHT TRANSPORTATION, INC. SUBSIDIARIES 1. Knight Transportation Gulf Coast, Inc., a Mississippi corporation. 2. Knight Administrative Services, Inc., an Arizona corporation. 3. Knight Management Services, Inc., an Arizona corporation. 4. Knight Transportation Midwest, Inc., an Arizona corporation. 5. Knight Transportation South Central, L.P., a Nevada limited partnership. 6. KTE/Com, LLC, a Delaware limited liability company. 7. KTTE Holdings, Inc., a Nevada corporation. 8. QKTE Holdings, Inc., a Nevada corporation. 9. Quad K Leasing, Inc., an Arizona corporation. EX-23 5 ex-23.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 16, 2002, included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (File No. 333-72377). /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona March 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----