AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Arizona 4213 86-0649974
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
----------
5601 West Buckeye Road
Phoenix, Arizona 85043
(602) 269-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------
Kevin P. Knight, Chief Executive Officer
Knight Transportation, Inc.
5601 West Buckeye Rd.
Phoenix, Arizona 85043
(602) 269-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
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Copies to:
James E. Brophy, III, Esq. Richard C. Tilghman, Jr., Esq.
Gregory R. Moore, Esq. Stephen A. Riddick, Esq.
Ryley, Carlock & Applewhite Piper & Marbury L.L.P.
Suite 2700 36 South Charles Street
101 North First Avenue Baltimore, Maryland 21201
Phoenix, Arizona 85003-1973 (410) 539-2530
(602) 258-7701
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX: / /
<TABLE>
CALCULATION OF REGISTRATION FEE
==============================================================================================
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to to be Price Offering Registration
be Registered Registered(1) Per Share(2) Price(2) Fee
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share ........................ 1,840,000 shares $20.50 $37,720,000 $13,007
==============================================================================================
<FN>
(1) Includes 240,000 shares that the underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
</FN>
</TABLE>
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
KNIGHT TRANSPORTATION, INC.
----------
<TABLE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGISTRATION S-K
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
-------------------------------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus ................................................. Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus ............ Inside Front Cover Page of Prospectus and Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges ................................................... Prospectus Summary; Risk Factors; Selected Consolidated
Financial and Operating Data; Business
4. Use of Proceeds .................................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price .................................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution ........................................................... Dilution
7. Selling Security Holders ........................................... Principal and Selling Shareholders
8. Plan of Distribution ............................................... Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered ......................... Description of Capital Stock; Shares Eligible for
Future Sale
10. Interests of Named Experts and Counsel ............................. Legal Matters; Experts
11. Information with Respect to the Registrant
(a) Item 101 of Regulation S-K .................................. Business
(b) Item 102 of Regulation S-K .................................. Business; Certain Transactions
(c) Item 103 of Regulation S-K .................................. Business
(d) Item 201 of Regulation S-K .................................. Dividend Policy; Underwriting; Risk Factors;
Description of Capital Stock
(e) Financial Statements ........................................ Consolidated Financial Statements of Knight
Transportation, Inc.
(f) Item 301 of Regulation S-K .................................. Selected Consolidated Financial and Operating Data
(g) Item 302 of Regulation S-K .................................. Not Applicable
(h) Item 303 of Regulation S-K .................................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Item 304 of Regulation S-K .................................. Experts
(j) Item 401 of Regulation S-K .................................. Management
(k) Item 402 of Regulation S-K .................................. Executive Compensation and Other Information
(l) Item 403 of Regulation S-K .................................. Principal and Selling Shareholders; Certain Transactions
(m) Item 404 of Regulation S-K .................................. Business; Certain Transactions
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities .................................. Not Applicable
</TABLE>
<PAGE>
INFORMATION HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JUNE 14, 1996
1,600,000 SHARES
################################################################################
IMAGE OMITTED
################################################################################
Knight Transportation
COMMON STOCK
----------
Of the 1,600,000 shares of Common Stock offered hereby, 800,000 shares are
being sold by Knight Transportation, Inc. ("Knight" or the "Company") and
800,000 shares are being sold by certain of the Company's shareholders (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any proceeds from the sale of the Common Stock by the Selling
Shareholders. The Company's Common Stock is traded on the Nasdaq Stock Market
(National Market) under the symbol "KNGT." The closing price of the Company's
Common Stock on June 12, 1996 was $20.50 per share.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds Proceeds to
to Discounts and to Selling
Public Commissions Company (1) Shareholders
- --------------------------------------------------------------------------------
Per Share $ $ $ $
Total (2) $ $ $ $
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of $175,000 payable by the Company.
(2) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 240,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares to the public at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Shareholders will be $ , $ and $ , respectively.
See "Underwriting."
----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares will be made at the offices of Alex. Brown
& Sons Incorporated, Baltimore, Maryland, on or about , 1996.
ALEX. BROWN & SONS
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
WILLIAM BLAIR & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933 with respect to the Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract, agreement or document. The Registration Statement and the
exhibits thereto filed by the Company with the Commission may be inspected and
copies may be obtained (at prescribed rates) at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the Commission's Regional Office located at Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, New York, New York 10048.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
----------------
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. Unless the context otherwise requires, references in this
Prospectus to "Knight" or the "Company" refer to Knight Transportation, Inc. and
its consolidated subsidiaries.
THE COMPANY
Knight is a short to medium-haul, dry van truckload carrier providing
regional service primarily in the western United States. The Company transports
general commodities, including consumer goods, packaged foodstuffs, paper
products, beverage containers, and imported and exported commodities. The
Company has recently established operations near Houston, Texas to provide
dedicated services to one of its larger customers and to commence regional
service in Texas and Louisiana. The Company has also initiated operations in
Indianapolis, Indiana, from which it will provide regional and dedicated service
in the Midwest and on the East Coast.
The Company's operating strategy is to achieve significant but controlled
growth by providing high quality services to service-sensitive customers, with
the goal of obtaining sustained, predictable business that will allow the
Company to achieve a high level of equipment utilization and other operating
efficiencies. Knight commenced operations in July 1990, when Kevin, Gary and
Keith Knight joined Randy Knight to establish a new short to medium-haul
truckload carrier. The Knights average more than 20 years of experience in the
truckload industry. The Company's goal is to attain growth and profitability
through intensive management and the creation of simplified, cost effective
operations.
During the five year period ended December 31, 1995, management led the
Company to a 43.0% compounded annual increase in operating revenue and a 61.2%
compounded annual increase in net income. The Company intends to continue to
develop its business by servicing existing and new customers in its core markets
in the western United States, while expanding its operations and providing
regional and dedicated service in Texas and Louisiana as well as in the Midwest
and on the East Coast.
The Company was incorporated in Arizona in 1989. Knight's headquarters are
located at 5601 West Buckeye Road, Phoenix, Arizona 85043, and its telephone
number is (602) 269-2000.
THE OFFERING
Common Stock offered by the Company ................. 800,000 shares
Common Stock offered by the Selling Shareholders .... 800,000 shares
Common Stock to be outstanding after the offering .. 9,902,000 shares(1)
Use of proceeds ..................................... To reduce indebtedness,
acquire revenue equipment,
and for other general
corporate purposes
Nasdaq National Market symbol ....................... KNGT
- ----------
(1) Excludes 648,000 and 75,000 shares reserved for issuance under the Company's
Stock Option Plan and 401(k) Plan, respectively. See "Executive Compensation
and Other Information -- 1994 Stock Option Plan; 401(k) Plan."
3
<PAGE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenue .................$13,445 $19,579 $26,381 $37,543 $56,170 $11,908 $16,581
Income from operations ............ 2,287 3,366 5,126 8,112 10,601 2,362 2,835
Net interest expense and other ... (786) (847) (844) (734) (195) (44) (97)
Income before income taxes ........ 1,501 2,519 4,282 7,378 10,406 2,318 2,738
Net income ........................ 861 1,399 2,447 4,094 5,806 1,286 1,588
Net income per share .............. .11 .17 .30 .49 .64 .14 .17
Weighted average outstanding
shares .......................... 8,200 8,200 8,200 8,375 9,141 9,142 9,151
OPERATING DATA:
Operating ratio(1) ................ 83.0% 82.8% 80.6% 78.4% 81.1% 80.2% 82.9%
Average revenue per mile ..........$ 1.20 $ 1.17 $ 1.22 $ 1.29 $ 1.26 $ 1.29 $ 1.24
Average length of haul (miles) .... 448 464 472 482 494 488 483
Empty mile factor ................. 12.8% 14.3% 11.8% 10.1% 10.3% 10.0% 10.4%
Tractors operated at end of
period:
Company ...................... 110 147 199 262 310 285 360
Independent contractor ....... -- -- -- 30 115 55 131
--------- --------- --------- --------- --------- --------- ---------
Total tractors .................... 110 147 199 292 425 340 491
Trailers operated at end of period 260 323 489 639 1,044 664 1,264
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) ..................................$(5,807) $ 9,474
Total assets ............................................... 52,791 63,072
Current portion of long-term debt and line of credit ....... 6,003 1,003
Long-term debt, net of current portion ..................... 754 754
Shareholders' equity ....................................... 26,320 41,601
<FN>
- ----------
(1) Operating expenses as a percentage of operating revenue.
(2) Adjusted for the sale of 800,000 shares offered by the Company (at an
assumed public offering price of $20.50 per share) and the application of
the estimated net proceeds as described in "Use of Proceeds".
</FN>
</TABLE>
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Company's Common Stock.
ECONOMIC FACTORS
Fuel prices, insurance costs, liability claims, interest rates, the
availability of qualified drivers, fluctuations in the resale value of revenue
equipment and customers' business cycles and shipping demands are economic
factors over which the Company has little or no control. Significant increases
or rapid fluctuations in fuel prices, interest rates or increases in insurance
costs or liability claims, to the extent not offset by increases in freight
rates, would reduce the Company's profitability. Although the Company's
independent contractors are responsible for paying for their own equipment, fuel
and other operating costs, significant increases in these costs could cause them
to seek higher compensation from the Company or other employment opportunities.
Difficulty in attracting or retaining qualified drivers or a downturn in
customers' business cycles or shipping demands also could have a material
adverse effect on the growth and profitability of the Company. If the resale
value of the Company's revenue equipment were to decline, the Company could be
forced to retain some of its equipment longer, with a resulting increase in
operating expenses for maintenance and repairs. At this time a significant
portion of the Company's business is concentrated in the Arizona and California
markets and a general economic decline or a natural disaster in either of these
markets could have a material adverse effect on the growth and profitability of
the Company. If the Company is successful in deriving a significant portion of
its revenues from markets in Texas and Louisiana and the Midwest and on the East
Coast in the near future, its growth and profitability could be materially
adversely affected by general economic declines or natural disasters in those
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." "--Growth of Business; Expansion of Operations";
"Business -- Business Strategy"; "-- Fuel."
COMPETITION
The Company competes primarily with other regional short to medium-haul
truckload carriers, logistics providers, national carriers and other national
equipment providers. Railroads and air freight also provide competition, but to
a lesser degree. The Company believes that the principal competitive factors in
its business are service, pricing and the availability and configuration of
equipment that meets a variety of customers' needs. Recently, the trucking
industry, including the short to medium-haul truckload market, has been affected
by the availability of excess revenue equipment, which has had a negative effect
on both equipment utilization and rates. The entire trucking industry is highly
competitive and fragmented. Competition for the freight transported by the
Company is based on freight rates, service, and efficiency. A number of the
Company's competitors have greater financial resources, own more equipment, and
carry a larger volume of freight than the Company.
AVAILABILITY OF DRIVERS AND INDEPENDENT CONTRACTORS
The Company utilizes the services of both employee drivers and independent
contractors. Competition for employee drivers and independent contractors is
intense within the trucking industry, and the Company has at times experienced
difficulty attracting and retaining qualified drivers and independent
contractors, which has resulted in the temporary idling of revenue equipment.
From time to time, there have been industry-wide shortages of qualified drivers
and independent contractors and there can be no assurance that the Company will
not be affected by a shortage of qualified drivers or independent contractors in
the future. Prolonged difficulty in attracting or retaining qualified drivers or
independent contractors could have a material adverse effect on the Company's
operations and limit its growth. See "Business -- Drivers and Other Employers;
Independent Contractor Program."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services of Randy Knight, its
Chairman; Kevin P. Knight, its Chief Executive Officer; Gary J. Knight, its
President; and Keith T. Knight, its Executive Vice President. The loss of one or
more of these officers could have a material adverse effect on the Company's
operations and future profitability. The Company maintains and is the
beneficiary of a "key man" life insurance policy of $1,000,000 on each of Randy,
Kevin, Gary and Keith Knight. See "Management."
GROWTH OF BUSINESS; EXPANSION OF OPERATIONS
The Company has experienced significant and rapid growth in revenues and
profits since the inception of its business in 1990. There can be no assurance
that the Company's business will continue to grow in a similar fashion
5
<PAGE>
in the future or that the Company can effectively adapt its management,
administrative and operational systems to respond to any future growth. Further,
there can be no assurance that the Company's operating margins will not be
adversely affected by future changes in and expansion of the Company's business
or by changes in economic conditions.
In early 1996, the Company commenced regional and dedicated services
operations from facilities located near Houston and in Indianapolis. These
initiatives represent the first established operations of the Company in markets
outside of its primary regional operations in the western United States. The
Company's senior management team has not had extensive experience operating a
truckload carrier in either of the Company's new markets, and the Company may
encounter operating conditions in these new markets that differ substantially
from those previously experienced in its western United States markets. There
can be no assurance that the Company's regional operating strategy as employed
in the western United States can be duplicated successfully or that it will not
take longer than expected or require a more substantial financial commitment
than anticipated in order for the Company to generate positive operating results
in these new markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business --Marketing and Customers."
CAPITAL REQUIREMENTS
The trucking industry is capital intensive. The Company has depended on debt
financing and the proceeds of its initial public offering in 1994 to obtain new
revenue equipment, to expand the size of its fleet and to maintain modern
revenue equipment. If the Company were unable in the future to enter into
acceptable financing arrangements, raise additional equity, or borrow sufficient
funds, it would be forced to limit its growth and operate its revenue equipment
for longer periods, which would likely adversely affect the Company's operating
results. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
ACQUISITION OF REVENUE EQUIPMENT
The Company's strategy for continued growth is dependent on the acquisition
and deployment of additional revenue equipment, and the expansion and
development of operations beyond the western region of the United States. The
Company has recently established operations near Houston to provide dedicated
services to one of its larger customers and to commence regional service in
Texas and Louisiana. The Company has also recently initiated expansion of its
operations by establishing operations in Indianapolis in order to access markets
in the Midwest and on the East Coast. These operations will require the
commitment of additional revenue equipment and personnel, as well as management
resources, for future development. The Company currently has orders for the
purchase of 37 tractors (net of trade-ins) and 264 trailers (net of trade-ins)
during the 12-month period commencing April 1, 1996. There can be no assurance
that the Company will be able to attract and retain enough qualified employee
drivers or engage a sufficient number of independent contractors to meet its
growth targets. Although Knight expects to take delivery of this revenue
equipment during the course of this 12-month period, delays in the availability
of equipment could occur due to a number of factors beyond the Company's
control, including work stoppages at the equipment supplier and equipment and
supply shortages. Any delay or interruption in the availability of equipment in
the future could have a material adverse effect on the Company. Finally, the
Company may be forced to curtail its plans for growth due to the occurrence of
certain changes in economic conditions, particularly decreased demand for
truckload carrier services. See "Business -- Business Strategy; Revenue
Equipment and Maintenance."
DEPENDENCE ON CERTAIN CUSTOMERS
For the year ended December 31, 1995, the Company's 25 largest customers
represented 53.2% of operating revenue, its ten largest customers represented
32.1% of operating revenue and its five largest customers represented 19.4% of
operating revenue. Most of the Company's truckload carriage contracts with
customers are cancellable on 30 days notice. The loss of one or more large
customers could have a material adverse effect on the Company's operating
results. See "Business -- Marketing and Customers."
FUEL
Fuel is one of the Company's largest operating expenses, and the Company has
recently experienced sharp increases in its fuel costs. Increases in fuel taxes
or fuel prices, to the extent not offset by freight rate increases, or any
interruption in the supply of fuel, could have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Inflation" and "Business --
Fuel."
6
<PAGE>
REGULATION
Historically, the Interstate Commerce Commission ("ICC") and various state
agencies regulated truckload carriers' operating rights, accounting systems,
rates and charges, safety, mergers and acquisitions, periodic financial
reporting and other matters. In 1995, the passage of certain federal legislation
preempted state regulation of prices, rates, and services of motor carriers and
eliminated the ICC. Several ICC functions were transferred to the Department of
Transportation ("DOT"), but a lack of implementing regulations currently
prevents the Company from assessing the full impact of this action. Generally,
the trucking industry is subject to regulatory and legislative changes that can
have a material effect on operations. The Company's motor carrier operations are
also subject to environmental laws and regulations, including laws and
regulations dealing with underground fuel storage tanks, the transportation of
hazardous materials and other environmental matters. In the event the Company
should fail to comply with applicable regulations, the Company could be subject
to substantial fines or penalties and to civil or criminal liability. There is
no assurance that compliance with regulations promulgated from time to time by
the DOT, Environmental Protection Agency ("EPA") or other regulatory bodies
exercising jurisdiction over the Company will not require the expenditure of
substantial monies. Such expenditures, if they should occur, could adversely
affect the Company's results of operations. See "Business -- Legal Proceedings."
The Company's tractor and trailer fleets are registered in Oklahoma and Utah
and operate primarily in the western United States, including California. The
Company is presently being audited by the State of California's Department of
Motor Vehicles. Although no assessment has yet been made, California is
asserting that all the Company's trailers are subject to apportioned
registration in California and that the Company owes California additional
trailer registration fees in excess of those amounts previously paid. The
Company intends to vigorously contest the position taken by California. The
Company believes that the outcome of the California audit will not have a
materially adverse effect on the Company's financial position or results of
operations. See "Business -- Legal Proceedings."
SELF-INSURED CLAIMS
The Company is self-insured for personal injury and property damage up to a
maximum limit of $100,000 per occurrence, for collision, comprehensive, and
cargo liability up to a combined limit of $25,000 per occurrence, and, in states
in which the Company elects to do so, workers' compensation up to $250,000 per
occurrence. If the Company were to experience numerous claims in significant
amounts for which it is self-insured, or if significant increases in insurance
costs should occur which could not be offset by higher freight rates, the
Company's results of operations could be adversely affected. See "Business --
Safety and Risk Management."
ENVIRONMENTAL HAZARDS
The Company's operations are subject to various environmental laws and
regulations dealing with the transportation, storage, presence, use, disposal
and handling of hazardous materials and hazardous wastes, discharge of
stormwater and underground fuel storage tanks. The Company rarely engages in the
transportation of hazardous substances and underground storage tanks are
situated only on its recently acquired Indianapolis property. However, if the
Company should be involved in a spill or other accident involving hazardous
substances, or if any such substances were found on the Company's properties in
violation of applicable environmental laws and regulations, the Company could be
responsible for clean-up costs, property damage, fines or other penalties, any
one of which could have a material adverse effect on the Company. See "Business
- -- Safety and Risk Management; Regulation; Properties"
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock or their
availability for sale in the public market following this offering may have an
adverse effect on prevailing market prices for the Common Stock. Following this
offering, the 1,600,000 shares offered hereby will be freely tradeable unless
acquired by affiliates of the Company. The Selling Shareholders, either in their
individual capacities or through certain related trusts and limited liability
companies established for the benefit of their respective families, will
beneficially own 6,028,900 shares, or 60.9%, of the Company's outstanding Common
Stock, after giving effect to this offering. The Selling Shareholders, along
with the Company and its other officers and directors, have agreed with the
Underwriters not to sell, offer or otherwise dispose of any of their shares for
180 days from the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. After the 180 day period, all of such shares
will be eligible for sale under, and subject to the limitations of, Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Principal and Selling Shareholders" and "Shares Eligible for Future Sale."
7
<PAGE>
LIMITS ON CHANGES IN CONTROL
The Company's Articles of Incorporation and Bylaws contain certain provisions
that could have the effect of making it more difficult for a party to acquire,
or discouraging a party from attempting to acquire, control of the Company. The
Articles of Incorporation authorize the Board of Directors to issue shares of
preferred stock from time to time in one or more designated series or classes.
The Board of Directors, without the approval of the shareholders, is authorized
to establish voting, dividend, redemption, conversion, liquidation and other
provisions of a particular series or class of preferred stock. In addition, the
Articles of Incorporation contain provisions requiring the approval of the
holders of 67% or more of the Company's issued and outstanding voting stock,
voting as a single class, to sell substantially all of the Company's assets or
effect any plan of merger or consolidation pursuant to which shares of common
stock of the Company are converted into the right to receive cash or other
consideration. See "Description of Capital Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 800,000 shares offered on
behalf of the Company are estimated to be approximately $15.3 million after
deduction of underwriting discounts and commissions and estimated offering
expenses. It is expected that approximately $10.2 million of the net proceeds
from the shares offered on behalf of the Company will be used to repay its
current line of credit indebtedness incurred primarily to acquire revenue
equipment, with the balance used to acquire additional revenue equipment and for
general corporate purposes. The indebtedness to be repaid has a current interest
rate equal to the London Interbank Offered Rate (LIBOR) plus .75% (having a
weighted average rate of 5.9% as of March 31, 1996) and matures in July 1997.
The Company will not receive any proceeds from the sale of the Common Stock by
the Selling Shareholders.
CAPITALIZATION
The following table sets forth the current portion of long-term debt and the
capitalization of the Company as of March 31, 1996 and as adjusted to give
effect to the sale of the 800,000 shares of Common Stock offered by the Company
hereby (assuming a public offering price of $20.50 per share) and application of
the estimated net proceeds to repay indebtedness as set forth in "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and line of credit balance(1) ....$ 6,003 $ 1,003
========= =============
Long-term debt, net of current portion(2) ..........................$ 754 $ 754
Shareholders' equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized;
none issued and outstanding .................................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 9,102,000 shares issued and outstanding;
9,902,000 shares issued and outstanding, as adjusted(3) ....... 91 99
Additional paid-in capital ......................................... 9,762 25,035
Retained earnings .................................................. 16,467 16,467
--------- -------------
Total shareholders' equity ......................................... 26,320 41,601
--------- -------------
Total capitalization ...............................................$27,074 $42,355
========= =============
<FN>
- ----------
(1) As of June 12, 1996, borrowing under the Company's line of credit totaled
$10.2 million.
(2) For information regarding the Company's long-term debt, see Note 4 of Notes
to Consolidated Financial Statements.
(3) Excludes 648,000 and 75,000 shares reserved for issuance under the Company's
Stock Option Plan and 401(k) Plan, respectively. See "Executive Compansation
and Other Information -- 1994 Stock Option Plan; 401(k) Plan."
</FN>
</TABLE>
8
<PAGE>
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. Future payment
of cash dividends will depend upon the financial condition, results of
operations and capital requirements of the Company, as well as other factors
deemed relevant by the Board of Directors. It is the current intention of the
Company's Board of Directors to retain earnings to finance the growth of the
Company's business, rather than to pay cash dividends.
PRICE RANGE OF COMMON STOCK
Following the Company's initial public offering of Common Stock on October
25, 1994, the Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "KNGT." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Common Stock, as
reported by Nasdaq:
HIGH LOW
---- ---
1994
- ----
Fourth Quarter (from October 25)...................... $15.75 $12.00
1995
- ----
First Quarter ........................................ $16.13 $11.44
Second Quarter ....................................... $13.75 $11.63
Third Quarter ........................................ $16.88 $13.50
Fourth Quarter ....................................... $15.63 $13.00
1996
- ----
First Quarter ........................................ $16.25 $13.13
Second Quarter (through June 12)...................... $20.50 $15.00
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
The following table sets forth certain financial and operating data of the
Company. The selected historical financial data of the Company are qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations " and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The statements of income data set forth below as of December 31, 1991, 1992 and
1993 and the balance sheet data for the two years ended December 31, 1991 and
1992 have been derived from the Company's Consolidated Financial Statements
which have been audited by Arthur Andersen LLP, independent public accountants,
and are not included herein. The balance sheet data set forth below as of
December 31, 1994 and 1995 and the statements of income data for the three years
ended December 31, 1993, 1994 and 1995 have been derived from the Company's
Consolidated Financial Statements which have been audited by Arthur Andersen
LLP, independent public accountants, and are included elsewhere in this
Prospectus. The interim data as of March 31, 1995 and March 31, 1996 and for the
quarters then ended have been derived from unaudited financial statements. In
the opinion of management, the unaudited financial statements include all
adjustments, consisting of normal recurring adjustments and accruals, necessary
for a fair presentation of the financial position and results of operations of
the Company for these periods. The results of operations for the first quarter
ended March 31, 1996 are not necessarily indicative of results to be expected
for the year ending December 31, 1996. See "Experts."
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Operating revenue .................$13,445 $19,579 $26,381 $37,543 $56,170 $11,908 $16,581
Income from operations ............ 2,287 3,366 5,126 8,112 10,601 2,362 2,835
Net interest expense and other ... (786) (847) (844) (734) (195) (44) (97)
Income before income taxes ........ 1,501 2,519 4,282 7,378 10,406 2,318 2,738
Net income ........................ 861 1,399 2,447 4,094 5,806 1,286 1,588
Net income per share .............. .11 .17 .30 .49 .64 .14 .17
Weighted average outstanding
shares .......................... 8,200 8,200 8,200 8,375 9,141 9,142 9,151
OPERATING DATA:
Operating ratio(1) ................ 83.0% 82.8% 80.6% 78.4% 81.1% 80.2% 82.9%
Average revenue per mile ..........$ 1.20 $ 1.17 $ 1.22 $ 1.29 $ 1.26 $ 1.29 $ 1.24
Average length of haul (miles) ... 448 464 472 482 494 488 483
Empty mile factor ................. 12.8% 14.3% 11.8% 10.1% 10.3% 10.0% 10.4%
Tractors operated at end of
period:
Company ......................... 110 147 199 262 310 285 360
Independent contractors ......... -- -- -- 30 115 55 131
---------- ---------- --------- --------- --------- ---------- ----------
Total tractors .................... 110 147 199 292 425 340 491
Trailers operated at end of period 260 323 489 639 1,044 664 1,264
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital (deficit)(2) .....$(1,000) $(1,327) $ (787) $ 1,761 $ (293) $(1,247) $(5,807)
Total assets ...................... 12,862 18,724 24,651 32,588 43,099 35,325 52,791
Long-term debt, net of current
portion ......................... 7,151 7,334 9,208 2,117 981 1,847 754
Shareholders' equity .............. 1,334 2,733 5,179 18,903 24,732 20,189 26,320
<FN>
- ----------
(1) Operating expenses as a percentage of operating revenue.
(2) Includes approximately $6,003 of the current portion of the Company's long
term debt and line of credit balance at March 31, 1996.
</FN>
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled "Risk
Factors" and "Business", as well as those discussed in this section and
elsewhere in this Prospectus.
GENERAL
The following discussion analyzes the Company's financial condition and
results of operations for the three month periods ended March 31, 1995 and 1996,
and for the three-year period ended December 31, 1995, and should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto contained elsewhere in this Prospectus. Knight was incorporated in 1989
and commenced operations in July 1990. For the five year period ended December
31, 1995, the Company's operating revenue grew at a 43.0% compounded annual
rate, while net income increased at a 61.2% compounded annual rate.
In 1994, the Company initiated an independent contractor program. As of March
31, 1996, the Company had retained 129 independent contractors, who provided the
Company with 131 tractors. As a result of the increase in the use of independent
contractors, the Company has experienced a decrease in salaries, wages and
benefits, fuel and maintenance, and other expenses as a percentage of operating
revenues and a corresponding increase in purchased transportation as a
percentage of operating revenues. Purchased transportation represents the amount
an independent contractor is paid to haul freight for the Company on a mutually
agreed to per-mile basis. The Company's decision to focus fleet expansion on
independent contractors was based on such factors as the Company's reduced
capital requirements since the independent contractors provide their own
tractors, the lower turnover rate that the Company has experienced with
independent contractors, and the Company's success in attracting qualified
independent contractors.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of expense items
to operating revenue for the periods indicated:
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
Operating revenue ...............100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and benefits ... 35.9 33.8 29.1 31.3 28.5
Fuel ............................ 14.3 12.7 10.9 11.3 10.4
Operations and maintenance ..... 5.8 6.2 6.6 7.3 5.0
Insurance and claims ............ 4.9 4.9 3.7 4.8 3.7
Operating taxes and licenses ... 4.2 4.9 3.8 4.0 3.6
Communications .................. .5 .5 .5 .5 .8
Depreciation and amortization .. 11.6 10.9 9.7 10.1 10.0
Purchased transportation ........ -- 1.8 14.0 8.8 18.5
Miscellaneous operating expenses 3.4 2.7 2.8 2.1 2.4
-------- -------- -------- -------- --------
Total operating expenses ........ 80.6 78.4 81.1 80.2 82.9
-------- -------- -------- -------- --------
Income from operations .......... 19.4 21.6 18.9 19.8 17.1
Net interest expense ............ 3.2 2.0 .4 .4 .6
-------- -------- -------- -------- --------
Income before income taxes ..... 16.2 19.6 18.5 19.4 16.5
Income taxes .................... 6.9 8.7 8.2 8.7 6.9
-------- -------- -------- -------- --------
Net income ...................... 9.3% 10.9% 10.3% 10.7% 9.6%
======== ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Operating revenue for the three months ended March 31, 1996 increased by
39.2% to $16.6 million from $11.9 million over the same period in 1995. The
increase in operating revenue resulted from expansion of the Company's
11
<PAGE>
customer base and increased volume from existing customers, and was facilitated
by the continued expansion of the Company's fleet, including an increase in the
Company's independent contractor fleet. The Company's fleet increased by 44.4%
to 491 tractors (including 131 owned by independent contractors) as of March 31,
1996 from 340 tractors (including 55 owned by independent contractors) as of
March 31, 1995. Average Revenue per mile declined to $1.24 per mile for the
three months ended March 31, 1996 from $1.29 per mile for the same period in
1995 and equipment utilization declined to an average of 29,815 miles per
tractor for the three months ended March 31, 1996 from an average of 30,534
miles per tractor for the same period in 1995 due to weakness in the domestic
freight market. These decreases were offset by revenue increases resulting from
the growth of the Company's independent contractor program combined with
additional revenues generated by the Company's expansion of its operations with
the commencement of dedicated service and regional operations near Houston in
early 1996.
Salaries, wages and benefits decreased as a percentage of operating revenue
to 28.5% for the three months ended March 31, 1996 from 31.3% for the same
period in 1995 primarily as a result of the increase in the ratio of independent
contractors to Company drivers. The Company records accruals for workers'
compensation insurance as a component of its claims accrual, and the related
expense is reflected in salaries, wages and benefits expense in its consolidated
statements of income.
Fuel expense decreased as a percentage of operating revenue to 10.4% for the
three months ended March 31, 1996 from 11.3% for the same period in 1995.
Although fuel costs increased slightly, the overall decrease resulted from the
growth of the Company's independent contractor program. Independent contractors
are required to pay their own fuel costs. Increases in fuel costs, which began
in the latter part of the first quarter of 1996, may increase the Company's
operating expenses in subsequent quarters to the extent such increases cannot be
passed through to customers.
Operations and maintenance expense decreased as a percentage of operating
revenue to 5.0% for the three months ended March 31, 1996 from 7.3% for the
corresponding period in 1995. This change resulted from a substantial decline in
trailer lease costs incurred due to an increase in Company owned trailers during
the period and the continued growth in the Company's independent contractor
program.
Insurance and claims expense decreased as a percentage of operating revenue
to 3.7% for the three months ended March 31, 1996 from 4.8% for the same period
in 1995. This decrease was due to a reduction in insurance premium costs and an
overall relative lower level of new claims reserves.
Operating taxes and licenses decreased as a percentage of revenue to 3.6% for
the three months ended March 31, 1996 from 4.0% for the same period in 1995.
This decrease resulted primarily from growth in the independent contractor
program. Independent contractors are required to pay their own mileage taxes.
For the three month period ended March 31, 1996, depreciation and
amortization expense decreased slightly as a percentage of operating revenue to
10.0% from 10.1% for the corresponding period in 1995. This decrease resulted
from the continued growth of the Company's independent contractor program.
Although depreciation and amortization expense decreased as a percentage of
operating revenue, depreciation expense increased due to the Company's expansion
of its trailer fleet during the period.
Purchased transportation increased as a percentage of operating revenue to
18.5% for the three months ended March 31, 1996 from 8.8% for the same period in
1995. This increase was due to the growth of the Company's independent
contractor program from 55 tractors as of March 31, 1995 to 131 as of March 31,
1996.
Communications and miscellaneous operating expenses as a percentage of
revenues for the three months ended March 31, 1996 was slightly higher than the
same period in 1995.
The Company's operating ratio (operating expenses as a percentage of
operating revenue) for the three months ended March 31, 1996 increased to 82.9%
from 80.2% for the same period in 1995. Management believes the increase in the
operating ratio was mainly due to the competitive marketplace resulting in a
lower revenue per mile and lower tractor utilization.
For the three month period ended March 31, 1996, net interest expense as a
percentage of revenue was slightly higher than the same period in 1995,
resulting from increased borrowings to finance the purchase of additional
revenue equipment.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement and
income tax reporting.
12
<PAGE>
As a result of the preceding changes, the Company's net income as a
percentage of operating revenue was 9.6% for the three month period ended March
31, 1996 compared to 10.7% for the same period in 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Operating revenue increased by 49.6% to $56.2 million in 1995 from $37.5
million in 1994. This increase resulted from expansion of the Company's customer
base and increased volume from existing customers and was facilitated by a
substantial increase in the Company's tractor and trailer fleet, including an
increase in the Company's independent contractor fleet, during 1995 compared to
1994. The Company's fleet increased by 45.5% to 425 tractors (including 115
owned by independent contractors) as of December 31, 1995, from 292 tractors
(including 30 owned by independent contractors) as of December 31, 1994. Average
Revenue per mile declined to $1.26 per mile for the year ended December 31, 1995
from $1.29 per mile for the same period in 1994 and equipment utilization
declined to an average of 120,714 miles per tractor in 1995 from an average of
128,994 miles per tractor in 1994 due to weakness in the domestic freight
market.
Salaries, wages and benefits expense decreased as a percentage of operating
revenue to 29.1% for 1995 from 33.8% for 1994 as a result of the increase in the
ratio of independent contractors to Company drivers. The Company records
accruals for workers' compensation as a component of its claims accrual, and the
related expense is reflected in salaries, wages and benefits expense in its
consolidated statements of income.
Fuel expense decreased as a percentage of operating revenue to 10.9% for 1995
from 12.7% in 1994. Though fuel costs per mile in 1995 remained consistent with
1994 fuel costs per mile, the decrease was due to the growth of the Company's
independent contractor program. Independent contractors are required to pay
their own fuel costs.
Operations and maintenance expense increased slightly as a percentage of
operating revenue to 6.6% for 1995 from 6.2% in 1994. This change resulted from
the Company's need to lease trailers on a short term basis to ensure an adequate
trailer pool. The Company's need for additional trailers resulted from the rapid
growth of its independent contractor program.
Insurance and claims expense decreased as a percentage of operating revenue
to 3.7% for the year ended December 31, 1995 from 4.9% for the same period in
1994. This decrease was due to a reduction in insurance premium costs and a
lower than expected level of actual claims costs during the period. The claims
accrual represents accruals for the estimated uninsured portion of pending
claims, including the potential for adverse development of known claims and
incurred but not reported claims.
Operating taxes and license expense decreased as a percentage of operating
revenue to 3.8% in 1995 from 4.9% in 1994. This decrease resulted primarily from
growth in the independent contractor program. Independent contractors are
required to pay their own mileage taxes.
Depreciation and amortization expense declined as a percentage of operating
revenue to 9.7% for 1995 from 10.9% for 1994. This change resulted from the
continued growth of the Company's independent contractor program and the
Company's increased use of leased trailers.
Purchased transportation expense increased to 14.0% in 1995 from 1.8% in 1994
due to an increase in the Company's use of independent contractor tractors from
30 as of December 31, 1994 to 115 as of December 31, 1995.
Communications and miscellaneous operating expenses remained steady, with no
significant change taking place in 1995.
The Company's operating ratio (operating expenses as a percentage of
operating revenue) for 1995 was 81.1% as compared to 78.4% for 1994. Management
believes the increase in the operating ratio was due mainly to the competitive
marketplace resulting in a lower revenue per mile and lower tractor utilization.
Net interest expense declined as a percentage of operating revenue to 0.4%
for 1995 from 2.0% for 1994. This change resulted from a decrease in the
Company's debt. The decrease also reflects the full year effect of the
application of the proceeds from the Company's initial public offering to reduce
the Company's debt.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences in income for tax purposes, primarily
resulting from the non-deductible portion of reimbursements to drivers for meals
and other expenses.
13
<PAGE>
As a result of the preceding changes, the Company's net income as a
percentage of operating revenue was 10.3% in 1995 as compared to 10.9% in 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Operating revenue increased by 42.3% to $37.5 million in 1994 from $26.4
million in 1993. This increase resulted from expansion of the Company's customer
base and increased volume from existing customers. The increase was facilitated
by a substantial increase in the Company's tractor and trailer fleet during 1994
compared to 1993. Operating revenue during 1994 was enhanced by improved tractor
utilization resulting from a reduction of the Company's empty mile factor to
10.1% from 11.8%. This improvement contributed to an increase in average revenue
per mile to $1.29 in 1994 from $1.22 in 1993.
Salaries, wages and benefits expense decreased as a percentage of operating
revenue to 33.8% for 1994 from 35.9% for 1993 as a result of increased driver
productivity, relatively fixed general and administrative salary costs per mile,
higher revenue per mile, and the initiation and growth of the Company's
independent contractor program.
Fuel expense decreased as a percentage of operating revenue to 12.7% for 1994
from 14.3% in 1993 due to the addition of newer, more fuel efficient tractors
and the initiation and growth of the Company's independent contractor program.
Operations and maintenance expense increased slightly as a percentage of
operating revenue to 6.2% for 1994 from 5.8% in 1993. This change resulted from
additional maintenance costs associated with an increase in the average age of
the Company's trailer fleet.
Insurance and claims expense remained approximately 4.9% of operating revenue
for 1994 and 1993. During this period, the Company experienced relatively stable
insurance costs and claims expense.
Operating taxes and license expense increased as a percentage of operating
revenue to 4.9% in 1994 from 4.2% in 1993. This increase was due to more miles
operated in higher tax rate states.
Depreciation and amortization expense declined as a percentage of operating
revenue to 10.9% for 1994 from 11.6% for 1993. The change resulted from an
increase in the Company's revenue per mile and the initiation and development of
the Company's independent contractor program.
Purchased transportation expense increased from zero in 1993 to 1.8% in 1994
due to the implementation of the Company's independent contractor program in
1994.
Miscellaneous operating expenses (primarily administrative costs) decreased
as a percentage of operating revenue to 2.7% in 1994 from 3.4% in 1993. This
change resulted from effective cost containment programs and an increase in
revenue per mile.
As a result of the changes described above, the Company's operating ratio for
1994 improved to 78.4% from 80.6% for 1993.
Net interest expense declined as a percentage of operating revenue to 2.0%
for 1994 from 3.2% for 1993, despite the Company's increased capital
requirements, as a result of a decline in effective interest rates and the
application of the proceeds from the Company's initial public offering to reduce
the Company's debt.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences in income for tax purposes, primarily
resulting from the non-deductible portion of reimbursements to drivers for meals
and other expenses.
As a result of the preceding changes, the Company's net income as a
percentage of operating revenue increased to 10.9% in 1994 from 9.3% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required a significant investment in
new revenue equipment. The Company's primary sources of liquidity have been
funds provided by operations, its initial public offering in 1994, term
borrowings to finance equipment purchases, and the Company's line of credit. Net
cash provided by operating activities totaled approximately $3.5 million and
$1.2 million for the first three months of 1996 and 1995, respectively, and
$10.7 million, $10.1 million and $5.5 million for the years ended December 31,
1995, 1994 and 1993, respectively.
14
<PAGE>
Capital expenditures for the purchase of revenue equipment, office equipment
and leasehold improvements totaled $9.0 million and $3.0 million for the first
three months of 1996 and 1995, respectively, and $13.4 million, $8.2 million and
$9.5 million for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company anticipates that capital expenditures for the acquisition of revenue
equipment to expand the Company's fleet, net of trade-ins, will be approximately
$8.0 million for the last nine months of 1996.
Net cash used in financing activities and net direct equipment financing was
$300,000 for the first three months of 1996 and 1995 and $700,000 and $800,000
for the years ended December 31, 1995 and 1994, respectively. These amounts
remain relatively low due to the Company's ability to finance the majority of
its revenue equipment purchases from operations and, in 1994, the Company's
application of the net proceeds of its initial public offering to repay certain
indebtedness. Net cash provided by financing activities and net direct equipment
financing was $2.5 million for the year ended December 31, 1993. The Company's
financing activities were primarily the result of increasing debt, net of
repayments, and reductions from trade-ins to finance the growth of the Company's
tractor and trailer fleet.
The Company has a $15 million line of credit from its lender and uses that
line to finance the acquisition of revenue equipment and other corporate
purposes to the extent the cost of such acquisitions are not provided by funds
from operations. Under the Company's line of credit, the Company is obligated to
comply with certain financial covenants. The rate of interest on borrowings
against the line of credit will vary depending upon the interest rate election
made by the Company, based on either the London Interbank Offered Rate (LIBOR),
the prime rate, or the lender's certificate of deposit rate. At March 31, 1996
and June 12, 1996, the Company had borrowings under the revolving line of credit
totaling $5.0 million and $10.2 million, respectively. As of March 31, 1996, the
Company was in technical default of certain financial covenants under one of its
credit facilities. The lender has waived those defaults.
Management believes that the net proceeds of this offering, together with
cash flow from operating activities and available borrowings, will be sufficient
to meet the Company's capital needs through the next 18 months. The Company will
continue to have significant capital requirements over the long term, which may
require the Company to incur debt or seek additional equity capital in the
future. The availability of this capital will depend upon prevailing market
conditions, the market price of the Common Stock and other factors over which
the Company has no control, as well as the Company's financial condition and
results of operations.
SEASONALITY
To date, the Company's revenue has not shown any significant seasonal
pattern. Because the Company has operated primarily in Arizona, California and
the western United States, winter weather generally has not adversely affected
the Company's business. Expansion of the Company's operations into Texas and
Louisiana, as well as in the Midwest and on the East Coast, could expose the
Company to greater operating variances due to seasonal weather conditions.
INFLATION
Many of the Company's operating expenses, including fuel costs and fuel
taxes, are sensitive to the effects of inflation, which could result in higher
operating costs. The effects of inflation on the Company's business during the
first three months of 1996 and the years ended December 31, 1995, 1994 and 1993
generally were not significant. See "Business -- Fuel."
15
<PAGE>
INDUSTRY OVERVIEW
The Company operates in the non-local segment of the trucking industry, which
segment had estimated revenues of $330 billion in 1995. The trucking industry
can be further segmented into an estimated $55 billion for-hire truckload
segment and an estimated $110 billion private fleet segment, in which companies
transport goods for their own account. Truckload carriers typically transport
full trailer loads directly from origin to destination without en route
handling.
The truckload industry is highly fragmented, with the ten largest for-hire
truckload carriers accounting for less than 18% of total for-hire truckload
revenues in 1995. A variety of niches have developed within the truckload
industry based upon equipment type, length of haul, geographic region and
service criteria. The truckload transportation industry currently is undergoing
changes that affect both shippers and carriers. An increasing number of shippers
are focusing their capital resources on their primary businesses and are
outsourcing their transportation requirements to independent carriers.
Furthermore, many shippers are seeking to reduce the time and cost of bringing
finished products to the market quickly through the use of just-in-time
inventory management and regional assembly/distribution methods, all of which
make on-time pickup and delivery requirements more important to shippers.
Shippers also are seeking to reduce the number of authorized carriers they use
and to establish service-based, long-term relationships with a small group of
preferred or "core carriers." This helps to ensure higher quality and more
consistent service for the shipper, while providing the carrier the opportunity
for higher equipment utilization and more predictable revenue streams. In this
environment, shippers selectively choose carriers that are financially stable
and, based on measurable attributes, can meet their distribution and service
requirements. For example, carriers must deliver shipments on a timely basis and
possess reliable, quality equipment and offer specialized services to customers.
This trend toward the use of "core carriers" offers significant growth
opportunities for carriers that possess financial stability and critical mass to
support high equipment utilization, a commitment to quality service and
technological capabilities. Carriers that do not possess these capabilities or
that are less efficient have begun to exit the truckload industry through
liquidation or from continued industry consolidation. The Company believes that
this consolidation trend in the industry will continue and that the trend toward
consolidation will provide growth opportunities for efficient, well run
carriers.
Many carriers have focused on regional growth strategies, as over 66% of the
truckload market is in shorter length (less than 500 miles) markets. A regional
focus provides a carrier the opportunity to haul loads from origin to
destination, without any need for intermediate sorting, and increases the
opportunities for providing higher service levels to customers. Furthermore, a
shortage of qualified drivers continues to constrain the truckload market, and
truckload carriers are constantly seeking methods, such as increased driver
compensation and other techniques, to attract and retain drivers. Carriers with
a regional focus participating in the short to medium-haul market generally have
had more success in attracting and retaining drivers because drivers may return
home with more regularity.
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BUSINESS
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such such
differences include, but are not limited to, those discussed in the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as well as those discussed in this section
and elsewhere in this Prospectus.
OVERVIEW
Knight is a short to medium-haul, dry van truckload carrier providing
regional service primarily in the western United States. The Company transports
general commodities, including consumer goods, packaged foodstuffs, paper
products, beverage containers, and imported and exported commodities. The
Company has recently established operations near Houston to provide dedicated
services to one of its larger customers and to commence regional service in
Texas and Louisiana. The Company has also initiated operations in Indianapolis
from which it will provide regional and dedicated service in the Midwest and on
the East Coast.
The Company's operating strategy is to achieve significant but controlled
growth by providing high quality services to service-sensitive customers, with
the goal of obtaining sustained, predictable business that will allow the
Company to achieve a high level of equipment utilization and other operating
efficiencies. Knight commenced operations in July 1990, when Kevin, Gary and
Keith Knight joined Randy Knight to establish a new short to medium-haul
truckload carrier. The Knights average more than 20 years of experience in the
truckload industry. The Company's goal is to attain growth and profitability
through intensive management and the creation of simplified, cost effective
operations.
During the five year period ended December 31, 1995, management led the
Company to a 43.0% compounded annual increase in operating revenue and a 61.2%
compounded annual increase in net income. The Company intends to continue to
develop its business by servicing existing and new customers in its core markets
in the western United States, while expanding its operations and providing
regional and dedicated service in Texas and Lousiana as well as in the Midwest
and on the East Coast.
BUSINESS STRATEGY
Knight's business strategy focuses on four key elements: growth, regional
operations, service and operating efficiencies.
o Growth. Knight's objective is to achieve significant growth through the
controlled expansion of high quality service to existing customers and the
development of new customers in its expanded market areas. The Company has
achieved substantial revenue growth in the western United States, with a
particular emphasis on the Arizona and California markets. The Company has
developed an independent contractor program in order to increase its
tractor fleet, while minimizing capital investment by the Company, and
provide additional service to customers. The Company believes that there
are significant opportunities to continue to increase its business in the
short to medium-haul market by pursuing existing strategies and expanding
its dedicated services.
o Regional Operations. As part of its regional operations focus, in early
1996, the Company established operations near Houston to meet the needs of
one of its larger customers and to commence regional service in Texas and
Louisiana. During the same period, the Company also initiated operations
in Indianapolis in order to expand the Company's customer base in the
short to medium-haul market and provide regional and dedicated service to
customers in the Midwest and on the East Coast.
o Service. Knight's operating strategy is to provide a high level of service
to customers, establishing the Company as a preferred or "core carrier"
for shippers who have time sensitive, high volume or high weight
requirements. The Company's services include multiple pick-ups and
deliveries, dedicated equipment and personnel, pick-ups and deliveries
within narrow time frames, specialized training of drivers, and other
services tailored to customers' needs. The Company has developed an
independent contractor program to increase the size of its revenue
equipment fleet and, thus, provide better service to customers. The
Company has adopted an equipment configuration that meets a wide variety
of customer needs and facilitates customer shipping flexibility. The
Company uses lightweight tractors and high cube trailers capable of
handling both high volume and high weight shipments.
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o Operating Efficiencies. The Company employs a number of strategies that it
believes are instrumental to its efforts to achieve and maintain operating
efficiencies. Knight seeks to maintain a simplified operation that focuses
on operating dry vans in particular geographical and shipping markets.
This approach allows the Company to concentrate its marketing efforts to
achieve higher penetration of its targeted service areas. The Company
seeks operating economies by purchasing a generally uniform and compatible
fleet of tractors and trailers that facilitates Knight's ability to serve
a broad range of customer needs and thereby maximizes equipment
utilization and efficiencies in equipment maintenance and positioning.
Knight intends to maintain its new and efficient equipment fleet by
following a regimen of tractor replacement on a three year cycle and
trailer replacement on a five to seven year cycle.
CUSTOMER SERVICE
Knight believes that its principal competitive strength is its ability to
provide consistent, timely, flexible and cost effective service to shippers. The
Company's strategy is to develop and service specified traffic lanes for
customers who ship on a consistent basis, thereby providing a 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 of equipment availability. Although
price is a primary concern to all shippers, the Company seeks to obtain a
competitive advantage by providing high quality service. Knight's services
include multiple pickups and deliveries, dedicated equipment and personnel,
on-time pickup and delivery within narrow time frames, specialized driver
training and other services tailored to customers' needs. To be responsive to
customers' and drivers' needs, the Company often assigns particular drivers and
equipment to prescribed routes, providing better service to customers, while
obtaining higher equipment utilization.
Knight targets a trailer/tractor ratio of 2.7 to 1. Management believes this
ratio promotes efficiency and allows it to serve a large variety of customers'
needs, without significantly changing or modifying equipment. The Company
operates a uniform fleet of 53 foot long, 102 inch wide, high cube trailers,
including 45 refrigerated trailers in its dedicated fleet as of June 1, 1996.
The efficiency and flexibility provided by its fleet configurations permit the
Company to handle both high volume and high weight shipments. Knight's fleet
configuration also allows the Company to move freight on a "drop-and-hook"
basis, increasing asset utilization and providing better service to customers.
DRIVERS AND OTHER EMPLOYEES
The recruitment, training and retention of qualified drivers is essential to
support the Company's continued growth and to meet the service requirements of
the Company's customers. Drivers are selected in accordance with specific
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. Once selected, the
Company's drivers are referred to as "driving associates" to emphasize the
driver's important role within the Company. Drivers are trained in all phases of
the Company's policies and procedures, including customer service requirements,
general operations, fuel conservation and equipment maintenance, operation and
safety.
The Company seeks to maintain a qualified driver force by providing
attractive and comfortable equipment, direct communication with senior
management, competitive wages and benefits and other incentives designed to
encourage driver retention and long-term employment. Many drivers are assigned
to dedicated or semi-dedicated fleet operations, thereby enhancing job
predictability. Drivers are recognized for providing superior service and
developing good safety records and must successfully complete driver reviews
administered by the Company's human resources department.
Knight's drivers are compensated on the basis of miles driven and length of
haul. Drivers also are compensated for additional flexible services provided to
the Company's customers. Drivers participate in Knight's 401(k) program and in
Company-sponsored health, life and dental plans. The Company has also adopted a
stock option program in which drivers who meet certain criteria are eligible to
participate. See "Executive Compensation and Other Information--1994 Stock
Option Plan; 401(k) Plan."
As of March 31, 1996, Knight employed 522 persons; of these 399 were drivers,
30 were in maintenance, 11 were in sales and marketing, and 82 were in
administration and management. The Company also had contracted with 129
independent contractors as of March 31, 1996 to provide tractors. None of the
Company's employees is represented by a labor union.
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INDEPENDENT CONTRACTOR PROGRAM
The Company initiated and began to develop an independent contractor program
during 1994. Because independent contractors provide their own tractors, the
independent contractor program provides the Company an alternative method of
obtaining additional revenue equipment. The Company intends to continue to
increase its use of independent contractors. As of March 31, 1996, the Company
had 129 independent contractors who owned and operated 131 tractors. Each
independent contractor enters into a contract with the Company pursuant to which
it is required to furnish a tractor and a driver exclusively to transport, load
and unload goods carried by the Company. Independent contractors are paid a
fixed level of compensation based on total trip-loaded and empty miles.
Independent contractors are obligated to maintain their own equipment and pay
for their own fuel. The Company provides trailers for each independent
contractor. The Company also provides maintenance services for its independent
contractor tractors for a charge.
MARKETING AND CUSTOMERS
Knight provides carrier service to manufacturers, retailers, food
distributors, agricultural producers, and other uses of dry van service.
Knight's location in Phoenix allows it to serve the western United States. The
Company's operations near Houston allow it to serve the Texas and Louisiana
region. Similarly, Knight's operations in Indianapolis allow it to serve markets
in the Midwest and on the East Coast. From these same locations, Knight is able
to meet particular customer needs by providing dedicated services. The Company's
standard dedicated fleet services involve management of a significant part of a
customer's transportation operations. Under a dedicated carriage service
agreement, the Company provides drivers, equipment and maintenance, and, in some
instances, transportation management services that supplement the in-house
transportation department. The Company's primary arrangements for dedicated
services in Houston obligate the Company to provide a portion of its customer's
transportation needs from one of the customer's distribution centers. The
Company provides these services through Company furnished revenue equipment and
drivers.
The Company's sales and marketing function is led by its senior management,
who are assisted by other sales professionals. The Company's marketing team
emphasizes the Company's high level of service and ability to accommodate a
variety of customer needs. The Company's marketing efforts are designed to take
advantage of the trend among shippers toward private fleet conversions,
outsourcing transportation requirements, and the use of core carriers to meet
shippers' needs.
For the year ended December 31, 1995, the Company's 25 largest customers
represented 53.2% of operating revenue. The Company believes that a substantial
majority of the Company's 25 largest customers regard Knight as a preferred or
"core" carrier. Most of the Company's truckload carriage contracts are
cancellable on 30 days notice. The loss of one or more large customers could
have a material adverse effect on the Company's operating results.
REVENUE EQUIPMENT AND MAINTENANCE
A substantial majority of the Company's equipment fleet is standardized
equipment manufactured to its specifications. The Company operates a standard
fleet of 53 foot long, 102 inch wide, high cube trailers, and, in its dedicated
fleet, approximately 45 refrigerated trailers. The Company believes that its
equipment acquisition program allows it to meet the needs of a wide range of
customers in the dry van truckload market while, at the same time, controlling
costs relating to maintenance, driver training and operations. The Company
considers a number of factors in deciding which equipment to purchase, including
economy, price, technology, warranty terms, manufacturers' support, safety
features, driver comfort and resale value. To reduce the Company's risk on trade
or resale, the Company has negotiated conditional repurchase commitments with
the manufacturers to allow the Company, at its option, to trade back tractors to
the manufacturer at an agreed price, subject to certain conditions. To date, the
Company has not elected to exercise its rights under these agreements because it
has been able to negotiate more favorable trade-in terms. At March 31, 1996, the
Company operated 360 Company-owned tractors with an average age of 1.4 years and
1,264 trailers with an average age of 2.1 years. The following table shows the
number of units and age of revenue equipment operated by the Company at March
31, 1996:
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MODEL YEAR TRACTORS TRAILERS
- ---------------------------------- ---------- ----------
1991 1 200
1992 1 60
1993 33 205
1994 104 50
1995 107 350
1996 114 399
Total Company-owned 360 1,264
---------- ----------
Total independent contractor owned 131 --
---------- ----------
Total 491 1,264
========== ==========
The Company seeks to minimize the operating costs of its tractors and
trailers by maintaining a relatively new fleet featuring cost saving
technologies. The Company's current policy is to replace most of its tractors
within 36 months after the date of purchase. The Company's strategy for
replacing its tractors is based on various factors, including the used equipment
market, technological improvements, fuel efficiency and prevailing interest
rates. The Company's current policy is to replace its trailer fleet over a five
to seven year period. Actual replacement depends upon the condition of
particular equipment, its resale value and other factors. The Company employs a
strict preventive maintenance program designed to minimize equipment down time,
facilitate customer service, and enhance trade value when equipment is replaced.
The Company operates primarily Freightliner tractors, most of which are
powered by electronically controlled diesel engines. These electronically
controlled engines decrease fuel consumption and control speed. All tractors
have air-ride suspension systems and other modern features designed to enhance
performance and provide driver comfort. As of March 31, 1996, the Company had
ordered 37 new tractors (net of trades), and 264 new trailers (net of trades)
intended for use primarily by independent contractors, for delivery over the
12-month period beginning April 1, 1996.
OPERATIONS
The Company's headquarters are located in Phoenix, where the administrative
offices, truck terminal, and dispatching and maintenance services relating to
Knight's Western region operations are located. In early 1996, the Company
established regional operations in Indianapolis and near Houston. Each of the
Company's regional operations includes dispatchers and other support personnel
who are assigned a specific geographic area. Dispatchers work closely with sales
and marketing personnel and drivers to enhance equipment utilization and serve
as the contact, on a daily basis, with customers and shipping and receiving
personnel.
Knight uses an IBM AS/400 computer driven by Innovative Software and the
Octel Voice Communication Systems to monitor pick-ups and deliveries,
communicate with drivers and enhance overall control of Company operations. Each
of the Company's regional operations centers is linked to the Company's Phoenix
headquarters by the IBM AS/400 computer system. The Company provides electronic
data interchange ("EDI") services to shippers requiring such service. The
capabilities of these systems enhance the Company's operating efficiency by
providing cost effective access to detailed information concerning equipment and
shipment status and specific customer requirements, and also permit the Company
to respond promptly and accurately to customer requests. The system also assists
the Company in matching available equipment and loads.
SAFETY AND RISK MANAGEMENT
The Company is committed to ensuring that it has safe drivers and independent
contractors. The Company regularly communicates with drivers to promote safety
and to instill safe work habits through Company media and safety review
sessions. These programs reinforce the importance of driving safety, abiding by
all laws and regulations regarding such matters as speed and driving hours, and
performing equipment inspections. The Company conducts quarterly safety training
meetings for its drivers and independent contractors. In addition, the Company
has an innovative recognition program for driver safety performance.
The Company's Safety Director reviews all accidents, takes appropriate action
related to drivers, examines trends and implements changes in procedures or
communications to address any safety issues. Management's emphasis on safety
also is demonstrated through its equipment specifications and maintenance
programs.
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The Company requires prospective drivers to meet higher qualification
standards than those required by the DOT. The DOT requires the Company's drivers
and independent contractors to obtain national commercial driver's licenses
pursuant to regulations promulgated by the DOT. The DOT also requires that the
Company implement a drug testing program in accordance with DOT regulations. The
Company's program includes pre-employment, random, post-accident and post-injury
drug testing.
The primary claims arising in the Company's business consist of cargo loss
and damage, workers' compensation, and auto liability (personal injury and
property damage). The Company is self-insured for personal injury and property
damage up to a maximum limit of $100,000 per occurrence, for collision,
comprehensive and cargo liability up to a combined limit of $25,000 per
occurrence, and, in states in which the Company elects to do so, for workers'
compensation up to $250,000 per occurrence. The Company maintains insurance to
cover liabilities in excess of these amounts. The Company's insurance policies
provide for general liability coverage up to $2,000,000 per occurrence,
automobile liability coverage up to $1,000,000 per occurrence, cargo insurance
coverage up to $2,500,000 per occurrence and additional umbrella liability
coverage up to $14,000,000. The Company also maintains primary and excess
coverage for employee medical expenses and hospitalization, and damage to
physical properties. The Company carefully monitors claims and participates
actively in claims estimate and adjustment. The estimated costs of such
self-insured claims, which include estimates for incurred but not reported
claims, are accrued as liabilities on the Company's balance sheet.
REGULATION
Historically, the Interstate Commerce Commission ("ICC") and various state
agencies regulated truckload carriers' operating rights, accounting systems,
rates and charges, safety, mergers and acquisitions, periodic financial
reporting and other matters. In 1995, the passage of federal legislation
preempted state regulation of prices, rates, and services of motor carriers and
eliminated the ICC. Several ICC functions were transferred to the Department of
Transportation ("DOT"), but a lack of implementing regulations currently
prevents the Company from assessing the full impact of this action. Generally,
the trucking industry is subject to regulatory and legislative changes that can
have a material effect on operations.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT Such matters as weight and dimensions of equipment are
also subject to federal and state regulation. In 1988, the DOT began requiring
national commercial driver's licenses for interstate truck drivers.
The Company's motor carrier operations are also subject to environmental laws
and regulations, including laws and regulations dealing with underground fuel
storage tanks, the transportation of hazardous materials and other environmental
matters. The Company has initiated programs to comply with all applicable
environmental regulations. As part of its safety and risk management program,
the Company periodically performs an internal environmental review to assist the
Company achieve environmental compliance and avoid environmental risk. The
Company's Phoenix facility was designed, after consultation with environmental
advisors, to contain and properly dispose of hazardous substances and petroleum
products used in connection with the Company's business. The Company has rarely
transported environmentally hazardous substances and, to date, has experienced
no claims for hazardous substance shipments. In the event the Company should
fail to comply with applicable regulations, the Company could be subject to
substantial fines or penalties and to civil or criminal liability.
The State of Arizona has enacted laws that provide for a water quality
assurance revolving fund ("WQARF"). The purpose of these laws is to identify and
remediate areas of groundwater contamination resulting from the release of
hazardous substances. Once an area of contamination is identified, the Arizona
Department of Environmental Quality ("ADEQ") designates the area as a WQARF
Study Area in order to determine the extent of contamination and to identify
potentially responsible parties. Responsible parties are liable for the cost of
remediating contamination. In December 1987, ADEQ designated a 25 square mile
area in West Phoenix, which includes the Company's Phoenix location, as a WQARF
Study Area. To date, ADEQ has not identified the Company as a potentially
responsible party or the Company's facility as a facility warranting further
investigation with respect to the WQARF Study Area. The Company has been located
at its present Phoenix facility since 1990. Neither the Company nor its
predecessors have maintained underground petroleum storage tanks at the
Company's Phoenix location. Prior to 1974, the property upon which the Company's
Phoenix facilities are located was farm land.
There are two underground storage tanks located on the Company's recently
acquired Indianapolis property. The tanks are subject to regulation under both
federal and state law and are currently being leased to and operated by an
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independent, third party fuel distributor. The Company assumed the lease as part
of its purchase of the property. The lessee has agreed to carry environmental
impairment liability insurance, naming the Company, as lessor, as an insured,
covering the spillage, seepage or other loss of petroleum products, hazardous
wastes, or similar materials onto the leased premises and has agreed to
indemnify the Company, as lessor, against damage from such occurences. The
Indianapolis property is located approximately 0.1 mile east of Reilly Tar and
Chemical Corporation ("Reilly"), a federal superfund site listed on the National
Priorities List. The Reilly site has known soil and groundwater contamination.
There are also other sites in the general vicinity of the Company's Indianapolis
property that have known contamination. Environmental reports obtained by the
Company have disclosed no evidence that activities on the Company's Indianapolis
property have caused or contributed to the area contamination.
The Company is currently engaged in negotiations to purchase a 6.5 acre
parcel of vacant land adjacent to its Indianapolis facility. The Company is
still conducting due diligence concerning the environmental condition of this
property.
The Company believes it is currently in material compliance with applicable
laws and regulations and that the cost of compliance has not materially affected
results of operations. See "-- Legal Proceedings" for additional information
regarding certain regulatory matters.
FUEL
In connection with its operations, the Company negotiates fuel discounts with
truck stop operators and other fuel suppliers. The Company stores no fuel and
has no underground storage tanks at its Phoenix and Houston facilities. However,
a lessee of the Company conducts a fuel service business and stores fuel in
underground storage tanks at Knight's recently acquired Indianapolis property.
The Company has not used derivative products to hedge against increases in fuel
costs and has no current plans to use any derivative products in the future.
Increases in fuel costs, which began in the latter part of the first quarter of
1996, may increase the Company's operating expenses in subsequent quarters to
the extent such increases cannot be passed through to customers. Although the
Company usually seeks rate increases to offset fuel increases, excess capacity
in the trucking industry may limit the Company's ability to maintain rate
increases or pass through increases in fuel costs. Increases in fuel taxes or
fuel prices could have a direct effect on the Company's operating results if
increases cannot be passed on to customers. Similarly, any increases in fuel
taxes or fuel prices could also adversely affect the profitability of
independent contractors and the Company's cost of retaining such contractors, to
the extent such increases could not be passed along to the Company's customers.
See "Risk Factors -- Fuel" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Inflation."
COMPETITION
The Company competes primarily with other regional short to medium-haul
truckload carriers, logistics providers, national carriers and other national
equipment providers. Railroads and air freight also provide competition, but to
a lesser degree. The Company believes that the principal competitive factors in
its business are service, pricing and the availability and configuration of
equipment that meets a variety of customers' needs. Recently, the trucking
industry, including the short to medium-haul truckload market, has been affected
by an availability of excess revenue equipment, which has negatively affected
both equipment utilization and rates. The entire trucking industry is highly
competitive and fragmented. Competition for the freight transported by the
Company is based on freight rates, service and efficiency. A number of the
Company's competitors have greater financial resources, own more equipment, and
carry a larger volume of freight than the Company. The Company also competes
with other motor carriers for the services of drivers and independent
contractor.
PROPERTIES
The Company's headquarters are located at 5601 West Buckeye Road, Phoenix,
Arizona, on approximately 43 acres. The Company owns approximately 35 of the 43
acres and leases the remaining eight acres from Randy Knight, an officer and
director of the Company and one if its principal shareholders. The term of the
Company's lease is for five years, with two options to extend for two additional
five-year terms. Under the lease between the Company and Mr. Knight, the base
rent is $4,828 per month for the initial three years of the lease and increases
by 3% on the third anniversary of the commencement date, the first anniversary
of each option term, and the third anniversary of the commencement of each
option term. See "Certain Relationships and Related Transactions," below, for
additional information.
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In early 1996, the Company purchased a three acre operations facility in
Indianapolis. The facility includes a truck terminal, administrative offices,
and dispatching and maintenance services and will serve as a base for expanding
the Company's operations in the Midwest and on the East Coast. The Company is
currently engaged in negotiations to purchase a 6.5 net acre parcel of vacant
land adjacent to its Indianapolis facility in order to provide for future
growth. The Company's operations near Houston are currently located on the
premises of one of the Company's significant customers, for whom it provides
dedicated services.
The Company leases office facilities in California, Oklahoma and Utah, which
it uses for fleet maintenance, record keeping and general operations. The
Company also leases space in various locations for temporary trailer storage.
Management believes that replacement space comparable to these facilities is
readily obtainable, if necessary. As of March 31, 1996, the Company's aggregate
monthly rental for all leased properties was approximately $15,000.
LEGAL PROCEEDINGS
The Company is party to ordinary routine litigation incidental to its
business primarily involving claims for personal injury or property damage
incurred in the transportation of freight. The Company maintains insurance to
cover liabilities in amounts in excess of self-insured retentions.
In 1994, the Company received notice from the Equal Employment Opportunity
Commission ("EEOC") of charges of race discrimination filed by two drivers
seeking employment as dispatchers. The EEOC found reasonable cause to believe
the Company had discriminated against the individuals and a class of similarly
situated individuals based on race. The EEOC also determined that the Company
had engaged in retaliatory conduct against a charging party. The Company has
been notified by the EEOC that conciliation has failed with respect to the two
charges, including the class charge, and the EEOC has filed suit against the
Company alleging unlawful employment practices on the basis of race and unlawful
retaliation. The EEOC is seeking damages on behalf of the individuals involved
and a class of persons the Company is alleged to have failed to hire as
dispatchers. The EEOC is also seeking injunctive relief against alleged unlawful
employment practices, the institution of policies providing for equal
employment, pecuniary relief for the affected class, including back pay,
pre-judgment interest and compensation for past and future services, and
punitive damages. It is the Company's policy to comply with all applicable laws
relating to equal employment opportunity. The Company believes that the EEOC
claims are without merit and that it has defenses to all claims. The Company
intends to vigorously defend the claims.
The Company's tractor and trailer fleets are registered in Oklahoma and Utah
and operate primarily in the western United States, including California. The
Company is presently being audited by the State of California's Department of
Motor Vehicles, with respect to the 1994, 1995, and 1996 "mileage years".
Although no assessment has yet been made, California is asserting that all the
Company's trailers are subject to mileage based apportioned registration, and
that the Company owes trailer registration fees in excess of those amounts
previously paid. The Company intends to vigorously contest the position taken by
California. To the extent the Company is unsuccessful in its efforts, it may be
required to pay additional registration fees for the mileage years involved and
penalties as well as increased registration fees (relative to payments paid with
respect to prior periods) for future periods. The Company believes that the
outcome of the California audit will not have a materially adverse effect on the
Company's financial position or results of operations.
Two of the Company's officers, Kevin P. Knight and Gary J. Knight, are
engaged in arbitration proceedings with their former employer, Swift
Transportation, Inc. ("Swift") with respect to claims by Swift for damages and
injunctive relief in connection with disputes related to their departure in
March 1990 from employment with Swift. The matter has been submitted to the
Superior Court of the State of Arizona for definition of issues and referral for
further arbitration proceedings. The Company is not a party to any of these
proceedings and does not believe these proceedings will affect its business or
financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
executive officers of the Company.
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ----------------- ----- -------------------------------------------- ----------
Randy Knight ..... 47 Chairman of the Board, Director 1997
Kevin P. Knight . 39 Chief Executive Officer, Director 1997
Gary J. Knight .. 44 President, Director 1997
Keith T. Knight . 41 Executive Vice President, Director 1997
Clark A. Jenkins 38 Chief Financial Officer, Secretary, Director 1997
Keith L. Turley . 72 Director 1997
Donald A. Bliss . 63 Director 1997
Randy Knight has served as the Company's Chairman of the Board since 1993 and
has been an officer and director of the Company since its inception in 1989.
From 1985 to the present, Mr. Knight has owned and operated Total Warehousing,
Inc., a commercial warehousing and local transportation business located in
Phoenix, Arizona. Mr. Knight was employed by Swift or related companies from
1969 to 1985, where he was a Vice President and shareholder.
Kevin P. Knight has served as the Company's Chief Executive Officer since
1993, and has been an officer and director of the Company since 1990. From 1975
to 1984 and again from 1986 to 1990, Mr. Knight was employed by Swift, where he
was an Executive Vice President and President of Cooper Motor Lines, Inc., a
Swift subsidiary.
Gary J. Knight has served as the Company's President since 1993, and has been
an officer and director of the Company since 1990. From 1975 until 1990, Mr.
Knight was employed by Swift, where he was an Executive Vice President.
Keith T. Knight has served as the Company's Executive Vice President since
1993, and has been an officer and director of the Company since 1990. From 1977
until 1990, Mr. Knight was employed by Swift, where he was a Vice President and
manager of the Los Angeles terminal.
Clark A. Jenkins joined the Company in 1990 and has served as the Company's
Secretary and Chief Financial Officer since 1991. From 1986 to 1990, Mr. Jenkins
was employed by Swift as a Vice President of Finance. Prior to his employment
with Swift, Mr. Jenkins was employed as an accounting manager by Flying J. Inc.,
a fully-integrated oil and gas company.
Keith L. Turley has served as a director of the Company since November 1994.
Mr. Turley has been retired since 1990. From 1985 to 1990, Mr. Turley was
Chairman of the Board, President and Chief Executive Officer of Pinnacle West
Capital Corporation, the parent company of Arizona Public Service, Arizona's
largest privately owned public utility.
Donald A. Bliss was elected to the Board of Directors of the Company in
February 1995. Until December 1994, Mr. Bliss was Vice President and Chief
Executive Officer of US West Communications, a U.S. West company. Mr. Bliss has
also been a Director of Bank of America Arizona since 1988 and of Mutual of
Omaha since 1989, and was a Director of US West Communications from 1987 to
1994.
Randy Knight and Gary J. Knight are brothers and are cousins of Kevin P.
Knight and Keith T. Knight, who are also brothers.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive annual compensation of
$5,000, plus a fee of $500 for attendance at each meeting of the Board of
Directors, and a fee of $250 for committee meetings. Independent directors
appointed to the Board of Directors also receive an automatic grant of a
non-qualified stock option ("NSO") for a number of shares to be designated by
the Board of not less than 2,500 nor more than 5,000 shares. The exercise price
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of an NSO is eighty-five percent (85%) of the fair market value of the Company's
stock as of the date of grant. The Board of Directors has granted each of Keith
L. Turley and Donald A. Bliss an NSO for 2,500 shares of the Company's common
stock at exercise prices of $12.54 and $13.18, respectively.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of Directors
was created in November 1994, and is composed of Keith L. Turley and Donald A.
Bliss. The Compensation Committee reviews all aspects of compensation of
executive officers of the Company and makes recommendations on such matters to
the full Board of Directors. The Compensation Committee is composed entirely of
directors who are not officers, employees or ten percent or more shareholders of
the Company.
AUDIT COMMITTEE. The Audit Committee was created in November 1994, and is
composed of Kevin P. Knight, Keith L. Turley, and Donald A. Bliss. The Audit
Committee makes recommendations to the Board of Directors concerning the
selection of independent public accountants, reviews the consolidated financial
statements and internal controls of the Company, and considers such other
matters in relation to the external audit and the financial affairs of the
Company as may be necessary or appropriate in order to facilitate accurate and
timely financial reporting. The Audit Committee also reviews proposals for major
transactions. A majority of the members of the Audit Committee are independent
directors.
25
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth the cash compensation paid to each of the
Company's five most highly paid officers for services in all capacities to the
Company for the year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ------------ ---------------
NAME AND FISCAL OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS COMPENSATION(1)
- ---------------------------- -------- ---------- --------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Randy Knight ................ 1995 $253,000 -- -- -- $3,345
Chairman 1994 256,100 -- -- -- 3,040
Kevin P. Knight ............. 1995 253,000 -- -- -- 1,905
Chief Executive Officer 1994 276,100 -- -- -- 1,640
Gary J. Knight .............. 1995 253,000 -- -- -- 2,865
President 1994 256,100 -- -- -- 2,500
Keith T. Knight ............. 1995 253,000 -- -- -- 2,225
Executive Vice President 1994 256,100 -- -- -- 1,900
Clark A. Jenkins ............ 1995 82,524 $17,500 -- -- 625
Chief Financial Officer and
Secretary 1994 74,076 25,000 -- 35,000(2) 500
<FN>
- ----------
(1) In 1995 and 1994, compensation included in "All Other Compensation" for each
of the named executive officers included Company contributions in the
amounts of $625 and $500, respectively, to the Knight Transportation, Inc.
401(k) Plan and Trust Agreement. The balance of compensation included in
"All Other Compensation" represents premiums paid for a $2,000,000 split
dollar life insurance policy maintained for each of the Knights, which will
be refunded to the Company upon termination of the policy.
(2) Options shown for Mr. Jenkins were granted concurrently with the Company's
public offering in 1994. As of December 31, 1995, no additional options had
been granted to any of the above persons since the grant shown above.
</FN>
</TABLE>
<TABLE>
The following table sets forth shares of the Company's Common Stock subject
to exercisable stock options or acquired through the exercise of stock options
as of December 31, 1995:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AS OF DECEMBER 31, 1995
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR END FISCAL YEAR END
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ---------- ---------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLARK A. JENKINS(1) -- -- -- 35,000 -- $61,250(2)
<FN>
- ----------
(1) None of the other named executive officers (Randy Knight, Kevin P. Knight,
Gary J. Knight, and Keith T. Knight) held any options during fiscal year
1995.
(2) Based on the $13.75 closing price of the Company's common stock on December
31, 1995. One-third of Mr. Jenkins' outstanding options are exercisable in
October 1997, one third are exercisable in October 1998, and the remainder
are exercisable on October 1999.
</FN>
</TABLE>
The Company maintains an unfunded disability plan for Randy, Kevin, Gary and
Keith Knight. The plan provides for salary continuation of $75,000 per year for
up to 60 months in the event of termination of employment due to a disability.
The plan may be terminated by the Board of Directors at any time after providing
90 days written notice.
26
<PAGE>
1994 STOCK OPTION PLAN
The Company maintains a stock incentive plan (the "Plan") to enable
directors, executive officers and certain key and critical line employees of the
Company, including drivers and other employees, to participate in the ownership
of the Company. The plan will terminate on August 31, 2004. The Plan is designed
to attract and retain directors, executive officers, key employees and critical
line employees of the Company, and to provide incentives to such persons. In
July 1994, 650,000 shares of Common Stock were reserved for grants under the
Plan and, at present, 648,000 shares of Common Stock are available for issuance
of stock grants made under the Plan. Common Stock available for grant will be
automatically adjusted for stock splits, stock dividends, reverse stock splits
and similar transactions.
The Plan has three divisions: Division I, the Stock Option Plan, allows the
Compensation Committee to grant incentive or nonqualified stock options to
employees as a traditional form of incentive compensation. Nonqualified options
may not provide for an exercise price of less than 85% of the fair market value
of a share of the Company's common stock as of the date of grant. No limitation
exists on the number of shares that may be granted to any individual. Unless
otherwise provided in the granting agreements, unexercised options lapse on
termination of employment, except in the case of death or retirement, in which
event the right to exercise is extended. Division II, the Independent Directors
Automatic Stock Option Plan, provides for the automatic grant of a stock option
to an independent director upon such director's appointment to the Board in an
amount not less than 2,500 shares nor more than 5,000 shares. The exercise price
of an option granted under the Independent Directors Automatic Stock Option Plan
is 85% of the fair market value of a share of the Company's Common Stock as of
the date of grant. Up to 25,000 shares of the Company's Common Stock may be
issued to independent directors under the Independent Directors Automatic Stock
Option Plan. Division III, the Employee Incentive Plan, allows the Compensation
Committee to make incentive awards of cash or stock, or a combination thereof,
on an annual basis, to employees who have attained performance goals set by the
Company. Under this division of the Plan, Common Stock may be issued as an
incentive award for the performance of past services. Awards granted under the
Employee Incentive Plan may not exceed $10,000 per employee in any calendar
year. Stock grants made under one division of the Plan reduce the number of
shares that may be awarded under the other divisions of the Plan.
The Plan, other than the Independent Directors Automatic Stock Option Plan
Division, is administered by the Compensation Committee, which is authorized to
select from among the eligible employees of the Company the individuals to whom
options, restricted stock purchase rights, or incentive awards are to be
granted, the number of shares to be awarded and the terms and conditions of the
award. The Independent Directors Automatic Stock Option Plan Division is
administered by those directors who are not entitled to participate in the Plan.
The Compensation Committee also is authorized to adopt, amend and rescind rules
relating to the administration of the Plan. No member of the Compensation
Committee may participate in or take action with respect to any grant of an
option or stock purchase right with respect to such member.
Shares issued by the Company under its Stock Option Plan are registered with
the Securities and Exchange Commission and, in general, are freely tradeable.
401(k) PLAN
The Company sponsors a 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a
profit sharing plan that permits voluntary employee contributions on a pre-tax
basis under section 401(k) of the Internal Revenue Code. Under the 401(k) Plan a
participant may elect to defer a portion of his compensation and have the
Company contribute a portion of his compensation to the 401(k) Plan. The Company
makes a matching contribution in an amount not to exceed fifty percent (50%) of
a participant's contributions, up to a maximum amount of $750.00 per participant
per plan year. For 1995, the Company's contribution was $625 per participant.
Beginning in 1996, the 401(k) Plan allows the Company to make its matching
contribution in cash or in newly issued shares of the Company's common stock or
in a combination thereof. The Company has reserved 75,000 shares of its Common
Stock for contributions to the 401(k) Plan. Shares to be issued under the 401(k)
Plan are registered with the Securities and Exchange Commission and, in general,
are freely tradeable.
Under the 401(k) Plan, eligible employees have the right to direct the
investment of employee and employer contributions among four mutual funds.
Participants may not direct the investment of their contributions into the
Company's common stock.
Amounts contributed by the Company for a participant will vest over five
years and will be held in trust until distributed pursuant to the terms of the
401(k) Plan. Employees of the Company are eligible to participate in the
27
<PAGE>
401(k) Plan if they meet certain requirements concerning minimum age and period
of service. Distributions from participant accounts will not be permitted before
age 59 1/2 , except in the event of death, disability, certain financial
hardships or termination of employment.
COMPENSATION COMMITTEE INTERLOCKS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Compensation
Committee of the Board of Directors consists of Keith L. Turley and Donald A.
Bliss. Mr. Bliss also serves as the Chairman of the Compensation Committee.
Members of the Compensation Committee are neither employees, officers, nor 10
percent or greater shareholders of the Company. See "Certain Relationships and
Related Transactions" for a description of transactions between the Company and
members of the Board of Directors or their affiliates.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
COMPANY'S PURCHASE AND LEASE OF PROPERTIES.
The Company's headquarters is located at 5601 West Buckeye Road, Phoenix,
Arizona, on approximately 43 acres. The Company owns approximately 35 acres and
leases eight acres from Randy Knight, an officer, director and principal
shareholder of the Company. The Company has leased its operating facilities from
Randy Knight. Total payments of approximately $70,100, $10,000, $54,800 and
$14,900 were made by the Company to, or on behalf of, Total Warehousing and
Randy Knight for the years ended December 31, 1993, 1994, and 1995 and for the
three months ended March 31, 1996, respectively.
Under the lease between the Company and Randy Knight, the base rent is $4,828
per month for the initial three years of the lease, and increases by 3% on the
third anniversary of the commencement date, the first day of each option term,
and the third anniversary of the commencement date of each option term. In
addition to base rent, the lease requires the Company to pay its share of all
expenses, utilities, taxes and other charges. Under the lease, the Company and
Total Warehousing will continue jointly to use portions of the premises. The
Company has granted Randy Knight access and utility easements over its owned and
leased properties. The purchase and lease agreements between the Company and
Randy Knight include cross-indemnities relating to liabilities and expenses
arising from the use and occupancy of the property by the parties to the
agreements.
The Company and Total Warehousing have jointly purchased insurance and other
products and services and have shared other costs relating to the operation of
their businesses. Costs have been allocated on a basis consistent with their
respective use of the product or service. In addition, the Company and Total
Warehousing from time to time provide services to each other. The Company
provided maintenance and shipping, insurance and other services for Total
Warehousing and was paid $238,000, $154,000, $62,000 by Total Warehousing for
the years ended December 31, 1993, 1994 and 1995 and none for the three months
ended March 31, 1996, respectively. Total Warehousing provided general
warehousing services to the Company and was paid $53,000, $18,000, $60,000 and
$10,700 by the Company for the years ended December 31, 1993, 1994 and 1995 and
for the three months ended March 31, 1996, respectively.
FUTURE TRANSACTIONS WITH AFFILIATES
Upon completion of its initial public offering, the Company adopted a policy
that future transactions with affiliated persons or entities would be on terms
no less favorable to the Company than those that could be obtained from
unaffiliated third parties on an arm's length basis, and that any such
transactions would be approved by the Company's independent directors.
28
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding 9,902,000
shares of Common Stock. Of these shares, the 1,600,000 shares to be sold in this
offering (1,840,000 if the over-allotment option is exercised) will be freely
tradeable without restriction or registration under the Securities Act unless
acquired by affiliates of the Company. Of the remaining 8,302,000 shares,
2,282,100 were freely tradeable without restriction or registration prior to
this offering and 6,819,900 are restricted shares ("Restricted Shares") within
the meaning of Rule 144 of the Securities Act and may not be sold in the absence
of registration under the Securities Act unless an exemption from registration
is available, including the exemption contained in Rule 144. There are currently
available for issuance 648,000 shares under the Company's Stock Option Plan and
75,000 shares under its 401(k) Plan. These shares, when and if issued, would be
freely tradeable unless acquired by an affiliate of the Company.
All of the Restricted Shares will become eligible for sale pursuant to Rule
144 under the Act beginning 90 days after the date of this Prospectus if the
conditions of that Rule have been met. The Selling Shareholders, either in their
individual capacities or through certain related trusts and limited liability
companies established for the benefit of their respective families, will
beneficially own 6,028,900 shares, or 60.9%, of the Company's outstanding Common
Stock, after giving effect to this offering and have agreed, along with the
Company and its other officers and directors, with the Underwriters not to sell,
offer or otherwise dispose of any of their shares for 180 days from the date of
this Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. After the 180 day period, all of such shares will be eligible for
sale under, and subject to the limitations of, Rule 144 under the Securities
Act. See "Principal and Selling Shareholders".
In general, under Rule 144 as currently in effect, an affiliate (or persons
whose shares are aggregated with an affiliate) who has beneficially owned, for
at least two years, shares acquired directly or indirectly from the Company or
from an affiliate of the Company is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock or the average weekly trading
volume of the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
limitations, notice requirements, and the availability of current public
information about the Company. However, a person who has not been an affiliate
of the Company at any time during the three months preceding a sale and who has
beneficially owned his shares for at least three years is entitled to sell such
shares under Rule 144 without regard to any of the limitations of the Rule.
No predictions can be made of the effect, if any, that market sales of
Restricted Shares or the availability of Restricted Shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the shares of Common Stock in the public market could
adversely affect the market price of the Company's Common Stock. See "Risk
Factors -- Shares Eligible for Future Sale."
29
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
<TABLE>
The following table sets forth, as of the date of this Prospectus,
information concerning shares of the Company's Common Stock beneficially owned
by (i) each director and proposed director of the Company, (ii) all officers and
directors of the Company as a group, and (iii) each shareholder known by the
Company to be the beneficial owner of more than 5% of the Company's outstanding
Common stock. The table also sets forth information as to the shares of Common
Stock to be sold by the Selling Shareholders. Unless otherwise indicated, each
person listed has sole voting and investment power over the shares beneficially
owned by him.
<CAPTION>
SHARES TO BE
BENEFICIALLY
SHARES BENEFICIALLY SHARES OWNED AFTER
OWNED BEFORE OFFERING OFFERED OFFERING(1)
--------------------- --------- ---------------------
NAME AND ADDRESS(2) NUMBER PERCENT NUMBER NUMBER PERCENT
- -------------------------------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Randy Knight(3) .......................1,708,975 18.8% 200,000 1,508,975 15.2%
Kevin P. Knight(4) ....................1,706,975 18.8% 200,000 1,506,975 15.2%
Gary J. Knight(5) .....................1,706,475 18.7% 200,000 1,506,475 15.2%
Keith T. Knight(6) ....................1,706,475 18.7% 200,000 1,506,475 15.2%
Clark A. Jenkins ...................... 650 * -- 650 *
Keith L. Turley(7) .................... 6,100 * -- 6,100 *
Donald A. Bliss(8) .................... 3,500 * -- 3,500 *
William Blair & Company, L.L.C.(9) ... 680,950 7.5% -- 680,950 6.9%
All directors and officers as a group 6,839,150 75.1% 800,000 6,039,150 61.0%
<FN>
- ----------
* Less than one percent
(1) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters' over-allotment is exercised in full, the ownership of each of
the Selling Shareholders will be reduced by an additional 60,000 shares.
(2) The address of each officer and director is 5601 West Buckeye Road, Phoenix,
Arizona 85043. The address of William Blair & Company, L.L.C. ("William
Blair") is 222 West Adams Street, Chicago, Illinois 60606. All information
provided with respect to William Blair is based solely upon the Company's
review of a Schedule 13G filed by William Blair with the Securities and
Exchange Commission.
(3) Includes 1,404,975 shares beneficially owned by Randy Knight over which he
exercises sole voting and investment power as a Trustee under a Revocable
Trust Agreement dated April 1, 1993; 300,000 shares held by a limited
liability company for which Mr. Knight acts as manager and whose members
include Mr. Knight and his four children; and 4,000 shares owned by a minor
child and three adult children who share the same household.
(4) Includes 1,704,975 shares beneficially owned by Kevin P. Knight over which
he and his wife, Sydney Knight, exercise sole voting and investment power as
Trustees under a Revocable Trust Agreement dated March 25, 1994, and 2,000
shares owned by four minor children.
(5) Includes 1,704,975 shares beneficially owned by Gary J. Knight over which he
exercises sole voting and investment power as a Trustee under a Revocable
Trust Agreement dated May 19, 1993, and 1,500 shares owned by three minor
children who share the same household.
(6) Includes 1,704,975 shares beneficially owned by Keith T. Knight over which
he and his wife, Fawna Knight, exercise sole voting and investment power as
Trustees under a Revocable Trust Agreement dated March 13, 1995, and 1,500
shares owned by three minor children who share the same household.
(7) Includes 2,500 shares that Mr. Turley has the right to acquire through the
exercise of a stock option.
(8) Includes 2,500 shares that Mr. Bliss has the right to acquire through the
exercise of a stock option.
(9) William Blair has sole voting power over 109,550 shares and sole dispositive
power over 680,950 shares. It has shared dispositive power over no shares.
</FN>
</TABLE>
30
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock, par
value $0.01 per share, of which 9,102,000 shares were issued and outstanding
immediately prior to this offering. Upon completion of this offering, 9,902,000
shares will be issued and outstanding.
The issued and outstanding shares of Common Stock are, and the shares offered
hereby when issued will be, fully paid and non-assessable. Holders of Common
Stock do not vote as a class, except as required by law, and, except for certain
cumulative voting rights, each share is entitled to one vote on all matters
submitted to a vote of the shareholders. Under the Arizona State Constitution,
cumulative voting is required for the election of directors. This means that a
shareholder has the right to cast as many votes in the aggregate as he is
entitled to vote under the Articles of Incorporation multiplied by the number of
directors to be elected. A shareholder may cast all his votes for one director
candidate or distribute such votes among two or more director candidates, as he
sees fit.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, dissolution or winding up
of the Company, to share ratably in all assets remaining after payments of
liabilities and liquidation preferences to the holders of any preferred stock
then outstanding.
The holders of Common Stock have no preemptive or conversion rights and are
not subject to assessments by the Company. There are no redemption or sinking
funds provisions applicable to Common Stock and holders of Common Stock have no
preference in liquidation. The rights of the holders of Common Stock are subject
to the rights of holders of any preferred stock that may be issued in the
future.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the Board of Directors to
issue 50,000,000 preferred shares, par value $0.01 (the "Preferred Shares"), in
one or more classes and to establish the preferences and rights (including the
right to vote and the right to convert into the Common Stock) of any class of
Preferred Shares issued. No Preferred Shares will be issued or outstanding as of
the closing of the offering, and the Company has no present plans to issue
Preferred Shares.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
A number of provisions of the Articles of Incorporation and Bylaws deal with
matters of corporate governance and the rights of shareholders. The Articles of
Incorporation provide the Board of Directors the ability to issue shares of
preferred stock and to set the voting rights, preferences and other terms
thereof. The ability of the Board of Directors to authorize the issuance of
preferred stock may have an anti-takeover effect and may discourage takeover
attempts not first approved by the Board of Directors (including a takeover
which certain shareholders may deem to be in their best interests). To the
extent takeover attempts are discouraged, fluctuations in the market price of
the Company's Common Stock, which may result from actual or rumored takeover
attempts, will be inhibited.
Knight's Articles of Incorporation provide that the consent of those persons
holding 67% of the Company's issued and outstanding voting shares, voting as a
single class, is required to approve any transaction to sell substantially all
of the Company's assets or to merge or consolidate the Company with another
corporation in a transaction in which shares of the Company's stock are
converted into cash or the right to receive other consideration in exchange for
their shares of the Company.
Indemnification. The Articles of Incorporation and the Bylaws of the Company
provide that directors of the Company will be indemnified by the Company to the
fullest extent not prohibited by Arizona law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Articles of
Incorporation also require that the Company advance expenses to defend any
claim, subject to a director agreeing to reimburse the Company for such advances
in the event indemnity is not permitted. The Articles of Incorporation and the
Bylaws also provide that the right of directors to indemnification is not
exclusive of any other right now possessed or hereafter acquired under any
statute, agreement or otherwise.
31
<PAGE>
The Company has entered into agreements to provide indemnification for its
directors (including actions in their capacity as officers) in addition to the
indemnification provided for in the Articles of Incorporation and the Bylaws.
These agreements, among other things, indemnify the Company's directors to the
fullest extent not prohibited by Arizona law, for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by such
person in any action or proceeding, including any action by or in the right of
the Company, on account of services as a director or officer of the Company or
any subsidiary of the Company, or as a director or officer of any other company
or enterprise to which the person provides services at the request of the
Company, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company must also advance the costs and
expenses of directors seeking to enforce their rights under the indemnification
agreements, and cover directors under the Company's directors and officers
liability insurance, to the extent insurance coverage is available on reasonable
terms. Although the form of the indemnification agreements offers substantially
the same scope of coverage afforded by provisions in the Articles of
Incorporation and the Bylaws, it provides greater assurance to directors that
indemnification will be available, because, as a contract, it cannot be modified
unilaterally by the Board of Directors or by the shareholders to eliminate the
rights it provides. This provision does not affect a director's responsibilities
under certain other laws, such as the federal securities laws or state or
federal environmental laws. There is no pending litigation or proceeding
involving any director of the Company as to which indemnification is being
sought, and the Company is not aware of any pending or threatened litigation
that may result in claims for indemnification by a director, officer, employee
or other agent.
Limitation of Liability. The Articles of Incorporation provide that directors
of the Company will not be personally liable for monetary damages to the Company
for certain breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to the Company or its shareholders, acted in bad faith,
knowingly or intentionally violated the law, authorized the unlawful payment of
dividends or redemptions, derived an improper personal benefit from their action
as directors, or engaged in certain transactions involving a conflict of
interest. This provision has no effect on the availability of equitable remedies
or non-monetary relief, such as an injunction or rescission for breach of the
duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws or environmental laws
will not be limited by this provision. Directors will, however, not be
personally liable for monetary damages arising from decisions involving
violations of the duty of care, including conduct that could be considered
grossly negligent.
TRANSFER AGENT
First Interstate Bank of Arizona, N.A. has been appointed transfer agent
and registrar for the Company's Common Stock.
32
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Morgan Keegan & Company, Inc. and William Blair
& Company, L.L.C. (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Shareholders the following respective numbers
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
UNDERWRITER AMOUNT
- ------------------------------------ ------------
Alex. Brown & Sons Incorporated ...............................
Morgan Keegan & Company, Inc. .................................
William Blair & Company, L.L.C. ...............................
------------
Total .......................................................... 1,600,000
============
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $. per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $. per share to certain
other dealers. After commencement of the offering, the public offering price and
other selling terms may be changed by the Representatives.
The Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 240,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the number
of shares of Common Stock to be purchased by it in the above table bears to
1,600,000, and the Selling Shareholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of the Common Stock offered hereby. If purchased, the Underwriters
will sell such additional shares on the same terms as those on which the
1,600,000 shares of Common Stock are being offered.
33
<PAGE>
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Company and the Selling Shareholders with respect to
certain civil liabilities, including liabilities under the Securities Act.
The Company, its officers, directors and the Selling Shareholders have agreed
not to offer, sell or otherwise dispose of any additional shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated, except that the Company may,
without such consent, issue shares as consideration for future acquisitions. The
sales of shares by any affiliate is also restricted by Rule 144. See "Shares
Eligible for Future Sale."
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Ryley, Carlock & Applewhite, Phoenix, Arizona. Certain legal
matters in connection with the offering are being passed upon for the
Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements included in this prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
34
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants ...............................................................F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited) ............................................................................F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995
and for the Three Months Ended March 31, 1995 (unaudited) and 1996 (unaudited) ........................F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and 1995
and for the Three Months Ended March 31, 1996 (unaudited) .............................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and for the
Three Months Ended March 31, 1995 (unaudited) and 1996 (unaudited) ....................................F-6
Notes to Consolidated Financial Statements .............................................................F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Knight Transportation, Inc.
We have audited the accompanying consolidated balance sheets of KNIGHT
TRANSPORTATION, INC. (an Arizona corporation) and subsidiary as of December 31,
1994 and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Knight Transportation, Inc. and
subsidiary as of December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Phoenix, Arizona,
February 7, 1996.
F-2
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ...............$ 2,146,797 $ 623,656 $ 137,790
Accounts receivable, net (Notes 1, 2 and 4) ..... 4,816,262 7,375,038 8,989,931
Inventories and supplies (Note 1) ................ 306,916 422,589 570,891
Prepaid expenses ................................. 165,563 937,304 1,843,382
Deferred tax asset (Notes 1 and 3) ............... 1,200,400 1,420,000 1,574,000
-------------- -------------- --------------
Total current assets ....................... 8,635,938 10,778,587 13,115,994
-------------- -------------- --------------
PROPERTY AND EQUIPMENT (Notes 1 and 4):
Land and improvements ............................ 2,104,394 2,104,394 2,104,394
Buildings and improvements ....................... 246,384 246,384 246,384
Furniture and fixtures ........................... 658,193 1,158,140 1,260,801
Shop and service equipment ....................... 267,838 367,900 474,210
Revenue equipment ................................ 28,146,990 38,557,223 46,414,015
Leasehold improvements ........................... 392,779 469,854 527,654
-------------- -------------- --------------
31,816,578 42,903,895 51,027,458
Less: Accumulated depreciation ................... (7,984,928) (10,926,067) (11,898,687)
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, net .......................... 23,831,650 31,977,828 39,128,771
OTHER ASSETS ......................................... 120,278 343,079 545,740
-------------- -------------- --------------
$32,587,866 $ 43,099,494 $ 52,790,505
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................$ 2,323,428 $ 3,202,258 $ 6,214,602
Accrued liabilities .............................. 1,801,242 1,773,293 3,252,046
Claims accrual (Note 6) .......................... 1,701,028 3,093,513 3,452,989
Current portion of long-term debt (Note 4) ...... 1,049,690 1,002,150 1,003,416
Line of credit (Note 4) .......................... -- 2,000,000 5,000,000
-------------- -------------- --------------
Total current liabilities ................... 6,875,388 11,071,214 18,923,053
LONG-TERM DEBT, less current portion (Note 4) ....... 2,117,480 980,787 753,760
DEFERRED INCOME TAXES (Notes 1 and 3) ................ 4,692,400 6,315,200 6,793,600
-------------- -------------- --------------
13,685,268 18,367,201 26,470,413
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Preferred stock, $.01 par value; authorized
50,000,000 shares, none issued and outstanding
Common stock, $.01 par value; authorized 100,000,000
shares, issued and outstanding 9,100,000,
9,102,000 and 9,102,000 shares at December 31, 1994,
1995 and March 31, 1996, respectively ........... 91,000 91,020 91,020
Additional paid-in capital ........................ 9,737,767 9,761,747 9,761,747
Retained earnings ................................. 9,073,831 14,879,526 16,467,325
-------------- -------------- --------------
Total shareholders' equity .................. 18,902,598 24,732,293 26,320,092
-------------- -------------- --------------
$32,587,866 $ 43,099,494 $ 52,790,505
============== ============== ==============
<FN>
The accompanying notes are an integral part of these
consolidated balance sheets.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
(Note 1) ....................$26,381,022 $37,542,888 $56,170,279 $11,907,641 $16,580,836
-------------- -------------- -------------- ------------- -------------
OPERATING EXPENSES:
Salaries, wages and benefits 9,470,132 12,676,306 16,359,957 3,725,292 4,729,893
Fuel ......................... 3,784,580 4,767,153 6,101,460 1,347,568 1,720,197
Operations and maintenance .. 1,539,106 2,315,991 3,727,240 872,944 832,574
Insurance and claims ......... 1,291,250 1,842,192 2,097,361 564,921 617,961
Operating taxes and licenses 1,111,038 1,834,348 2,154,739 479,731 591,968
Communications ............... 125,214 185,821 286,469 57,679 123,503
Depreciation and amortization 3,049,300 4,105,079 5,416,390 1,206,493 1,663,110
Purchased transportation
(Note 1) ................... -- 690,824 7,831,506 1,041,200 3,062,882
Miscellaneous operating
expenses ................... 884,181 1,013,008 1,593,711 249,720 403,500
-------------- -------------- -------------- ------------- -------------
21,254,801 29,430,722 45,568,833 9,545,548 13,745,588
-------------- -------------- -------------- ------------- -------------
Income from operations ....... 5,126,221 8,112,166 10,601,446 2,362,093 2,835,248
-------------- -------------- -------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income .............. 50,887 105,335 36,620 16,879 1,935
Interest expense ............. (895,484) (839,948) (232,371) (60,720) (99,384)
-------------- -------------- -------------- ------------- -------------
(844,597) (734,613) (195,751) (43,841) (97,449)
-------------- -------------- -------------- ------------- -------------
Income before income taxes .. 4,281,624 7,377,553 10,405,695 2,318,252 2,737,799
INCOME TAXES
(Notes 1 and 3) ............ (1,835,000) (3,283,000) (4,600,000) (1,032,000) (1,150,000)
-------------- -------------- -------------- ------------- -------------
Net income ...................$ 2,446,624 $ 4,094,553 $ 5,805,695 $ 1,286,252 $ 1,587,799
============== ============== ============== ============= =============
Net income per common share
and common share equivalent
(Note 1) ...................$ .30 $ .49 $ .64 $ .14 $ .17
============== ============== ============== ============= =============
Weighted average number
of common shares and common
share equivalents outstanding 8,200,000 8,375,356 9,141,176 9,141,775 9,151,222
============== ============== ============== ============= =============
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 ..8,200,000 $82,000 $ 118,000 $ 2,532,654 $ 2,732,654
Net income ................... -- -- -- 2,446,624 2,446,624
----------- ---------- ------------ ------------- -------------
BALANCE, December 31, 1993 ..8,200,000 82,000 118,000 4,979,278 5,179,278
Issuance of 900,000 shares of
common stock, net of offering
costs of $1,171,233 (Note 8) 900,000 9,000 9,619,767 -- 9,628,767
Net income ................... -- -- -- 4,094,553 4,094,553
----------- ---------- ------------ ------------- -------------
BALANCE, December 31, 1994 ..9,100,000 91,000 9,737,767 9,073,831 18,902,598
Exercise of stock options ... 2,000 20 23,980 -- 24,000
Net income ................... -- -- -- 5,805,695 5,805,695
----------- ---------- ------------ ------------- -------------
BALANCE, December 31, 1995 ..9,102,000 91,020 9,761,747 14,879,526 24,732,293
Net income (unaudited) ....... -- -- -- 1,587,799 1,587,799
----------- ---------- ------------ ------------- -------------
BALANCE, March 31, 1996
(unaudited) ................9,102,000 $91,020 $9,761,747 $16,467,325 $26,320,092
=========== ========== ============ ============= =============
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .......................$ 2,446,624 $ 4,094,553 $ 5,805,695 $ 1,286,252 $ 1,587,799
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization ... 3,049,300 4,105,079 5,416,390 1,206,493 1,662,601
Allowance for doubtful accounts . 26,394 83,179 162,045 24,000 25,525
Deferred income taxes ............ 929,400 1,316,447 1,403,200 430,800 324,400
Changes in assets and liabilities:
Increase in receivables .......... (1,153,532) (1,642,985) (2,720,821) (401,443) (1,640,418)
Increase in inventories and
supplies ....................... (33,715) (75,410) (115,673) (33,556) (148,302)
(Increase) decrease in prepaid
expenses ....................... 2,371 172,223 (771,741) (464,419) 195,122
(Increase) decrease in other
assets ......................... (89,573) 25,258 (370,499) 19,341 (48,046)
Increase (decrease) in accounts
payable ........................ 79,053 (126,068) 479,426 (1,585,314) 225,815
Increase in accrued liabilities
and claims accrual ............. 263,202 2,150,661 1,364,536 702,799 1,838,229
------------- ------------- -------------- ------------- -------------
Net cash provided by operating
activities ..................... 5,519,524 10,102,937 10,652,558 1,184,953 4,022,725
------------- ------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment ...................... (712,092) (3,087,876) (11,360,029) (1,102,055) (4,253,904)
Purchase of temporary investment
-- real estate ................. -- (588,296) -- -- --
Increase in related party
receivable ..................... -- (598,929) -- -- --
Proceeds from sale of temporary
investment -- real estate ...... 170,537 588,296 -- -- --
------------- ------------- -------------- ------------- -------------
Net cash used in investing
activities ..................... (541,555) (3,686,805) (11,360,029) (1,102,055) (4,253,904)
------------- ------------- -------------- ------------- -------------
</TABLE>
F-6
<PAGE>
<TABLE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
------------- -------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease) in line of
credit and notes payable ....$ (434,654) $ -- $ 2,000,000 $ -- $ 1,887,037
Repayment of debt .............. (4,812,487) (13,717,117) (1,311,348) (332,640) (213,998)
Increase (decrease) in notes
payable -- officers .......... 77,489 (365,625) -- -- --
Decrease in accounts
payable -- equipment ......... -- -- (1,528,322) -- (1,927,726)
Net proceeds from sale of
common stock ................. -- 9,628,767 -- -- --
Proceeds from exercise of stock
options ...................... -- -- 24,000 -- --
------------- -------------- ------------- ------------ -------------
Net cash used in financing
activities ................... (5,169,652) (4,453,975) (815,670) (332,640) (254,687)
------------- -------------- ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ......... (191,683) 1,962,157 (1,523,141) (249,742) (485,866)
CASH AND CASH EQUIVALENTS,
beginning of year ............ 376,323 184,640 2,146,797 2,146,797 623,656
------------- -------------- ------------- ------------ -------------
CASH AND CASH EQUIVALENTS,
end of year ..................$ 184,640 $ 2,146,797 $ 623,656 $1,897,055 $ 137,790
============= ============== ============= ============ =============
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing
transactions:
Insurance premium financed ....$ -- $ -- $ -- $ -- $ 1,101,200
Equipment acquired by direct
financing .................... 8,693,184 3,616,298 127,115 -- --
Equipment acquired by accounts
payable ...................... 50,124 1,528,322 1,927,726 1,885,190 4,714,255
Equipment refinanced ........... 930,934 -- -- -- --
Equipment trades receivable ... -- -- -- -- 229,900
Debt reduction from trade-in of
revenue equipment ............ 1,065,941 -- -- -- --
Equipment sale receivable ..... 114,756 -- -- -- --
Land acquired by retirement of
shareholder advance .......... -- 1,110,504 -- -- --
Cash Flow Information:
Income taxes paid ..............$ 925,060 $ 2,139,906 $ 3,368,373 $ -- $ 4,400
============= ============== ============= ============ =============
Interest paid ..................$ 893,540 $ 873,362 $ 228,681 $ 61,401 $ 90,774
============= ============== ============= ============ =============
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-7
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Knight Transportation, Inc. and Subsidiary (the Company) is a short to
medium-haul, truckload carrier of general commodities operating primarily in
Arizona, California and other western states. The operations are centered in
Phoenix, Arizona, where the Company has its corporate offices, truck terminal,
and dispatching and maintenance services. The Company has recently established
operations near Houston, Texas to provide dedicated services to one of its
larger customers and to commence regional services in Texas and Louisiana. The
Company has also initiated operations in Indianapolis, Indiana, from which it
will provide regional service in the Midwest and on the East Coast. The Company
operates predominantly in one industry, road transportation, subject to
regulation by the Department of Transportation and various state regulatory
authorities.
The Company initiated and began to develop an independent contractor program
during 1994. Because independent contractors provide their own tractors, the
Company views independent contractors as an alternative method of obtaining
additional revenue equipment. The Company intends to continue to increase its
use of independent contractors. The Company had 30, 115 and 131 tractors
operated by independent contractors at December 31, 1994, 1995 and March 31,
1996, respectively.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the parent company Knight Transportation, Inc., and its
wholly owned subsidiary. All material intercompany items and transactions have
been eliminated in consolidation. During the first quarter of 1996, the Company
formed three additional wholly-owned subsidiaries, KTTE Holdings, Inc., QKTE
Holdings, Inc., and Knight Dedicated Services Limited Partnership, which is
comprised of KTTE Holdings, Inc. as general partner and QKTE Holdings, Inc. as
the sole limited partner. The unaudited consolidated financial statements as of
March 31, 1996 and for the quarter then ended include these subsidiaries,
although they did not have significant activity.
PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
INVENTORIES AND SUPPLIES -- Inventories and supplies consist of tires and
spare parts which are stated at the lower of cost using the first-in, first-out
(FIFO) method or net realizable value.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation on property and equipment is calculated by the straight-line method
over the following estimated useful lives:
YEARS
-------
Buildings and improvements ............................... 5-20
Furniture and fixtures ................................... 5
Shop and service equipment ............................... 5
Revenue equipment ........................................ 5-7
Leasehold improvements ................................... 10
Revenue equipment is depreciated to a 10% salvage value for all trailers, and
a 15% salvage value for all tractors.
TIRES -- Tires on revenue equipment purchased are capitalized as a part of
the equipment cost and depreciated over the life of the vehicle. Replacement
tires and recapping costs are expensed when placed in service.
INVESTMENTS IN REAL ESTATE -- During 1994 the Company purchased undeveloped
real property in Deer Valley, Utah from an unrelated third party. The Company
then sold the property to its original shareholders at the original cost plus
expenses.
F-8
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
REVENUE RECOGNITION -- The Company's typical customer delivery is completed
one day after pickup. Accordingly, the Company recognizes operating revenues
when the freight is picked up for delivery and accrues the estimated direct
costs to complete the delivery. This method of revenue recognition is not
materially different from recognizing revenue based on completion of delivery.
INCOME TAXES -- The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject the Company to credit risk consist principally of trade receivables. The
Company earns revenues primarily from companies in California and Arizona.
NET INCOME PER COMMON SHARE -- Net income per common share is computed by
dividing net income by the weighted average number of common stock and common
stock equivalents assumed outstanding during the year. Fully diluted net income
per share is considered equal to primary net income per share in all periods
presented.
RECENTLY ISSUED ACCOUNTING STANDARDS -- Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which is required to be adopted by the
Company in fiscal 1996, is not expected to have a material effect on the
Company's financial position or its results of operations upon adoption.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), is also required to be adopted by the Company in
fiscal 1996. Pursuant to the provisions of SFAS No. 123, the Company will
continue to account for transactions with its employees pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Therefore, this statement is not expected to have a material effect on the
Company's financial position or its results of operations when adopted.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- During October 1994, the Financial
Accounting Standards Board issued SFAS No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. This statement
requires the disclosure of estimated fair values for all financial instruments
for which it is practicable to estimate fair value.
For instruments including cash, accounts receivable and payable, accruals and
line of credit, it was assumed that the carrying amount approximated fair value
because of their short maturities.
The fair value of long-term debt, including current portion, is estimated
based on current rates offered to the Company for debt of the same maturities
and approximates the carrying amounts of long-term debt.
INTERIM FINANCIAL INFORMATION -- In management's opinion, the consolidated
financial statements for the three-month periods ended March 31, 1995 and 1996
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the Company's financial position, results of operations and
cash flows as of and for the periods then ended. Operating results for the three
month period ending March 31, 1996 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1996.
F-9
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2) ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
------------ ------------- ------------
(UNAUDITED)
Trade customers ........................$4,650,377 $7,206,311 $8,653,547
Other .................................. 298,788 463,675 656,857
------------ ------------- ------------
4,949,165 7,669,986 9,310,404
Less -- Allowance for doubtful accounts (132,903) (294,948) (320,473)
------------ ------------- ------------
Accounts receivable, net ...............$4,816,262 $7,375,038 $8,989,931
============ ============= ============
(3) INCOME TAXES:
As discussed in Note 1, the Company uses SFAS No. 109 in accounting for
income taxes.
<TABLE>
Income tax expense consists of the following:
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------- ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income taxes:
Federal ..................$ 722,200 $ 1,464,800 $2,500,500 $ 462,300 $ 667,600
State .................... 183,400 501,753 696,300 138,900 158,000
------------ ------------- ------------- ------------ -----------
905,600 1,966,553 3,196,800 601,200 825,600
------------ ------------- ------------- ------------ -----------
Deferred income taxes:
Federal .................. 675,800 1,142,700 1,173,300 397,500 277,100
State .................... 253,600 173,747 229,900 33,300 47,300
------------ ------------- ------------- ------------ -----------
929,400 1,316,447 1,403,200 430,800 324,400
------------ ------------- ------------- ------------ -----------
Total income tax expense $1,835,000 $ 3,283,000 $ 4,600,000 $1,032,000 $1,150,000
============ ============= ============= ============ ===========
</TABLE>
<TABLE>
The effective income tax rate is different than the amount which would be
computed by applying the United States corporate income tax rate to the income
before income taxes. The differences are summarized as follows:
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at the statutory rate (34%) $ 1,455,800 $ 2,508,400 $3,537,900 $ 820,400 $1,003,700
State income taxes, net of
federal benefit ................ 288,400 446,000 611,300 113,700 135,500
Other ........................... 90,800 328,600 450,800 97,900 10,800
------------- ------------- ------------ ------------ ------------
Actual tax expense ..............$ 1,835,000 $ 3,283,000 $4,600,000 $1,032,000 $1,150,000
============= ============= ============ ============ ============
</TABLE>
F-10
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
The net effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Short-term deferred tax assets:
Insurance accruals .........................$ 680,400 $1,237,400 $1,381,200
AMT credit ................................. 365,900 -- --
Other ...................................... 154,100 182,600 192,800
------------ ------------ ------------
Total short-term deferred tax assets ......$1,200,400 $1,420,000 $1,574,000
============ ============ ============
Long-term deferred tax liabilities:
Property and equipment depreciation .......$4,584,300 $6,072,500 $6,491,600
Prepaid expenses deducted for tax purposes 108,100 242,700 302,000
------------ ------------ ------------
Total long-term deferred tax liabilities ..$4,692,400 $6,315,200 $6,793,600
============ ============ ============
</TABLE>
(4) LONG-TERM DEBT:
<TABLE>
Long-term debt consists of the following:
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to a commercial lending institution with
varying payments to 1998; collateralized by tractors,
fixed interest rates from 6.4% to 7.0% ...................$ 2,406,074 $ 1,687,177 $ 1,499,806
Note payable to a financial institution with varying
payments to 1997; collateralized by trailers, fixed
interest rate of 7% ...................................... 275,160 168,645 142,018
Notes payable to a commercial lending institution with
varying payments to 1997; collateralized by trailers,
variable interest rate of the London Interbank Offered
Rate (LIBOR) plus 2.95%.
The entire balance was paid off in 1995 .................. 485,936 -- --
Asset under capital lease, monthly payment of $2,959
for 5 years commencing December 1995 ..................... -- 127,115 115,352
------------- ------------- -------------
3,167,170 1,982,937 1,757,176
Less -- Current portion ................................... (1,049,690) (1,002,150) (1,003,416)
------------- ------------- -------------
$ 2,117,480 $ 980,787 $ 753,760
============= ============= =============
</TABLE>
Maturities of long-term debt as of December 31, 1995, are as follows:
YEARS ENDING
DECEMBER 31 AMOUNT
-------------- -------------
1996 $ 1,002,150
1997 883,708
1998 97,079
-------------
$ 1,982,937
=============
F-11
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 1995, the Company had a $10,000,000 revolving line of
credit with principal due at maturity, July 1997, and interest payable monthly
using one of three variable interest rate options selected by the Company at the
time of borrowing (prime, LIBOR plus .9%, or Certificate of Deposit plus 2.15%).
Effective March 31, 1996, the Company's maximum borrowing capacity under the
line of credit increased to $15 million and its LIBOR interest rate option was
adjusted to LIBOR plus .75%. Borrowings under the line of credit are limited to
80% of eligible accounts receivable, as defined, and 50% of net fixed assets, as
defined and amounted to $2,000,000 at December 31, 1995, and $5,000,000 at March
31, 1996.
Under the terms of the line of credit, the Company is required to maintain
certain financial ratios. These ratios are the total liabilities to net worth
ratio, current ratio, and certain debt service ratios. The Company is also
required to maintain certain other financial conditions relating to corporate
structure, ownership and management. As of December 31, 1995, the Company was in
compliance with all covenants. As of March 31, 1996, the Company was in
technical default of certain financial covenants, for which it has received a
letter of waiver from the lender.
The weighted average interest rate on these notes payable was 7.08%, 7.50%
and 6.66% at December 31, 1994, 1995 and March 31, 1996, respectively.
(5) COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leased its facilities from Total Warehousing, Inc., a related
party, on a 32-month cancellable lease through October 1994. Beginning November
1994 the Company entered into a five year lease with a shareholder (see Note 7).
In addition, the Company leased three tractors under an operating lease at
$3,885 per month during 1994. These tractors were purchased and traded in June
1994.
PURCHASE COMMITMENTS
As of December 31, 1995, and March 31, 1996, the Company had purchase
commitments for additional tractors and trailers for an estimated purchase price
of $13,000,000, and $12,200,000, respectively.
Although Knight expects to take delivery of this revenue equipment, delays in
the availability of equipment could occur due to factors beyond the Company's
control. Any delay or interruption in the availability of equipment in the
future could have a material adverse effect on the Company.
The Company is in the process of acquiring both a terminal facility in
Indianapolis, Indiana for approximately $1,000,000 and approximately 15 acres of
land adjacent to the Company's Phoenix facility for approximately $1,000,000.
DISABILITY PLAN
The Company has a disability plan for certain of its key employees. The plan
provides disability benefits of $75,000 annually for sixty months if a key
employee terminates by reason of disability. The plan is subject to termination
at any time by the Board of Directors.
OTHER
The Company's tractor and trailer fleets are registered in Oklahoma and Utah
and operate primarily in the western United States, including California. The
Company is presently being audited by the State of California's Department of
Motor Vehicles with respect to 1994, 1995 and 1996 mileage years. Although no
assessment has yet been made, California is asserting that all the Company's
trailers are subject to apportioned registration, and the Company owes
additional trailer registration fees in excess of the amounts previously paid.
The Company believes that the outcome of the California audit will not have a
materially adverse effect on the Company's financial position or results of
operations. The Company intends to vigorously contest the position taken by
California. To the extent the Company is not successful in its efforts, it may
be required to pay additional registration fees for the mileage years involved
and possible penalties as well as increased registration fees (relative to
payments previously paid) for future periods.
F-12
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company is involved in certain administrative legal proceedings arising
in the normal course of business. In the opinion of management, the Company's
potential exposure under the pending proceedings is adequately provided for in
the accompanying consolidated financial statements.
(6) CLAIMS ACCRUAL:
Under an agreement with its insurer, the Company acts as a self-insurer for
bodily injury and property damage claims up to $100,000 per single occurrence.
Beginning in 1995, the Company is self-insured for workers' compensation for
claims up to $250,000 per single occurrence in states in which the Company has
elected to do so. The Company is also self-insured for collision, comprehensive
and cargo liability up to $25,000 per occurrence. Liability in excess of these
amounts is assumed by the insurer, subject to certain coverage limitations.
Exposure greater than individual coverage limitations is insured under the
Company's umbrella liability policy.
The claims accrual represents accruals for the estimated uninsured portion of
pending claims including adverse development of known claims and incurred but
not reported claims. These estimates are based on historical information along
with certain assumptions about future events. Changes in assumptions as well as
changes in actual experience could cause these estimates to change in the near
term. The agreements with the underwriters are collateralized by letters of
credit totaling $650,000. These letters of credit reduces the available
borrowings under the Company's line of credit (see Note 4).
(7) RELATED PARTY TRANSACTIONS:
The Company leased facilities from Total Warehousing, Inc. (TWI) under a
32-month lease that was terminated in 1994. Terms of the lease called for rent
of $7,500 per month until June 1992, and $5,000 per month from July 1992 until
the end of the lease. TWI is owned by a shareholder of the Company. In March
1994, the Company leased approximately eight acres from a shareholder and
officer, "the Shareholder", under a five year lease, with an option to extend
for two additional five-year terms. The lease terms include base rent of $4,828
per month for the initial three years of the lease, and increases of 3% on the
third anniversary of the commencement date, the first day of each option term,
and the third anniversary of the commencement date of each option term. In
addition to base rent, the lease requires the Company to pay its share of all
expenses, utilities, taxes and other charges. The rent expense paid to TWI under
the former lease was $70,100 for the year ended December 31, 1993, and $10,000
for the year ended December 31, 1994. Rent expense paid to the Shareholder was
approximately $54,800 and $14,900 for the year ended December 31, 1995 and the
three months ended March 31, 1996, respectively.
In September 1994, the Company purchased for $1,285,000 approximately 20
acres of property from the Shareholder.
The Company provided maintenance and shipping for TWI and was paid $238,000,
$154,000, $62,000, $45,800 and none for the years ended December 31, 1993, 1994,
1995 and the three months ended March 31, 1995 and 1996, respectively. TWI
provided general warehousing services to the Company and was paid $53,000,
$18,000, $60,000, $3,300 and $10,700 for the years ended December 31, 1993,
1994, 1995 and the three months ended March 31, 1995 and 1996, respectively.
(8) SHAREHOLDERS' EQUITY:
The Company's authorized capital stock consists of 100,000,000 shares of $.01
par value common stock. In addition, the Company has authorized 50,000,000
shares of $.01 par value preferred stock, none of which was issued or
outstanding at December 31, 1994, 1995 and March 31, 1996.
In October 1994, the Company issued 900,000 shares of common stock at $12.00
per share in its initial public offering. The offering consisted of 1,800,000
shares comprised of 900,000 newly-issued Company shares and 900,000 shares from
shareholders.
F-13
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(9) EMPLOYEE BENEFIT PLANS:
1994 STOCK OPTION PLAN
The Company established the 1994 Stock Option Plan (the 1994 Plan) with
650,000 shares of common stock reserved for issuance thereunder. The Plan will
terminate on August 31, 2004. The Compensation Committee of the Board of
Directors administers the stock incentive plan, and has the discretion to
determine the employees, officers and independent directors who will 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 will be designed to comply with the applicable
provisions of the Internal Revenue Code (the Code) and will be 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 will 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 will become exercisable in
installments after the grant date. Non-qualified stock options may be granted
for any reasonable term. The 1994 Plan provides that each independent director
shall receive, on the date of his appointment to the Board of Directors,
non-qualified options to purchase not less than 2,500 nor more than 5,000 shares
of common stock, at an exercise price equal to the fair market value of the
common stock on the date of the grant.
No options were exercisable at December 31, 1995.
The following summarizes the activity for the 1994 Plan:
NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ---------------
Options outstanding at December 31, 1994 251,250 $12.00-$12.54
Granted .................................. 25,000 12.00- 14.50
Canceled .................................(12,000) 12.00
Exercised ................................ (2,000) 12.00
----------- ---------------
Options outstanding at end of year ......262,250 $12.00-$14.50
=========== ===============
Options available for grant ..............385,750
===========
401(k) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the Plan) for all employees who
are 19 years of age or older and have completed one year of service. The Plan as
amended in 1995 provides for an annual matching contribution not to exceed 50%
of the employee's salary contribution up to $750. Contributions made by the
Company were equal to 35%, 40%, 50% and 50% for the plan years ended December
31, 1993, 1994, 1995, and 1996, respectively, of the amount of the employee's
salary deduction not to exceed $350, $500, $625 and $625 annually per employee
for the plan years ended December 31, 1993, 1994, 1995 and 1996, respectively.
The Plan also provides for a discretionary matching contribution not limited to
the amount permitted under the Internal Revenue Code as deductible expenses. For
the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1995 and 1996, 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 $23,500,
$40,300, $60,000, $20,900 and $24,800 for the years ended December 31, 1993,
1994, 1995 and the three months ended March 31, 1995 and 1996, respectively.
F-14
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(10) MAJOR CUSTOMERS:
The Company's three largest customers for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively,
represent 24%, 19%, 11%, 15% and 10% of operating revenues. The single largest
customer's revenues represent 11%, 9%, 4%, 5% and 5% of operating revenues for
the years ended December 31, 1993, 1994 and 1995, and the three months ended
March 31, 1995 and 1996, respectively.
F-15
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE
THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN.
----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 5
Use of Proceeds ........................................................... 8
Capitalization ............................................................ 8
Dividend Policy ........................................................... 9
Price Range of Common Stock ............................................... 9
Dilution .................................................................. 9
Selected Consolidated Financial and ....................................... 10
Operating Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................ 11
Industry Overview ......................................................... 16
Business .................................................................. 17
Management ................................................................ 24
Executive Compensation and Other .......................................... 26
Information
Certain Relationships and Transactions .................................... 28
Shares Eligible for Future Sale ........................................... 29
Principal and Selling Shareholders ........................................ 30
Description of Capital Stock .............................................. 31
Underwriting .............................................................. 33
Legal Matters ............................................................. 34
Experts ................................................................... 34
Available Information ..................................................... 34
Index to Consolidated Financial
Statements ............................................................... F-1
----------
================================================================================
1,600,000 SHARES
#############################################################################
IMAGE OMITTED
#############################################################################
COMMON STOCK
----------
P R O S P E C T U S
----------
ALEX. BROWN & SONS
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
WILLIAM BLAIR & COMPANY
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an itemized statement of all expenses to be incurred by
the Company in connection with the issuance and distribution of the securities
being registered by this registration statement, other than the underwriting
discount. All amounts are estimated except the Securities and Exchange
Commission registration fee, the NASD filing fee and the NASDAQ filing fee.
Securities and Exchange Commission registration fee $13,007
NASD filing fee ..................................... 4,272
NASDAQ filing fee ................................... 16,000
Blue sky fees and expenses .......................... 10,000*
Accounting fees and expenses ........................ 20,000*
Legal fees and expenses ............................. 50,000*
Printing and engraving .............................. 40,000*
Registrar and transfer agent fees ................... 3,000*
Miscellaneous ....................................... --
---------
Total .............................................. $156,279
=========
- ----------
* Estimated.
The Company will bear the expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 13 of the Company's Restated Articles of Incorporation provides as
follows:
The Corporation shall indemnify and hold harmless its incorporators, and each
of its existing and former directors, to the fullest extent not prohibited by
law, as it now exists or may hereafter be amended, for any and all acts or
omissions done or omitted to be done while employed by, or acting on behalf of,
the Corporation or its subsidiaries, including indemnity for service in the
capacity as an officer of the Corporation. The Corporation, subject to a
director executing and delivering any undertaking required by law to reimburse
the Corporation if indemnity should not be allowed, shall advance costs and
expenses to defend any claim subject to indemnification. Without limiting the
foregoing, a director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except as otherwise provided by law; provided that no provision of these
Articles of Incorporation shall eliminate or limit the liability of a director
for (i) any breach of a director's duty of loyalty to the Corporation or its
shareholders, (ii) acts or omissions which are not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) authorizing
the unlawful payment of a dividend or other distribution on the Corporation's
common capital stock or the unlawful purchase of its capital stock, (iv) any
transaction from which a director received an improper personal benefit, or (v)
any violation of Section 10-041 of the Arizona Revised Statutes, or any
successor provisions thereto. The indemnification rights provided herein shall
not be exclusive of or preclude any other rights of indemnification to which a
director, officer, employee or agent may be entitled, whether pursuant to law,
bylaws or agreement.
Section 7 of the Company's Amended and Restated Bylaws provides as follows:
Indemnification. The corporation shall indemnify and save harmless all of its
existing and former directors from and against all expenses incurred by them,
including, but not limited to, legal fees, judgments, penalties, and amounts
paid in settlement or compromise, to the fullest extent not prohibited by law,
as it now exists or may hereafter be amended, in connection with any proceeding,
actual or threatened, to which they may be made a party by reason of their
service to or at the request of the corporation, including service in their
capacity as officers, unless it is established that: (i) the act or omission of
the indemnified party was committed in bad faith; (ii) the indemnified party did
not believe such act or omission to be in, or not opposed to, the best interests
of the corporation; (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful; or
II-1
<PAGE>
(iv) the indemnified party is adjudged to be liable to the corporation unless a
court of competent jurisdiction determines that such person is entitled to
indemnity. The corporation shall advance to any person seeking indemnification
pursuant to Section 7.1 expenses, including attorneys' fees, actually and
reasonably incurred in defending any civil or criminal action, suit or
proceeding in advance of any final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director
seeking indemnification to repay such amount if it is ultimately determined that
he is not entitled to be indemnified by the corporation. In the event the
corporation is requested to indemnify an existing or former director in
connection with any threatened, pending or completed action or suit by or in the
right of the corporation to procure judgment in its favor by reason of the fact
that such person was a director, officer, or employee or agent of the
corporation, or is or was serving at the request of the corporation in such
capacity, the corporation shall indemnify such person against expenses,
including attorneys' fees, but excluding judgments and fines, and for amounts
paid in settlement, actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit, if such person acted, or
failed to act, in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that a court in which such action or suit was
brought shall determine, upon application, that despite the adjudication of
liability, but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem to be proper.
Determination by Board. Whenever any existing or former director shall report
to the President that he has incurred or may incur expenses described in Section
7.1, the Board of Directors (other than any interested director) shall, at its
next regular meeting or at a special meeting held within a reasonable time
thereafter, determine whether, in regard to the matter involved, the person in
question is entitled to indemnification pursuant to Section 7.l. If the Board
determines that the standards of Section 7.1 are met, indemnification shall be
made. In the event the Board of Directors refuses to indemnify a person who is
determined by a court of competent jurisdiction to be entitled to
indemnification under Section 7.1 or applicable law, the corporation shall, in
addition to extending such indemnification, reimburse the person entitled to
indemnification for all attorneys' fees and costs of court actually incurred.
The corporation shall have the right to refuse indemnification in any instance
in which the person to whom indemnification would otherwise have been extended
unreasonably refuses to cooperate in the investigation or defense of such matter
or to permit the corporation, at its own expense, to retain counsel of its own
choosing to defend him.
The Company has entered into indemnification agreements with each of its
directors that requires, among other things, that the Company indemnify each
director to the fullest extent not prohibited by Arizona law, including
indemnity for a director's service in his capacity as an officer, and advance
all related fees and expenses to the directors and officers, subject to an
agreement to reimburse the Company if it is subsequently determined that
indemnification is not permitted.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
A. EXHIBITS
<CAPTION>
NUMBER DESCRIPTION
- ----------- ------------
<S> <C>
1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 No. 33-83534.)
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company's
Report on Form 10-K for the Fiscal Year Ended December 31, 1995.)
3.3 Specimen of Certificate representing shares of Common Stock (Incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement on Form S-1 No. 33-83534).
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 Registration Statement.)
4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to
Exhibit 3.2 to this Registration Statement.)
5* Opinion of Ryley, Carlock & Applewhite as to the legality of the securities being registered.
10.1 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 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.)
10.3 First Interstate Bank Letters of Credit and Business Loan Agreement. (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.3.1 First Interstate Bank Credit Facility Commitment Letter. (Incorporated by reference to Exhibit 10.5.1 to
Amendment No. 2 to the Company's Registration Statement on Form S-1 No. 33-83534.)
10.3.2 Modification Agreement between First Interstate Bank of Arizona, N.A. and the Company dated as of March
30, 1995. (Incorporated by reference to Exhibit 10.4.2 to the Company's Report on Form 10-K for the
Fiscal Year Ended December 31, 1995.)
10.3.3 Second Modification Agreement between First Interstate Bank of Arizona, N.A. and the Company dated as of
December 29, 1995. (Incorporated by reference to Exhibit 10.4.3 to the Company's Report on Form 10-K for
the Fiscal Year Ended December 31, 1995.)
10.3.4 Letter dated March 11, 1996 amending the March 30, 1995 Modification
Agreement between First Interstate Bank of Arizona, N.A. and the
Company. (Incorporated by reference to Exhibit 10.4.4 to the
Company's Report on Form 10-K for the Fiscal Year Ended December 31,
1995.)
10.3.5* Form of Loan Agreement between the Company, Quad-K Leasing and First Interstate Bank, N.A. entered into
as of March 31, 1996.
10.3.6* Waiver of Certain Financial Covenant Noncompliance by First Interstate Bank, N.A. (Wells Fargo Bank)
10.4 Restated Knight Transportation, Inc. 1994 Stock Option Plan, dated as of February 21, 1996.
(Incorporated by reference to Exhibit 10.5 to the Company's Report
on Form 10-K for the Fiscal Year Ended December 31, 1995.)
10.5 Indemnification Agreements Between the Company and Randy Knight, Kevin P. Knight, Gary J. Knight and
other directors. (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-1 No. 33-83534.)
10.6 Indemnification Agreement between the Company and Keith T. Knight. (Incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 No. 33-83534.)
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 Fiscal
Year Ended December 31, 1995.)
II-3
<PAGE>
NUMBER DESCRIPTION
- ----------- -----------
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 Fiscal Year 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 Fiscal Year Ended December 31, 1995.)
10.9 Purchase and Sale Agreement dated as of February 13, 1996, between
the Company and RR-1 Limited Partnership. (Incorporated by reference
to Exhibit 10.9 to the Company's Report on Form 10-K for the Fiscal
Year Ended December 31, 1995.)
10.9.1* Lease dated as of February 1, 1991, between Quick-Fuel Inc. and RR-1 Limited Partnership.
10.9.2* Assignment and Assumption of Lease dated as of April 15, 1996, between RR-1 Limited Partnership, the
Company and Quick-Fuel, Inc.
21 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.1 to the Company's Report on
Form 10-K for the Fiscal Year Ended December 31, 1995.)
23.1* Consent of Ryley, Carlock & Applewhite, filed as part of the Opinion filed as Exhibit 5.
23.2* Consent of Arthur Andersen LLP, independent public accountants.
24* Power of Attorney (included on signature page)
<FN>
* Filed herewith.
</FN>
</TABLE>
B. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted as the required information is inapplicable or the
information is presented in the Consolidated Financial Statements or related
notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
POWER OF ATTORNEY
The Company and each person whose signature appears below hereby appoints
Randy Knight, Kevin P. Knight, and Gary J. Knight, and each of them, as
attorneys-in-fact with full power of substitution and resubstitution, to execute
in their respective names and on behalf of the Company and each such person,
individually and in each capacity stated below, any and all amendments
(including post-effective amendments) to this Registration Statement as the
attorney- in-fact and to file any such amendment to the Registration Statement
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and their substitutes, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and their substitutes
may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on June 14, 1996.
KNIGHT TRANSPORTATION, INC.
By: /s/ Kevin P. Knight
-----------------------------------------------
Kevin P. Knight
Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------ ------------------------------------------ ----------------
<S> <C> <C>
/s/ Randy Knight Chairman of the Board and Director June 14, 1996
------------------------
Randy Knight
/s/ Kevin P. Knight Chief Executive Officer and Director June 14, 1996
------------------------ (Principal Executive Officer)
Kevin P. Knight
/s/ Gary J. Knight President and Director June 14, 1996
------------------------
Gary J. Knight
/s/ Keith T. Knight Executive Vice President and Director June 14, 1996
------------------------
Keith T. Knight
/s/ Clark A. Jenkins Secretary, Chief Financial Officer and June 14, 1996
------------------------ Director (Principal Financial and
Clark A. Jenkins Accounting Officer)
/s/ Keith T. Turley Director June 14, 1996
------------------------
Keith T. Turley
/s/ Donald A. Bliss Director June 14, 1996
------------------------
Donald A. Bliss
</TABLE>
II-5
1,600,000 SHARES
KNIGHT TRANSPORTATION, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1996
ALEX. BROWN & SONS INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
As Representatives of the Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Knight Transportation, Inc. an Arizona corporation (the "Company"), and
certain shareholders of the Company identified on Schedule II hereto, either in
their individual capacity or through related trusts or limited liability
companies as identified on Schedule II hereto (the "Selling Shareholders")
propose to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 1,600,000 shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"), of which 800,000 shares will be sold
by the Company and 800,000 shares will be sold by the Selling Shareholders. The
respective amounts of the Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto, and the
respective amounts to be sold by the Selling Shareholders are set forth opposite
their names in Schedule II hereto. The Company and the Selling Shareholders are
sometimes referred to herein collectively as the "Sellers." The Selling
Shareholders also propose to sell at the Underwriters' option an aggregate of up
to additional shares of the Company's Common Stock (the
"Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and the
Option Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the Selling
Shareholders.
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. ) with respect to
the Shares has been carefully prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended, (the "Act") and
the Rules and Regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder and has been filed
with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses and the final prospectuses
(meeting the requirements of the Rules and Regulations) contained therein
and the exhibits, financial statements and schedules, as finally amended
and revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Act, shall be referred to herein
as the "Registration Statement," which shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained in
1
<PAGE>
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed by the Company with the Commission pursuant to its Rule 424(b)
or (b) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed pursuant to
Rule 424(a) under the Act that is delivered by the Company to the
Underwriters for delivery to purchasers of the Shares, together with the
term sheet or abbreviated term sheet filed with the Commission pursuant to
Rule 424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Arizona, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit 21 to Item 16(a) of the
Registration Statement (collectively the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and the Subsidiaries
are duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification; the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and are
owned by the Company or another Subsidiary free and clear of all liens,
encumbrances and equities and claims; and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in the Subsidiaries are outstanding; and, other than the
Subsidiaries, the Company does not directly or indirectly beneficially own
any equity or other interest in any corporation, partnership, limited
liability company or other entity.
(iii) The outstanding shares of Common Stock of the Company, including
all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be
validly issued, fully-paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and
will not contain, any untrue statement of a material fact and do not omit,
and will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus
and any amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information contained
in or omitted from the Registration Statement or the Prospectus, or any
such amendment or supplement, in reliance pon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
2
<PAGE>
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such dates has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company.
(vii) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which
if determined adversely to the Company or any of the Subsidiaries might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and of the Subsidiaries taken as a
whole or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases conforming in all material respects to the description thereof set
forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or either of them to the extent that such taxes have
become due and are not being contested in good faith. All tax liabilities
have been adequately provided for in the financial statements of the
Company.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Company and its Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in the Registration Statement, as it
may be amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(xii) Neither the Company nor the Subsidiaries or with the giving of
notice or lapse of time or both, will be, in violation of or in default
under its Charter or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it, or any of its properties, is bound and which default is of
material significance in respect of the condition, financial or otherwise
of the Company and its Subsidiaries taken as a whole or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) as prospects of the Company and the Subsidiaries taken as a
whole. The execution and delivery of this Agreement and the consummation of
the transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or any
Subsidiaries is a party, or of the Charter or By-Laws of the Company or any
order, rule or regulation applicable to the Company or any Subsidiaries of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and
3
<PAGE>
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may be
required by the Commission, the National Association of Securities Dealers,
Inc. (the "NASD") or such additional steps as may be necessary to qualify
the Shares for public offering by the Underwriters under State securities
or Blue Sky laws) has been obtained or made and is in full force and
effect.
(xiv) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor
any of the Subsidiaries has infringed any patents, patent rights, trade
names, trademarks or copyrights, which infringement is material to the
business of the Company and the Subsidiaries taken as a whole.
(xv) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has been constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(xvi) Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940 and the Rules and Regulations of the Commission
thereunder.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xviii) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(xix) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
intepretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(b) Each of the Selling Shareholders severally represents and warrants as
follows:
(i) Such Selling Shareholder has and at the Closing Date and the
Option Closing Date, as the case may be (as such dates are hereinafter
defined) will have good and valid title to the Firm Shares and the Option
Shares to be sold by such Selling Shareholder, free and clear of any liens,
encumbrances, equities and claims, and full right, power and authority to
effect the sale and delivery of such Firm Shares and Option Shares; and
upon the delivery of, against payment for, such Firm Shares and Option
Shares pursuant to this Agreement, the Underwriters will acquire good and
valid title thereto, free and clear of any liens, encumbrances, equities
and claims.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney, and the
Custodian Agreement referred to below and to perform its obligations under
such Agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not require any consent, approval, authorization or other order
of any court,
4
<PAGE>
regulatory body, administration agency or other governmental body (except
as may be required under the Act, state securities laws or Blue Sky laws)
and will not result in a breach of any of the terms and provisions of, or
constitute a default under, organizational documents of such Selling
Shareholder, if not an individual, or any indenture, mortgage, deed of
trust or other agreement or instrument to which such Selling Shareholder is
a party, or of any order, rule or regulation applicable to such Selling
Shareholder of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in stabilization
or manipulation of the price of the Common Stock of the Company and, other
than as permitted by the Act, the Selling Shareholder will not distribute
any prospectus or other offering material in connection with the offering
of the Shares.
(iv) Such Selling Shareholder will engage in no offering, sale or
other disposition of any Common Stock of the Company, any options or
warrants to purchase shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock for a period of 180 days
after the date of this Agreement, directly or indirectly, otherwise than
hereunder or with the prior written consent of Alex. Brown & Sons
Incorporated.
(v) Without having undertaken to determine independently the accuracy
or completeness of either the representations and warranties of the Company
contained herein or the information contained in the Registration
Statement, such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1
are not true and correct, is familiar with the Registration Statement and
has no knowledge of any material fact, condition or information not
disclosed in the Registration Statement which has adversely affected or may
adversely affect the business of the Company or of the Subsidiaries; and
the sale of the Firm Shares and the Option Shares by such Selling
Shareholder pursuant hereto is not prompted by any information concerning
the Company or any of the Subsidiaries which is not set forth in the
Registration Statement. The information pertaining to such Selling
Shareholder under the caption "Selling Shareholders" in the Prospectus is
complete and accurate in all material respects.
2. Purchase, Sale and Delivery of the Firm Shares. (a) On the basis of the
representations, warranties and covenants herein contained, and subject to the
conditions herein set forth, the Sellers agree to sell to the Underwriters and
each Underwriter agrees, severally and not jointly, to purchase, at a price of $
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter
from each Seller shall be as nearly as practicable in the same proportion to the
total number of Firm Shares being sold by each Seller as the number of Firm
Shares being purchased by each Underwriter bears to the total number of Firm
Shares to be sold hereunder. The obligations of the Company and of each of the
Selling Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of the Shares to
be sold hereunder by the Selling Shareholders have been placed in custody with
First Interstate Bank of Arizona, N.A., as custodian (the "Custodian") pursuant
to the Custodian Agreement and Power of Attorney (the "Custodian Agreement")
executed by each Selling Shareholder for delivery of all Firm Shares and any
Option Shares to be sold hereunder by the Selling Shareholders. Each of the
Selling Shareholders specifically agrees that the Firm Shares and any Option
Shares represented by the certificates held in custody for the Selling
Shareholders under the Custodian Agreement are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Shareholders
for such custody are to that extent irrevocable, and that the obligations of the
Selling Shareholders hereunder shall not be terminable by any act or deed of the
Selling Shareholders (or by any other person, firm or corporation including the
Company, the Custodian or the Underwriters) or by operation of law (including
the death of an individual Selling Shareholder or the dissolution of a corporate
Selling Shareholder or by the occurrence of any other event or events, except as
set forth in the Custodian Agreement. If any such event should occur prior to
the delivery to the Underwriters of the Firm Shares or the Option Shares
hereunder, certificates for the Firm Shares or the Option Shares, as the case
may be, shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event has not occurred. The Custodian is
authorized to receive and acknowledge receipt of the proceeds of sale of the
Shares held by it against delivery of such Shares.
5
<PAGE>
(c) Payment for the Firm Shares to be sold hereunder is to be made in New
York Clearing House funds by certified or bank cashier's checks drawn to the
order of the Company for the shares to be sold by it and to the order of "First
Interstate Bank of Arizona, N.A. as Custodian" for the shares to be sold by the
Selling Shareholders, in each case against delivery of certificates therefor to
the Representatives for the several accounts of the Underwriters. Such payment
and delivery are to be made at the offices of Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland, at 10:00 A.M., Baltimore time,
on the third business day after the date of this Agreement or at such other time
and date not later than five business days thereafter as you and the Company
shall agree upon, such time and date being herein referred to as the "Closing
Date." (As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives requests in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Selling
Shareholders listed on Schedule III hereto hereby grant an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares to
be sold by the Selling Shareholders is set forth opposite their respective names
on Schedule III hereto. The option granted hereby may be exercised in whole or
in part by giving written notice (i) at any time before the Closing Date and
(ii) only once thereafter within 30 days after the date of this Agreement, by
you, as Representatives of the several Underwriters, to the Selling Shareholders
(care of the Company) [the Attorney-in-Fact, and the Custodian] setting forth
the number of Option Shares as to which the several Underwriters are exercising
the option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
If the option granted hereby is exercised in part, the respective number of
Option Shares to be sold by each of the Selling Shareholders listed in Schedule
III hereto shall be determined on a pro rata basis in accordance with the
percentages set forth opposite their names on Schedule III hereto, adjusted by
you in such manner as to avoid fractional shares. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to 1,600,000, adjusted by you in such manner as to avoid fractional shares. The
option with respect to the Option Shares granted hereunder may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written notice of such cancellation
to the Selling Shareholders (care of the Company). To the extent, if any, that
the option is exercised, payment for the Option Shares shall be made on the
Option Closing Date in New York Clearing House funds by certified or bank
cashier's check drawn to the order of "First Interstate Bank of Arizona, N.A.,
as Custodian" for the Option Shares to be sold by the Selling Shareholders
against delivery of certificates therefor at the offices of Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
(e) If on the Closing Date or Option Closing Date, as the case may be, any
Selling Shareholder fails to sell the Firm Shares or Option Shares which such
Selling Shareholder has agreed to sell on such date as set forth in Schedule II
hereto, the Company agrees that it will sell or arrange for the sale of that
number of shares of Common Stock to the Underwriters which represents Firm
Shares or the Option Shares which such Selling Shareholder has failed to sell,
as set forth in Schedule II hereto, or such lesser number as may be requested by
the Representatives.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
6
<PAGE>
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company and the Selling Shareholders. (a) The Company
covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, and (B)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations and (C) file on a timely basis all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of
the exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters,
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances existing at the
time the Prospectus is delivered to a purchaser, not misleading, or, if it
is necessary at any time to amend or supplement the Prospectus to comply
with any law, the Company promptly will prepare and file with the
Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with law.
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(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earning statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement
has been so made available.
(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined
in the Rules and Regulations, which are not consolidated in the Company's
financial statements.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company, or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown &
Sons Incorporated, except that the Company may, without such consent, (i)
issue options and shares pursuant to the 1994 Stock Option Plan described
in the Registration Statement and (ii) issue shares as consideration for
future acquisitions, provided that each recipient of such shares in any
such acquisition agrees in writing to be subject to the transfer
restrictions imposed pursuant to this Section 4 (viii) to the extent the
day period following the date of this Agreement has not expired.
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on The Nasdaq Stock Market.
(x) The Company has caused each officer and director and specific
shareholders of the Company to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock
of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of 180
days after the date of this Agreement, directly or indirectly, except with
the prior written consent of Alex. Brown & Sons Incorporated ("Lockup
Agreements").
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus.
(xii) The Company shall not invest, or othewise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act").
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other capital stock of the Company or
other securities convertible, exchangeable or exercisable for Common Stock
or derivative of Common Stock owned by the Selling Shareholder or request
the registration for the offer or sale of any of the foregoing (or as to
which the Selling Shareholder has the right to direct the disposition of)
will be made for a period of 180 days after the date of this Agreement,
directly or indirectly, by such Selling Shareholder otherwise than
hereunder or with the prior written consent of Alex. Brown & Sons
Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act
of 1983
8
<PAGE>
with respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
5. Costs and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Sellers under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of counsel
for the Company and the Selling Shareholders; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the Registration
Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the
Underwriters' Invitation Letter, the Preliminary Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees and expenses (including legal fees and disbursements) incident to securing
any required review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Shares; [the Listing Fee of The Nasdaq
Stock Market] and the expenses, including the fees and disbursements of counsel
for the Underwriters, incurred in connection with the qualification of the
Shares under State securities or Blue Sky laws. The Company shall not, however,
be required to pay for any of the Underwriters' expenses (other than those
related to qualification under NASD regulation and State securities or Blue Sky
laws) except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this Agreement is
terminated by the Representatives pursuant to Section 11 hereof, or by reason of
any failure, refusal or inability on the part of the Company or the Selling
Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company and the
Selling Shareholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Shares on the Closing Date and the
Option Shares, if any, on the Option Closing Date are subject to the accuracy,
as of the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company and the Selling Shareholders
contained herein, and to the performance by the Company and the Selling
Shareholders of their covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company or the Selling Shareholders, shall be contemplated
by the Commission and no injunction, restraining order, or order of any
nature by a Federal or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent the issuance of the
Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Ryley, Carlock &
Applewhite, counsel for the Company and the Selling Shareholders, (or other
counsel for the Selling Shareholders, such counsel having been found
acceptable by the Representatives), acceptable to the Representatives),
dated the Closing Date or the Option Closing Date, as the case may be,
addressed to the Underwriters (and stating that it may be relied upon by
counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Arizona, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own its properties and conduct its business as
9
<PAGE>
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions
in which the conduct of their business requires such qualification, or in
which the failure to qualify would have a materially adverse effect upon
the business of the Company and the Subsidiaries taken as a whole; the
outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, and are fully paid and non-assessable
and are owned by the Company or a Subsidiary; and, to the best of such
counsel's knowledge, the outstanding shares of capital stock of each of the
Subsidiaries owned free and clear of all liens, encumbrances and equities
and claims, and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership interests in
the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of its Preferred and Common Stock have been duly authorized; the
outstanding shares of its Common Stock, including the Shares to be sold by
the Selling Shareholders, have been duly authorized and validly issued and
are fully paid and non-assessable; all of the Shares conform to the
description thereof contained in the Prospectus; the certificates for the
Shares, assuming they are in the form filed with the Commission, are in due
and proper form; the shares of Common Stock, including the Option Shares,
if any, to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable when
issued and paid for as contemplated by this Agreement; and no preemptive
rights of stockholders exist with respect to any of the Shares or the issue
and sale thereof.
(iii) Except as described in or contemplated by the Prospectus, or in
documents previously filed with the Commission as exhibits and incorporated
into the Registration Statement, to the knowledge of such counsel, there
are no outstanding securities of the Company convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares of
capital stock of the Company and there are no outstanding or authorized
options, warrants or rights of any character obligating the Company to
issue any shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or subscribe for any
shares of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company or
any other person has the right, contractual or otherwise, which has not
been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any
of the Shares or the right to have any Common Shares or other securities of
the Company included in the Registration Statement or the right, as a
result of the filing of the Registration Statement, to require registration
under the Act of any shares of Common Stock or other securities of the
Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order proceedings
with respect thereto have been instituted or are pending or threatened
under the Act.
(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations thereunder
(except that such counsel need express no opinion as to the financial
statements and related schedules therein). [The conditions for the use of
Form S-1, set forth in the General Instructions thereto, have been
satisfied.]
(vi) The statements under the captions "Risk Factors -- Regulation,"
"Business -- Regulation," "-- Safety and Risk Management," "-- Properties,"
"-- Legal Proceedings," "Management -- 1994 Stock Incentive Plan," "--
401(k) Plan," "Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein or matters
of law, fairly summarize in all material respects the information called
for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described
in the Registration Statement or the Prospectus which are not so filed or
described as required, and such contracts and documents as are summarized
in the Registration Statement or the Prospectus are fairly summarized in
all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries, except as set forth in the Prospectus.
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<PAGE>
(ix) The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated do not and will not conflict with
or result in a breach of any of the terms or provisions of, or constitute a
default under, the Charter or By-Laws of the Company, or any agreement or
instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries
may be bound.
(x) This Agreement has been duly authorized, executed and delivered by
the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws, as to which such counsel need express
no opinion) except such as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and delivered
on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion), to sell, assign, transfer and deliver the portion of the Shares
to be sold by such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed and
delivered by each Selling Shareholder is valid and binding, except as such
enforceability may be limited by bankruptcy, moratorium, or similar laws or
principles of equity.
(xvi) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good and
marketable title to the Shares being sold by each Selling Shareholder on
the Closing Date, and the Option Closing Date, as the case may be, free and
clear of all liens, encumbrances, equities and claims.
In rendering such opinion, Ryley, Carlock & Applewhite may rely as to
matters governed by the laws of states other than Arizona or Federal laws on
local counsel in such jurisdictions provided that in each case such opinion is
also addressed to the underwriters and Ryley, Carlock & Applewhite shall state
that they believe that they and the Underwriters are justified in relying on
such other counsel. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A under the
Act) and as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Ryley, Carlock & Applewhite may state that their belief is based upon
the procedures set forth therein, but is without independent investigation and
verification.
(c) The Representatives shall have received from Piper & Marbury
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv), (ix) and (xi) of Paragraph
(b) of this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Arizona. In rendering
such opinion Piper & Marbury L.L.P. may rely as to all matters governed
other than by the laws of the State of Maryland or Federal laws on the
opinion of counsel referred to in paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or
any amendment thereto, as of the time it became effective under the Act
(but after giving effect to any modifications incorporated
11
<PAGE>
therein pursuant to Rule 430A under the Act) as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements in the light of the circumstances under which they were
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information included
therein). With respect to such statement, Piper & Marbury L.L.P. may state
that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Piper & Marbury L.L.P., a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) The Representatives shall have received, on each of the dates
hereof, the Closing Date or the Option Closing Date, as the case may be, a
signed letter from Arthur Andersen LLP, dated the Closing Date or the
Option Closing Date, as the case may be, which shall confirm that they are
independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants'
"conform letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the President or the Chief Executive Officer and the Chief Financial
Officer of the Company to the effect that, as of the Closing Date or the
Option Closing Date, as the case may be, each of them severally represents
as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission.
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set forth in a
supplement to or an amendment of the Prospectus which has not been so
set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.
(g) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.
12
<PAGE>
(h) The Firm Shares, and Option Shares, if any, have been approved for
designation upon notice of issuance on The Nasdaq National Market.
(i) The Lockup Agreements described in Section 4 (a) (x) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
7. Conditions of the Obligations of the Sellers. The obligations of the
Sellers to sell and deliver the portion of the Shares required to be delivered
as and when specified in this Agreement are subject to the conditions that at
the Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. Indemnification
(a) The Company and the Selling Shareholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act against any
losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person
in connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriters or controlling person is a party to any action or
proceeding; provided, however, that the Company and the Selling
Shareholders will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. In no
event, however, shall the liability of any Selling Shareholder for
indemnification under this Section 8(a) exceed the proceeds received by
such Selling Shareholder and any trusts or limited liability companies
identified on Schedule II as being related to such Selling Shareholder from
the Underwriters in the offering. This indemnity agreement will be in
addition to any liability which the Company or the Selling Shareholders may
otherwise have, (except that no party shall be entitled thereby to
duplicate recovery of the same item of damages).
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each
person, if any, who controls the Company or the Selling Shareholders within
the meaning of the Act, against any losses, claims, damages or liabilities
to which the Company or any such director, officer, Selling Shareholder or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling
13
<PAGE>
person in connection with investigating or defending any such loss, claim,
damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission
or alleged omission has been made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have, (except that no party
shall be entitled thereby to duplicate recovery of the same item of
damages).
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the fees and
expenses of the counsel retained by the indemnified party in the event (i)
the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed to
assume in defense and employ counsel acceptable to the indemnifying party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant
to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action or proceeding, but only to the extent any such
liability is subject to indemnification under this Agreement.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted
by applicable law then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
14
<PAGE>
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Shareholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and
commissions and compensation received by the Underwriters, in each case as
set forth in the table on the cover page of the Prospectus and any other
financial benefits received by the Underwriters from the offering. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Shareholders on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 8(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or reasonable actions or proceedings in respect thereof)
referred to above in this Section 8(d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions and benefits applicable to the Shares purchased
by such Underwriter, (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation, and (iii) no Selling Shareholder shall be required to
contribute any amount in excess of the lesser of (A) that proportion of the
total of such losses, claims, damages or liabilities indemnified or
contributed against equal to the proportion of the total Shares sold
hereunder which is being sold by such Selling Shareholder and any trusts or
limited liability companies identified on Schedule II as being related to
such Selling Shareholder, or (B) the proceeds received by such Selling
Shareholder and any trusts or limited liability companies identified on
Schedule II as being related to such Selling Shareholder from the
Underwriters in the offering. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(f) The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter, the Company, its directors or
offices or any persons controlling the Company, (ii) acceptance of any
Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors
or officers, or any person controlling the Company, shall be entitled to
the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
9. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of the Company
or a Selling Shareholder), you, as Representatives of the Underwriters, shall
use your reasonable efforts to procure within 36 hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company and the
Selling Shareholders such amounts as may be agreed upon and upon the terms set
forth herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
15
<PAGE>
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Shareholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown &
Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202,
Attention: Robert P. Irwin, Principal; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202. Attention:
General Counsel; if to the Company or the Selling Shareholders, to Knight
Transportation, Inc., 5601 West Buckeye Road, Phoenix, Arizona 85043, Attention:
Kevin P. Knight.
11. Termination. This Agreement may be terminated by you by notice to the
Sellers as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 A.M.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of
the Shares or, (iii) suspension of trading in securities generally on the
New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree
or other promulgation of any statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on The Nasdaq Stock Market
or (vii) the taking of any action by any governmental body or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company, as
to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 9 of this
Agreement.
12. Successors. This Agreement has been and is made solely for the benefit
of the Underwriters, the Company and the Selling Shareholders and their
respective successors, executors, administrators, heirs and assigns, and the
16
<PAGE>
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely because
of such purchase.
13. Information Provided by Underwriters. The Company, the Selling
Shareholders and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement.
For all purposes of this Agreement, including the indemnification
provisions set forth in Section 8, the term "Selling Shareholder" shall mean not
only the applicable trust or limited liability company which is selling shares
of Common Stock hereunder but also shall include, in the case of any such trust
(or limited liability company) L. Randy Knight, Gary J. Knight and Kevin P.
Knight (in their individual capacities), as applicable.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
17
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorized such Attorney-in-Fact to take such
action.
Very truly yours,
KNIGHT TRANSPORTATION, INC.
By
-----------------------------------------------
Kevin P. Knight
Chief Executive Officer
Selling Shareholders listed on Schedule II
By
-----------------------------------------------
Randy Knight, as Trustee under Revocable Trust
Agreement dated as of
By
-----------------------------------------------
Sidney Knight, as Trustee under Revocable Trust
Agreement dated as of
By
-----------------------------------------------
Kevin P. Knight, as Trustee under Revocable Trust
Agreement dated as of
By
-----------------------------------------------
Gary J. Knight, as Trustee under Revocable Trust
Agreement dated as of
By
-----------------------------------------------
Keith T. Knight, as Trustee under Revocable Trust
Agreement dated as of
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of the
date first above written.
ALEX. BROWN & SONS INCORPORATED
MORGAN, KEEGAN & COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
As Representatives of the several Underwriters listed on
Schedule I
By ALEX. BROWN & SONS INCORPORATED
By
--------------------------------
Authorized Officer
18
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
------------ ---------------
Alex. Brown & Sons Incorporated...............................
Morgan Keegan & Company, Inc. ................................
William Blair & Company, L.L.C ...............................
---------
Total .................................................... 1,600,000
=========
19
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
------------------- ------------
L. Randy Knight ................................................ 200,000
L. Randy Knight, as Trustee under
that certain Revocable Living Trust
Agreement dated April 1, 1993
Gary James Knight .............................................. 200,000
Gary James Knight, or his successors
in trust, under the GARY JAMES KNIGHT
TRUST TWO dated May 19, 1993, and any
Amendments thereto
Kevin P. Knight ................................................ 200,000
Kevin P. Knight and Syndey B. Knight,
as Trustees under that certain Revocable
Living Trust Agreement dated March 25, 1994
Keith T. Knight ................................................ 200,000
Keith T. Knight and Fawna S. Knight -------
as Trustees under that certain Revocable
Living Trust Agreement dated
Total .................................................... 800,000
=======
20
<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
MAXIMUM NUMBER PERCENTAGE OF
OF OPTION SHARES TOTAL NUMBER OF
NAME OF SELLER TO BE SOLD OPTION SHARES
- -------------- ---------------- ---------------
L. Randy Knight ........................ 60,000 25%
L. Randy Knight, as Trustee
under that certain Revocable
Living Trust Agreement dated
April 1, 1993
Gary James Knight ...................... 60,000 25
Gary James Knight, or his
successors in trust, under
the GARY JAMES KNIGHT
TRUST TWO dated May 19,
1993, and any Amendments thereto
Kevin P. Knight ........................ 60,000 25
Kevin P. Knight and Syndey
B. Knight, as Trutees under
that certain Revocable Living
Trust Agreement dated
March 25, 1994
Keith T. Knight ........................ 60,000 25
------- ---
Keith T. Knight and Fawna S. Knight
as Trustees under that certain
Revocable Living Trust Agreement
dated
Total ............................. 240,000 100%
======= ===
21
[RYLEY, CARLOCK & APPLEWHITE LETTERHEAD]
June 14, 1996
Knight Transportation, Inc.
5601 West Buckeye Road
Phoenix, Arizona 85043
Re: Knight Transportation, Inc. - Registration Statement
on Form S-1 pertaining to One Million Eight Hundred
Forty Thousand (1,840,000) Shares of Common Stock,
par value $ .01 per share (the "Shares")
Ladies and Gentlemen:
In connection with the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"), by Knight Transportation, Inc.,
an Arizona corporation (the "Company"), pursuant to Form S-1 filed with the
Securities and Exchange Commission (the "Commission") on or about June 14, 1996,
as amended ("Registration Statement), you have requested our opinion with
respect to the matters set forth below.
We have acted as corporate counsel for the Company in
connection with the matters described herein. In our capacity as corporate
counsel to the Company, we have reviewed and are familiar with the proceedings
taken and proposed to be taken by the Company in connection with the
authorization, issuance and sale of the Shares and, for purposes of this
opinion, we have assumed all such proceedings will be timely completed in the
manner presently proposed. In addition, we have relied upon certificates and
advice from the officers of the Company upon which we believe we are justified
in relying and on various certificates from, and documents recorded with, the
Arizona Corporation Commission (the "ACC"), including the Company's Restated
Articles of Incorporation filed with the ACC on August 31, 1994. We have also
examined the Amended and Restated Bylaws of the Company dated April 11, 1995
(the "Bylaws") and the resolutions of the Board of Directors of the Company
adopted or effective on or before June 14, 1996, and in full force
<PAGE>
Knight Transportation, Inc.
June 14, 1996
Page 2
and effect; and such laws, records, documents, certificates, opinions and
instruments as we deem necessary to render this opinion.
We have assumed the genuineness of all signatures, and the
authenticity of all documents submitted to us as originals and the conformity of
the originals of all documents submitted to us as certified, photostatic or
conformed copies. In addition, we have assumed that each person executing any
instrument, document or certificate referred to herein on behalf of any party is
duly authorized to do so.
Based on the foregoing and subject to the assumptions and
qualifications set forth herein, it is our opinion that, as of the date of this
letter, all of the Shares have been duly authorized and the Shares will, upon
issuance and delivery in accordance with the terms and conditions described in
the Registration Statement against payment therefore, be validly issued, fully
paid and non-assessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement, and further consent to the filing of this opinion as an
exhibit to the applications to Securities Commissioners for the various states
of the United States for registration of the Shares. We also consent to the
identification of our firm as counsel to the Company in the section of the
Prospectus (which is part of the Registration Statement) entitled "Legal
Matters."
We are qualified to practice law in the State of Arizona and
do not purport to be experts on, or to express any opinions herein concerning,
any law other than the law of the State of Arizona. Furthermore, the opinions
presented in this letter are limited to the matters specifically set forth
herein and no other opinion shall be inferred beyond the matters expressly
stated.
The opinions expressed in this letter are solely for your use
and may not be relied upon by any other person without our prior written
consent.
Sincerely,
RYLEY, CARLOCK & APPLEWHITE
LOAN AGREEMENT
by and Between
KNIGHT TRANSPORTATION, INC.
QUAD-K LEASING, INC.
and
FIRST INTERSTATE BANK OF ARIZONA, N.A.
Dated as of _______________, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
Page
----
<S> <C> <C>
ARTICLE 1 RECITALS........................................................................................1
ARTICLE 2 DEFINITIONS.....................................................................................1
Section 2.1 Definitions............................................................................1
Section 2.2 Terms Generally........................................................................7
Section 2.3 Accounting Terms.......................................................................7
ARTICLE 3 RLC.............................................................................................7
Section 3.1 RLC Commitment Amount..................................................................7
Section 3.2 RLC Note...............................................................................8
Section 3.3 RLC Advances...........................................................................8
Section 3.4 Conversion of RLC Advances.............................................................9
Section 3.5 RLC Unused Fee.........................................................................9
Section 3.6 RLC Payments...........................................................................9
Section 3.7 Issuance of Letter of Credit..........................................................10
Section 3.8 Conditions Precedent to the Issuance of Letters of Credit.............................10
Section 3.9 Drawing of a Letter of Credit.........................................................10
ARTICLE 3A TERM LOAN......................................................................................10
Section 3A.1 Term Loan Commitment..................................................................10
Section 3A.2 Term Note.............................................................................11
Section 3A.3 TCM Rate Election.....................................................................11
Section 3A.4 Term Loan Payments....................................................................11
ARTICLE 4 FIXED RATE PROVISIONS..........................................................................12
Section 4.1 Additional Provisions for Fixed Rate Advances.........................................12
Section 4.2 TCM Rate Prepayment...................................................................14
ARTICLE 5 CONDITIONS PRECEDENT...........................................................................14
Section 5.1 Conditions Precedent..................................................................14
Section 5.2 Conditions Precedent to All Future Advances...........................................15
ARTICLE 6 GENERAL REPRESENTATIONS AND WARRANTIES.........................................................15
Section 6.1 Recitals..............................................................................15
Section 6.2 Organization..........................................................................15
Section 6.3 Power.................................................................................15
Section 6.4 Enforceable...........................................................................16
Section 6.5 No Conflict...........................................................................16
-i-
<PAGE>
Section 6.6 No Actions............................................................................16
Section 6.7 Financial Statements..................................................................16
Section 6.8 Tax Payments..........................................................................16
Section 6.9 Margin Stock..........................................................................16
Section 6.10 Affirmation...........................................................................16
Section 6.11 Solvency..............................................................................17
ARTICLE 7 AFFIRMATIVE COVENANTS..........................................................................17
Section 7.1 Existence.............................................................................17
Section 7.2 Maintain Property.....................................................................17
Section 7.3 Insurance.............................................................................17
Section 7.4 Payments..............................................................................18
Section 7.5 Financial Reports.....................................................................18
Section 7.6 Records...............................................................................19
Section 7.7 Current Obligations...................................................................19
Section 7.8 Other Documents.......................................................................19
ARTICLE 8 NEGATIVE COVENANTS.............................................................................19
Section 8.1 Dissolution...........................................................................19
Section 8.2 Fiscal Year...........................................................................20
Section 8.3 Margin Stock..........................................................................20
Section 8.4 Debt/Worth............................................................................20
Section 8.5 TFCC..................................................................................20
Section 8.6 Debt/Cash Flow........................................................................20
Section 8.7 Current Ratio.........................................................................20
ARTICLE 9 DEFAULT AND REMEDIES...........................................................................20
Section 9.1 Event of Default......................................................................20
Section 9.2 Remedies and Cure Period..............................................................21
ARTICLE 10 ACTION UPON AGREEMENT..........................................................................22
Section 10.1 Third Party...........................................................................22
Section 10.2 Entire Agreement......................................................................22
Section 10.3 Writing Required......................................................................22
Section 10.4 No Partnership........................................................................22
ARTICLE 11 GENERAL........................................................................................22
Section 11.1 Survival..............................................................................23
Section 11.2 Context...............................................................................23
Section 11.3 Time..................................................................................23
Section 11.4 Notices...............................................................................23
Section 11.5 Costs.................................................................................23
-ii-
<PAGE>
Section 11.6 Law...................................................................................23
Section 11.7 Successors............................................................................23
Section 11.8 Headings..............................................................................23
Section 11.9 Arbitration...........................................................................23
EXHIBITS
A Compliance Letter
B Compliance Certificate
C Form of Term Note
-iii-
</TABLE>
<PAGE>
LOAN AGREEMENT
BY THIS LOAN AGREEMENT (the "Agreement"), made and entered
into as of this _____ day of _________, 1996, FIRST INTERSTATE BANK OF ARIZONA,
N.A., whose address is 100 West Washington, Post Office Box 53456, Phoenix,
Arizona 85072-3456 (hereinafter, together with successors and assigns, called
"Lender"), and KNIGHT TRANSPORTATION, INC., an Arizona corporation, whose
address is 5601 West Buckeye Road, Phoenix, Arizona 85043-4603 (hereinafter
called "Company") and QUAD-K LEASING, INC., a n Arizona corporation (with the
Company, the "Borrower"), a wholly owned subsidiary of the Company, in
consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, hereby confirm and agree as follows:
ARTICLE 1
RECITALS
--------
Section 1.1 Borrower has requested that Lender establish a revolving
line of credit (the "RLC") with Borrower in the amount of $15,000,000.00, under
which revolving line of credit advances ("RLC Advances") shall be made to
Borrower for the purposes of providing (i) Borrower with financing for general
corporate purposes, and (ii) a source of funding to any beneficiaries of any
letters of credit (each a "Letter of Credit") that may be issued, from time to
time by Lender on behalf of Borrower.
Section 1.2 Borrower has also requested that Lender allow Borrower,
upon its election, to term out the RLC.
Section 1.3 Lender has agreed to do so upon the terms, conditions and
provisions set forth herein.
Section 1.4 Effective as of the delivery of this Agreement, the Loan
Agreement dated November 30, 1994 (the "1994 Agreement") between the Company and
Lender will be terminated and replaced by this Agreement.
ARTICLE 2
DEFINITIONS
-----------
Section 2.1 Definitions. Although terms may be defined in other
sections of this Agreement, as used herein the following terms shall have the
meanings defined below:
<PAGE>
"Advance" means an RLC Advance.
"Advance Minimum Amount" means $50,000.00.
"Agreement" means this Loan Agreement.
"Authorized Officer" means the chief executive officer or chief
financial officer of Borrower, or such other individual who is from time to time
designated to Lender in writing by said officer as authorized to act for
Borrower with respect to the Loan.
"Borrower": See the Preamble.
"Borrowing Base" means an amount equal to:
(i) Eighty percent (80%) of the outstanding amount of all
"Eligible Accounts" of Borrower, less any retentions, discounts,
delinquency or service charges, commissions, freight charges,
advertising allowances or other allowances granted or charged by
Borrower; plus
(ii) fifty percent (50%) of Net Fixed Assets less the
outstanding principal balance of all debt secured by any security
interest in, or lien on, such Net Fixed Assets.
"Business Day" means a day of the year on which commercial banks are
not required or authorized to close in Phoenix, Arizona and, if the applicable
Business Day relates to any LIBOR Rate RLC Advances or LIBOR Rate Term Loans, a
day on which dealings are carried on in the London interbank market.
"CD Base Rate" means, for the Interest Period for each CD Rate RLC
Advance, an interest rate per annum equal to the rate of interest determined by
Lender, based on quotations published in The Wall Street Journal or such other
comparable source selected by Lender, to be the "CD Base Rate" for a period
equal to such Interest Period, two (2) Business Days before the first day of
such Interest Period.
"CD Rate" means an interest rate per annum equal to two and 15/100
percent (2.15%) in excess of the CD Base Rate, rounded upward, if necessary, to
the nearest 1/16 of 1 %.
"CD Rate RLC Advance" means an RLC Advance that bears interest at the
CD Rate.
"Company": See the Preamble.
"Compliance Certificate": See Section 7.5(f).
-2-
<PAGE>
"Convert," "Conversion," and "Converted" each refers to a conversion of
RLC Advances of one Type into RLC Advances of another Type pursuant to Section
3.4.
"Eligible Account" means any account of Borrower, so long as, at the
time of any RLC Advance: (i) the account is creditworthy in the reasonable
judgment of Lender; (ii) the original invoices or other statements or agreements
comprising that account require payment in full within sixty (60) days of the
date of delivery of the respective goods or services; and (iii) no invoice or
other statement or agreement comprising that account remained unpaid for more
than ninety (90) days after the due date for payment specified therein (at
Lender's option, if any account becomes ineligible because not paid within the
above specified period, all accounts from the same account debtor shall be
deemed ineligible).
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D by the Board of Governors of the Federal Reserve System, 12 C.F.R.
Part 204 as in effect from time to time.
" Eurodollar Reserve Percentage" for the Interest Period for each LIBOR
Rate RLC Advance or LIBOR Rate Term Loan means the reserve percentage applicable
two (2) Business Days before the first day of such Interest Period under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum reserve
requirement (including, but not limited to, any emergency, supplemental, or
other marginal reserve requirement) for a member Bank of the Federal Reserve
System in San Francisco with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities (or with respect to any other category of
liabilities which includes deposits by reference to which the interest rate on
LIBOR Rate RLC Advances or LIBOR Rate Term Loans is determined) having a term
equal to such Interest Period.
"Event of Default": See Section 9. 1.
"Financial Covenants" means those financial covenants specified in
Sections 8.4, 8.5, 8.6 and 8.7.
"Fixed Rate Minimum Amount" means $1,000,000.00, with increments of
$100,000.00.
"Fixed Rate Advance" means either a LIBOR Rate RLC Advance, a CD Rate
RLC Advance or a LIBOR Rate Term Loan.
"Fixed Rate RLC Advance" means either a LIBOR Rate RLC Advance or a CD
Rate RLC Advance.
"GAAP" means generally accepted accounting principles in the United
States, consistently applied.
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"Interest Period" means, for each Fixed Rate RLC Advance, or LIBOR Rate
Term Loan, the period commencing on the date of such Fixed Rate RLC Advance or
LIBOR Rate Term Loan or the date of the Conversion of any RLC Advance into a
Fixed Rate RLC Advance and ending on the last day of the period selected by the
Borrower pursuant to the provisions herein and, thereafter, each subsequent
period commencing on the day after the last day of the immediately preceding
Interest Period and ending on the last day of the period selected by the
Borrower pursuant to the provisions herein. The duration of each such Interest
Period shall be 30, 60 or 90 days, as the Borrower may select; provided,
however, that:
(i) Interest Periods commencing, on the same date for
the same Type of RLC Advances shall be of the same duration;
(ii) Whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided that if such
extension would cause the last day of such Interest Period to
occur in the next following calendar month, the last day of
such Interest Period shall occur on the next preceding
Business Day;
(iii) No Interest Period with respect to any RLC
Advance shall extend beyond the RLC Maturity Date; and
(iv) No Interest Period with respect to any LIBOR
Rate Term Loan shall extend beyond the Term Maturity Date.
"Lender": See the Preamble.
"Letter of Credit" mean any letter of credit issued at the request of
Borrower pursuant to Section 3.7.
"LIBOR Base Rate" means, for the Interest Period for each LIBOR Rate
RLC Advance or LIBOR Rate Term Loan, an interest rate per annum equal to the
rate of interest per annum obtained by dividing (i) the rate of interest
determined by Lender, based on Telerate System reports or such other source
selected by Lender, to be the "London Interbank Offered Rate" at which deposits
in U.S. dollars for a period equal to such Interest Period are offered by major
banks in London, England, two (2) Business Days before the first day of such
Interest Period by (ii) a percentage equal to one hundred percent (100%) minus
the Eurodollar Reserve Percentage.
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"LIBOR Rate" means:
(a) As to a LIBOR Rate RLC Advance an interest rate per annum
equal to three-quarters percent (0.75%) in excess of the LIBOR Base
Rate, rounded upward, if necessary, to the nearest 1/16 of 1%, or
(b) As to a LIBOR Rate Term Loan, an interest rate per annum
equal to 90/100 percent (0.90%) in excess of the LIBOR Base Rate,
rounded upward, if necessary, to the 1/16 of 1%.
"LIBOR Rate Advance" means either a LIBOR Rate RLC Advance or a LIBOR
Rate Term Loan.
"LIBOR Rate RLC Advance" means an RLC Advance that bears interest at
the applicable LIBOR Rate.
"LIBOR Rate Term Loan" means the Term Loan bearing interest at the
applicable LIBOR Rate.
"Loans" means the RLC and the Term Loan.
"Material Amount" means $1,000,000.00 for purposes of Section 7.5.
"Maximum Letter of Credit Balance" means $1,250,000.00.
"Net Fixed Assets" means the consolidated net book value of all fixed
assets of Borrower determined in accordance with GAAP.
"1994 Agreement": See Section 1.4.
"Notes" means the RLC Note and the Term Note.
"Notice of RLC Advance": See Section 3.3(b).
"Organizational Documents" means Borrower's Articles of Incorporation
and Bylaws.
"Prime Rate" means the interest rate per annum equal to the fluctuating
rate of interest announced publicly by Lender from time to time as its "prime
rate".
"Quarterly End Date" means the last day of March, June, September and
December.
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"Regulatory Change" means any change effective after the date of this
Agreement in United States federal, state, or foreign law or regulations or the
adoption or making after such date of any interpretation, directive, or request
applying to a class of banks including Lender, of or under any United States
federal, state, or foreign law or regulations (whether or not having the force
of law) by any court or governmental or monetary authority charged with the
interpretation or administration thereof.
"RLC": See Section 1.1.
"RLC Advance" means an advance by Lender to the Borrower under the RLC
pursuant to Section 3 and includes a Variable Rate RLC Advance, a LIBOR Rate RLC
Advance and a CD Rate RLC Advance (each of which shall be a "Type" of RLC
Advance).
"RLC Commitment Amount" means $15,000,000.00.
"RLC Expiration Date" means the earlier of the RLC Maturity Date or the
Term Conversion Date.
"RLC Maturity Date" means ____________, 1997 [12 months].
"RLC Note" means that Revolving Promissory Note of even date herewith
in the face amount equal to the RLC Commitment Amount from Borrower, evidencing
the RLC.
"RLC Payment Date" means the first day of each month.
"RLC Unused Fee" means one-eighth of one percent (1/8%).
"TCM Rate" means an interest rate per annum equal to one and
one-quarter percent (1.25%) in excess of the yield in percent per annum as shown
for three (3) year Treasury constant maturities, on the most recent Federal
Reserve statistical release H.15(519) available to Lender two (2) Business Days
before the Term Conversion Date.
"TCM Rate Election": See Section 3A.3.
"Term Conversion Date" means that date on which Lender shall have made
the Term Loan to the Borrower.
"Term Loan" means the single advance term loan made available by Lender
to Borrower pursuant to Article 3A.
"Term Maturity Date" means that date that is three (3) years after the
Tenn Conversion Date.
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"Term Note" means that Promissory Note dated the Term Conversion Date
in the face amount of the Term Loan from Borrower, evidencing the Term Loan,
substantially in the form attached hereto as Exhibit "C".
"Type": See the definition of RLC Advance.
"Variable Rate" means an interest rate per annum equal to the Prime
Rate, adjusted periodically on the effective date of, and in conformity with,
changes in that Prime Rate.
"Variable Rate RLC Advance" means an RLC Advance that bears interest at
the Variable Rate.
Section 2.2 Terms Generally. The definitions in Section 2.1 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. All references herein to Articles, Sections, Exhibits
and Schedules shall be deemed references to Articles and Sections of, and
Exhibits and Schedules to, this Agreement unless the context shall otherwise
require.
Section 2.3 Accounting Terms. Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time, consistently applied;
provided, however, that, for purposes of determining compliance with any
covenant set forth herein, such terms shall be construed in accordance with GAAP
as in effect on the date of this Agreement applied on a basis consistent with
the application used in preparing the Borrower's consolidated audited financial
statements referred to herein.
ARTICLE 3
RLC
---
Section 3.1 RLC Commitment Amount. Subject to the conditions set forth
herein, Lender, from time to time, shall make such RLC Advances as Borrower may
request and shall issue such Letters of Credit as Borrower shall request,
provided that (a) the aggregate amount of RLC Advances and the face amount of
Letters of Credit, at any one time outstanding in either case, shall not exceed
the lesser of (i) the Borrowing Base, or (ii) the RLC Commitment Amount, and (b)
the aggregate amount of the face amount of Letters of Credit outstanding at any
one time shall not exceed the Maximum Letter of Credit Balance. The RLC shall be
a revolving credit, against which RLC Advances may be made to Borrower, repaid
by Borrower, and readvances made to Borrower and Letters of Credit issued,
terminated or repaid by Borrower and reissued, provided that (i) Borrower is not
in default under any provision of this Agreement or under the RLC Note, (ii) no
RLC Advance shall be made or Letter of Credit issued that would cause the
outstanding principal balance of the RLC to exceed the lesser of the Borrowing
Base or the RLC Commitment Amount, (iii) no Letter
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of Credit shall be issued that would cause the aggregate amount of the face
amount of Letters of Credit outstanding at any one time to exceed the Maximum
Letter of Credit Balance, and (iv) no RLC Advance shall be made on or after the
RLC Expiration Date.
Section 3.2 RLC Note. The RLC shall be evidenced by the RLC Note in the
form approved by Lender, payable to the order of Lender upon the terms and
conditions therein contained, and executed and delivered simultaneously with the
execution of this Agreement.
Section 3.3 RLC Advances.
(a) Lender may from time to time make RLC Advances of the RLC
in such sums as Borrower shall request. No such RLC Advance shall be
less than the Advance Minimum Amount.
(b) The Borrower shall give Lender written notice, or
telephonic notice confirmed immediately in writing, of the request for
any RLC Advances under this Agreement, which notice (the "Notice of RLC
Advance") shall be received by Lender not later than 11:00 A.M.
(Phoenix, Arizona local time) on the same Business Day in the case of a
Variable Rate RLC Advance, and in the case of a Fixed Rate RLC Advance
not later than 2:00 P.M. (Phoenix, Arizona local time) on the second
Business Day before the date of the proposed RLC Advance. Each such
Notice of RLC Advance shall specify: (i) the date of the proposed RLC
Advance, (ii) the amount of such RLC Advance, (iii) the Type of RLC
Advance, and (iv) in the case of a Fixed Rate RLC Advance, the Interest
Period. Each Notice of RLC Advance shall be irrevocable and binding on
the Borrower.
Anything, herein to the contrary notwithstanding. no Fixed Rate RLC Advance
shall be less than the Fixed Rate Minimum Amount.
(c) In the case of any RLC Advance which the related Notice of
RLC Advance specifies is to be a Fixed Rate RLC Advance, the Borrower
shall indemnify Lender on demand for, from, and against any loss, or
expense incurred by Lender as a result of any failure by Borrower to
fulfill on or before the date specified in such Notice of RLC Advance
for such RLC Advance the applicable conditions set forth in Section
5.2, including, without limitation, any loss, costs, and expenses
incurred by Lender by reason of liquidation or reemployment of deposits
or other funds acquired by Lender to fund the Fixed Rate RLC Advance to
be made by Lender when such Fixed Rate RLC Advance, as a result of such
failure, is not made on such date.
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Section 3.4 Conversion of RLC Advances.
(a) The Borrower may, upon written notice to and received by
the Lender (i) not later than 2:00 P.M. (Phoenix, Arizona local time)
on the second Business Day before the requested Conversion, in the case
of any Conversion of a Variable Rate RLC Advance into a Fixed Rate RLC
Advance, or a Fixed Rate RLC Advance of one Type into a Fixed Rate RLC
Advance of another Type, and (ii) not later than 11:00 A.M. (Phoenix,
Arizona local time) on the same Business Day as the Conversion, in the
case of any Conversion of a Fixed Rate RLC Advance into a Variable Rate
RLC Advance, subject to the provisions of this Section 3.4, Convert any
RLC Advances of one Type into RLC Advances of another Type. Each such
notice of a Conversion shall be irrevocable and binding on the
Borrower. Each such notice of a Conversion shall, within the
restrictions specified above, specify (w) the date of such Conversion,
(x) the RLC Advances to be Converted, (y) the Type of RLC Advances into
which the RLC Advances are to be Converted, and (z) if such Conversion
is into Fixed Rate RLC Advances, the duration of the Interest Period
for each such RLC advance.
(b) If the Borrower should fail to give the Lender any notice
of Conversion upon the termination of the Interest Period for a Fixed
Rate RLC Advance, such RLC Advance, upon the termination of the
Interest Period, shall automatically become a Variable Rate RLC
Advance.
Section 3.5 RLC Unused Fee. Borrower agrees to pay to Lender an unused
fee equal to the PLC Unused Fee times the average daily undrawn balance of the
RLC, within three (3) days after Lender gives Borrower a notice showing the
amount due with respect to the prior three-month period, the first such payment
to be due on ____________, 1996, and thereafter on each Quarterly End Date.
Section 3.6 RLC Payments.
(a) Interest on the RLC shall accrue on the unpaid principal
of each RLC Advance.
(i) At the Variable Rate if it is a Variable Rate RLC
Advance.
(ii) At the applicable LIBOR Rate if it is a LIBOR
Rate RLC Advance.
(iii) At the applicable CD Rate if it is a CD Rate
RLC Advance.
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(b) All accrued interest shall be due and payable on the RLC
Payment Date.
(c) The entire outstanding principal balance of the RLC Note,
all accrued and unpaid interest and all other sums which may have
become payable thereunder shall be due and payable in full on the RLC
Maturity Date.
Section 3.7 Issuance of Letter of Credit. Provided that the Borrower
has satisfied the conditions precedent contained in Section 3.8 hereof, the
Lender agrees, from time to time, to issue and/or renew Letters of Credit on
behalf of the Borrower so long as upon such issuance or renewal (i) a fee is
paid by Borrower to Lender in an amount equal to Lender's current stated rate
for the issuance of all other types of Letters of Credit and for other Letter of
Credit services, (ii) in accordance with the terms and conditions of Section 3.1
hereof, the outstanding principal balance of the RLC would not exceed the lesser
of (i) the Borrowing Base, or (ii) the RLC Commitment Amount, and (iii) the
aggregate amount of the face amount of Letters of Credit outstanding at such
time would not exceed the Maximum Letter of Credit Balance.
Section 3.8 Conditions Precedent to the Issuance of Letters of Credit.
The obligation of the Lender to issue and/or renew any Letters of Credit on
behalf of the Borrower shall be subject to the following conditions precedent on
the date of issuance or renewal of each such Letter of Credit:
(a) The Borrower shall execute and deliver to Lender an
application for letter of credit, specifying the amount of the
requested letter of credit, the requested term thereof, which term may
not exceed the RLC Maturity Date, and the beneficiary thereof;
(b) No Event of Default shall exist and no event or condition
shall exist that after notice or lapse of time, or both would
constitute an Event of Default; and
(c) The RLC Expiration Date shall not have occurred.
Section 3.9 Drawing of a Letter of Credit. Should any Letter of Credit
be drawn upon by the beneficiary thereof, such draw shall be deemed to be a
Variable Rate RLC Advance.
ARTICLE 3A
TERM LOAN
---------
Section 3A.1 Term Loan Commitment. Subject to the terms and conditions
herein set forth, Lender agrees to make a Term Loan to the Borrower on or before
the RLC Maturity Date, in such
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amount as the Borrower shall request, up to but not to exceed the RLC Commitment
Amount; provided, however, that the Borrower shall have satisfied the following
conditions precedent:
(a) Borrower shall have given the Lender written notice of its
request at least thirty (30) days prior to the RLC Maturity Date;
(b) Borrower shall have paid to Lender prior to the Term
Conversion Date a fee equal to one quarter percent (0.25%) of the
amount of the Term Loan; and
(c) Borrower shall not be in default under any provision of
this Agreement.
Section 3A.2 Term Note. The Term Loan shall be evidenced by the Term
Note, executed by Borrower and delivered to Lender on or before the Loan
Conversion Date.
Section 3A.3 TCM Rate Election.
(a) The Borrower may elect that the Term Loan bear interest at
the TCM Rate by giving Lender written notice of such election (the "TCM
Rate Election") at least two Business Days before the Term Conversion
Date. Should Borrower deliver to Lender its TCM Rate Election, interest
shall accrue on the Term Loan throughout its term at the TCM Rate.
(b) Should Borrower not deliver to Lender its TCM Rate
Election pursuant to subparagraph (a) of this Section 3A.3, interest
shall accrue on the entire Term Loan at the applicable LIBOR Rate for
the Interest Period selected by the Borrower from time to time. In the
event that the Borrower fails to select a new Interest Period for the
Term Loan prior to the termination of an existing Interest Period, the
Term Loan shall bear interest at the LIBOR Rate with a 30 day Interest
Period.
Section 3A.4 Term Loan Payments.
(a) In the event that interest accrues on the Term Loan at the
TCM Rate, interest and principal shall be due in thirty-six (36) equal
monthly payments, payable on the first day of each month, commencing on
the first day of the second month after the Term Conversion Date.
(b) In the event that interest accrues on the Term Loan at the
applicable LIBOR Rate, principal in an amount sufficient to fully
amortize the amount of the Term Loan over thirty-six (36) equal monthly
payments, together with accrued
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interest, shall be due and payable on the first day of each month,
commencing on the first day of the second month after the Term
Conversion Date.
(c) The entire unpaid principal balance, all accrued interest
and unpaid interest, and all other sums which may have become payable
hereunder shall be due and payable on the Term Maturity Date.
ARTICLE 4
FIXED RATE PROVISIONS
---------------------
Section 4.1 Additional Provisions for Fixed Rate Advances.
(a) Unavailability of Deposits or Inability to Ascertain the
Rates. Notwithstanding any other provision of this Agreement, if prior
to the commencement of any Interest Period, Lender shall determine (i)
that United States dollar deposits in the amount of any LIBOR Rate
Advance to be outstanding during such Interest Period are not readily
available to Lender in the London interbank market, or (ii) by reason
of circumstances affecting the London interbank market, adequate and
reasonable means do not exist for ascertaining the LIBOR Base Rate,
then Lender shall promptly give notice thereof to the Borrower and the
obligation of Lender to create, or effect by conversion any LIBOR Rate
RLC Advance in such amount and for such Interest Period shall terminate
until United States dollar deposits in such amount and for the Interest
Period selected by the Borrower shall again be readily available in the
market and adequate and reasonable means exist for ascertaining the
LIBOR Base Rate.
(b) Increased Costs. (i) If, due to any Regulatory Change,
there shall be any increase in the cost to Lender of agreeing to make
or making, funding or maintaining Fixed Rate Advances (including,
without limitation, any increase in any applicable reserve
requirement), or of issuing or maintaining Letters of Credit, then the
Borrower shall from time to time, upon demand by Lender, pay to Lender
such amounts as Lender may reasonably determine to be necessary to
compensate Lender for any additional costs which it reasonably
determines are attributable to such Regulatory Change; (ii) if Lender
determines (in its reasonable discretion) that, as a result of any
Regulatory Change, the amount of capital required or expected to be
maintained by Lender is increased by or based upon the existence of
Lender's commitment to lend hereunder, then, upon demand by Lender, the
Borrower shall immediately pay to Lender such amounts as Lender may
reasonably determine to be necessary to compensate Lender for any
additional costs which it reasonably determines are attributable to the
maintenance by Lender of capital in respect of
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Lender's commitment to lend hereunder; and (iii) Lender will notify the
Borrower of any Regulatory Change that will entitle Lender to
compensation pursuant to this Section 3.7(b) as promptly as
practicable, but in any event within 90 days after Lender obtains
knowledge thereof; provided, however, that if Lender fails to give such
notice within 90 days after it obtains knowledge of such a Regulatory
Change, Lender shall, with respect to compensation payable in respect
of any costs resulting from such Regulatory Change, only be entitled to
payment for costs incurred from and after the date that Lender has
given such notice. Lender will furnish to Borrower a certificate
setting forth in reasonable detail the basis for the amount of each
request by Lender for compensation. Determinations by Lender of the
amounts required to compensate Lender shall be made on a reasonable
basis. Lender shall be entitled to compensation in connection with any
Regulatory Chance only for costs actually incurred by such Lender. Upon
receipt of notice of any such Regulatory Change from Under, Borrower
shall have the option to prepay or Convert any Fixed Rate Advances
adversely affected by any Regulatory Change within seven (7) days of
receipt of such notice, without the obligation to pay to Lender with
respect to such prepayment or Conversion any amount or amounts
otherwise payable to Lender by Borrower pursuant to Section 4.1(e).
(c) Illegality. Notwithstanding any other provision of this
Agreement, if Lender shall notify the Borrower that as a result of a
Regulatory Change it is unlawful for Lender, to perform its obligations
hereunder to make LIBOR Rate Advances or to fund or maintain LIBOR Rate
Advances hereunder (i) the obligation of Lender to make, or to Convert
RLC Advances into, LIBOR Rate Advances shall be suspended until Lender
shall notify Borrower that the circumstances causing such suspension no
longer exist and (ii) in the event such Regulatory Change makes the
maintenance of LIBOR Rate Advances hereunder unlawful, the Borrower
shall forthwith prepay in full all LIBOR Rate Advances then
outstanding, together with interest accrued thereon and all amounts in
connection with such prepayments specified in Section 4.1(e), unless
the Borrower, within five (5) Business Days of notice from Lender,
converts all LIBOR Rate RLC Advances then outstanding into Variable
Rate RLC Advances in accordance with Section 3.4 with no obligation to
pay any amount described in Section 4.1(e) in connection with such
prepayments.
(d) Discretion of Lender as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, Lender
shall be entitled to fund and maintain its funding of all or any part
of any Fixed Rate Advance in any manner it sees fit; provided, however,
that for the purposes of this Agreement, all determinations hereunder
shall be made as if Lender had actually funded and maintained each
Fixed Rate Advance during the Interest Period therefor through the
purchase of deposits having a maturity corresponding to the last day of
the Interest
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Period and bearing an interest rate equal to the applicable Rate for
such Interest Period.
(e) Non-availability of LIBOR Rate Advances. In the event that
Borrower shall have elected that the Tenn Loan accrue interest at the
LIBOR Rate and pursuant to this Section 4.1 LIBOR Rate Term Loans are
not available, the Term Loan shall accrue interest at a comparable rate
as shall be agreed to by Borrower in writing and as shall be acceptable
to Lender.
Section 4.2 TCM Rate Prepayment. Should the Term Loan bear interest it
the TCM Rate, all prepayments of the Term Loan shall be made with a prepayment
premium computed as follows: 1% of the outstanding principal balance if the
outstanding principal balance is less than $50,000.00, and if the outstanding
principal balance is equal to or more than $50,000.00, an amount equal to the
present value of the remaining cash flows discounted at the Treasury Constant
Yield (TCY) + 100 basis points] - outstanding principal. The TCY is calculated
as the interpolated constant maturity Treasury rate with a maturity matching the
remaining average 9 term of the Term Note to the Term Maturity Date. Rate data
is obtained, at the time of prepayment, from the most recent Federal Reserve
statistical release H.15(519), using data from the most recent week ending
column.
ARTICLE 5
CONDITIONS PRECEDENT
--------------------
Section 5.1 Conditions Precedent. The obligation of Lender to fund the
Loan is subject to the fulfillment of the following conditions:
(a) Borrower shall have executed (or obtained the execution or
issuing, of) and delivered to Lender the following documents or
information, all in form satisfactory to Lender:
(i) The RLC Note;
(ii) A corporate resolution of Borrower authorizing
(i) the Loans, and (ii) the execution and delivery by Borrower
of all documents to be executed by Borrower, and the
performance by Borrower of all acts and things to be performed
by Borrower, pursuant to this Agreement; and
(iii) A copy of the current Organizational Documents,
so certified by the Secretary of the corporation, together
with a copy of a current Certificate of Good Standing in the
State of incorporation
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for Borrower; and such other documents as Lender may require
relating to the existence and good standing of Borrower and
the authority of any person acting or executing documents on
behalf of Borrower.
(b) All representations and warranties by Borrower contained
in this Agreement shall remain true and correct and the Borrower has
performed or complied with all agreements of Borrower made in this
Agreement that Borrower is to have performed or complied with by the
date of the first Advance.
(c) No Event of Default shall exist and no event or condition
shall exist that after notice or lapse of time, or both would
constitute an Event of Default.
(d) Should Lender so require, Lender shall have received an
opinion of Counsel to Borrower in a form satisfactory to it.
(e) All amounts under the 1994 Agreement due and payable to
Lender shall have been paid.
Section 5.2 Conditions Precedent to All Future Advances. The obligation
of the Lender to make any Advances to the Borrower following the initial Advance
under Section 5.1 hereof shall be subject to the condition precedent that on the
date of each such Advance no Event of Default shall exist and no event or
condition shall exist that after notice of lapse of time or both, would
constitute an Event of Default.
ARTICLE 6
GENERAL REPRESENTATIONS AND WARRANTIES
--------------------------------------
Each Borrower hereby represents and warrants to Lender as follows:
Section 6.1 Recitals. The recitals and statements of intent appearing
in this Agreement are true and correct.
Section 6.2 Organization. Borrower is duly organized, validly existing
and in good standing under the laws of the state of its organization. Borrower
is qualified to do business and is in good standing in the State of Arizona and
in each state in which it is required by law to do so.
Section 6.3 Power. Borrower has full power and authority to own its
properties and assets and to carry on its business as presently being conducted.
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Section 6.4 Enforceable. Borrower is fully authorized and permitted to
enter into this Agreement, to execute any and all documentation required herein,
to borrow the amounts contemplated herein upon the terms set forth herein and to
perform the terms of this Agreement, none of which conflicts with any provision
of law or regulation applicable to Borrower. This Agreement and the RLC Note are
valid and binding legal obligations of Borrower, and each is enforceable in
accordance with its terms.
Section 6.5 No Conflict. The execution, delivery and performance by
Borrower of this Agreement, the Notes and all other documents and instruments
relating to the Loans are not in conflict with any provision by law applicable
to Borrower or with the Organizational Documents of Borrower and will not result
in any breach of the terms or conditions or constitute a default under any
agreement or instrument under which Borrower is a party or is obligated.
Borrower is not in default in the performance or observance of any obligations,
covenants or conditions of any such agreement or instrument.
Section 6.6 No Actions. There are no actions, suits or proceedings
pending, or threatened against Borrower which materially affect the repayment of
the Loans, the performance by Borrower under this Agreement or the financial
condition, business or operations of Borrower.
Section 6.7 Financial Statements. All financial statements and profit
and loss statements, all statements as to ownership and all other statements or
reports previously or hereafter given to Lender by Borrower are and shall be
true and correct as of the date thereof. There has been no material adverse
change in the business, properties or condition (financial or otherwise) of
Borrower since the date of the latest financial statements given to Lender.
Section 6.8 Tax Payments. Borrower has filed all federal, state and
local tax returns by the due date as extended and has paid all federal, state
and local taxes shown due thereon by such extended due date and all other
payments required under federal, state or local law.
Section 6.9 Margin Stock. No part of the proceeds of any financial
accommodation made by Lender in connection with this Agreement will be used to
purchase or carry "margin stock," as that term is defined in Regulation U of the
Board of Governors of the Federal Reserve System, or to extend credit to others
for the purpose of purchasing or carrying such margin stock.
Section 6.10 Affirmation. Each request by Borrower for an Advance
hereunder shall constitute an affirmation on the part of the Borrower that the
representations and warranties of Section 6.7 are true and correct with respect
to any financial statements submitted by Borrower to Lender between the date of
this Agreement and the date of such request, that the representations and
warranties of Sections 6.1, 6.5, 6.6, 6.7 and 6.8 hereof are true and correct as
of the time of such request and that the condition precedents set forth in
Article 5 hereof are fully satisfied. All representations and warranties made
herein shall survive the execution of this Agreement, any and all Advances or
proceeds of the Loans and the execution and delivery of all other documents and
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<PAGE>
instruments in connection with the Loans, so long as Lender has any commitment
to lend to Borrower hereunder and until the Loans and all indebtedness hereunder
have been paid in full and all of Borrower's obligations hereunder have been
fully discharged.
Section 6.11 Solvency. Borrower (both before and after giving effect to
the transactions contemplated hereby) is solvent, has assets having a fair value
in excess of the amount required to pay its probable liabilities on its existing
debts as they become absolute and matured, and has, and will have, access to
adequate capital for the conduct of its business and the ability to pay its
debts from time to time incurred in connection therewith as such debts mature.
ARTICLE 7
AFFIRMATIVE COVENANTS
---------------------
Each Borrower hereby covenants and agrees that so long, as Lender has
any commitment to lend to Borrower hereunder and until the Loans and all other
indebtedness hereunder have been paid in full and all of Borrower's obligations
hereunder have been fully discharged
Section 7.1 Existence. Borrower shall maintain its existence with no
material amendments or changes in its Organizational Documents without the prior
written approval of the Lender.
Section 7.2 Maintain Property. Borrower shall maintain in full force
and effect all agreements, rights, trademarks, patents and licenses necessary to
carry out its business, shall keep all of its properties in good condition and
repair, and shall make all needed and proper repairs and improvements to its
properties in order to properly conduct its business.
Section 7.3 Insurance. To the extent Borrower is not self-insured,
Borrower shall maintain in full force and effect at all times insurance
coverages in scope and amount not less than, and not less extensive than, the
scope and amount of insurance coverages customary for companies of comparable
size and financial strength in the trades or businesses in which Borrower is
from time to time engaged. All of the aforesaid insurance coverages shall be
issued by insurers acceptable to Lender. Copies of all policies of, or
certificates of, insurance evidencing such coverages in effect from time to time
shall be delivered to Lender prior to the initial advance of funds under this
Agreement and promptly upon issuance of new policies thereafter. From time to
time, promptly upon Lender's request, Borrower shall provide evidence
satisfactory to Lender that required coverage in required amounts is in effect.
Borrower shall deliver to Lender certificates of, and copies of the originals
of, all such policies of insurance in effect from time to time, to be retained
by Lender so long as Lender shall have any commitment to lend to Borrower and/or
any portion of the Loans shall be outstanding or unsatisfied.
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<PAGE>
Section 7.4 Payments. Borrower shall make all payments of interest and
principal on the Loans as and when the same become due and payable and shall
keep and comply with all covenants, terms and provisions of the Notes.
Section 7.5 Financial Reports. Borrower shall maintain a standard
system of accounting in accordance with good business practices, that reflects
the application of GAAP and Borrower shall furnish to Lender the following:
(a) Within thirty (30) days after the end of each monthly
period (or comparable fiscal accounting period of Borrower), monthly
and year-to-date financial and operating statements for Borrower as of
the end of the preceding month and profit and loss statements covering
that period, certified by Borrower to be a true and accurate
representation of its operations and financial condition during that
period and at its end.
(b) Not later than thirty-one (31) days after the end of each
fiscal year, a copy of Borrower's monthly financial projections
relating to its business operations for the new fiscal year and annual
financial projections relating to the borrower's business operations
for the new fiscal year, certified by Borrower to be representative of
its projected operation and projected financial condition during the
period covered.
(c) Within ninety (90) days after the end of each fiscal year
of Borrower, financial statements which accurately and completely
reflect Borrower's assets, liabilities and net worth, as of the end of
the fiscal year, together with profit and loss statements for the
fiscal year, all prepared in accordance with GAAP together with an
opinion thereon (which shall not be limited by reason of any limitation
imposed by Borrower) of independent certified public accountants of
national standing selected by Borrower and acceptable to Lender to the
effect that such financial statements have been prepared in accordance
with GAAP and that their examination of such accounts in connection
with such financial statements has been made in accordance with
generally accepted auditing standards and, accordingly, included such
tests of the accounting records and such other auditing procedures as
were considered necessary under the circumstances.
(d) With each statement submitted by Borrower under
subparagraphs (a) and (c) above, a certificate signed by an Authorized
Officer, in the form of Exhibit "A" attached hereto, stating that no
Event of Default exists and no event has occurred and no condition
exists that, after notice or passage of time, or both, would constitute
an Event of Default.
(e) A statement of litigation matters involving Borrower that
could cause any materially adverse effect upon the operations of the
Borrower or in which the
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<PAGE>
amount in controversy or exposure to the Borrower is in excess of a
Material Amount, such statement to be furnished within fifteen (15)
days after date of service of such litigation or the occurrence of any
such change.
(f) Within thirty (30) days of each fiscal quarter of
Borrower, a certificate signed by an Authorized Officer in the form of
Exhibit "B" attached hereto (the"Compliance Certificate").
(g) Such other information as Lender may reasonably request.
Section 7.6 Records. Borrower shall maintain. in a safe place, proper
and accurate books, ledgers, correspondence and other records relating to its
operations and business affairs. Lender shall have the right from time to time
to examine and audit and to make abstracts from and photocopies of Borrower's
books, ledgers, correspondence and other records.
Section 7.7 Current Obligations. Except for tax protests made in good
faith and, the posting, if required, of any and all bonds therewith, Borrower
shall pay all of its current obligations before they become delinquent,
including all federal, state and local taxes, assessments, levies and
governmental charges and all other payments required under any federal, state or
local law.
Section 7.8 Other Documents. Borrower shall execute and deliver to
Lender such other instruments and documents and do such other acts as Lender may
reasonably require in connection with the Loans.
ARTICLE 8
NEGATIVE COVENANTS
------------------
Each Borrower covenants and agrees that so long as Lender has any
commitment to lend to Borrower hereunder and until the Loans and all other
indebtedness hereunder have been paid in full and all of the Borrower's
obligations hereunder have been fully discharged, Borrower shall not without
receiving the prior written consent of Lender:
Section 8.1 Dissolution. Dissolve, liquidate, or merge or consolidate
with or into any corporation or entity, or turn over the management or operation
of its property, assets or businesses to any other person, firm or corporation,
or make any material change in its ownership, management structure or management
personnel.
Section 8.2 Fiscal Year. Change the times of commencement or
termination of its fiscal year or other accounting periods; or change its
methods of accounting other than to conform to GAAP.
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<PAGE>
Section 8.3 Margin Stock. Use any proceeds of the Loans, or any
proceeds of any other or future financial accommodation from Lender to Borrower,
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any "margin stock" as that term is defined
in Regulation U of the Board of Governors of the Federal Reserve System, and
will not use such proceeds in a manner that would involve Borrower in a
violation of Regulation T, U or X of such Board, nor use such proceeds for any
purpose not permitted by Section 7 of the Securities Exchange Act of 1934, as
amended, or any of the rules or regulations respecting the extensions of credit
promulgated thereunder.
Section 8.4 Debt/Worth. Permit the ratio of Borrower's total
liabilities to its net worth at the end of any fiscal quarter of Borrower to
exceed 1.0 to 1.
Section 8.5 TFCC. Permit (i) the sum of Borrower's net profit,
depreciation expense, amortization expense, deferred income tax expense,
interest expense and rent expense, (ii) divided by the sum of Borrower's prior
period current portion of long-term debt, interest expense and rent expense (the
latter two adjusted for taxes) to be less than 3.0.
Section 8.6 Debt/Cash Flow. Permit (i) the sum of Borrower's long-term
debt, including the current portion thereof, and the outstanding balance of the
RLC, (ii) divided by Borrower's net profit, depreciation expense and
amortization expense for the most recent four quarters to be more than 3.0.
Section 8.7 Current Ratio. Permit the ratio of Borrower's current
assets to its current liabilities, excluding the outstanding balance of the RLC
at the end of any fiscal quarter of Borrower to be less than 1.00 to 1.
ARTICLE 9
DEFAULT AND REMEDIES
--------------------
Section 9.1 Event of Default. The occurrence of any of the following
events or conditions shall constitute an "Event of Default" under this
Agreement:
(a) Failure to pay any installment of principal or interest
under the Notes as and when the same become due and payable, or the
failure to pay any other sum due under the Notes or this Agreement when
the same shall become due and payable;
(b) Any failure or neglect to perform or observe any of the
terms, provisions, or covenants of this Agreement (other than a failure
or neglect described in one or more of the other provisions of this
Section 9. 1);
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<PAGE>
(c) Any warranty, representation or statement contained in
this Agreement, or made or furnished to the Lender by or on behalf of
the Borrower, that shall be or shall prove to have been false when made
or furnished;
(d) The filing by Borrower (or against Borrower in which
Borrower acquiesces or which is not dismissed within forty-five (45)
days of the filing, thereof) of any proceeding under the federal
bankruptcy laws now or hereafter existing or any other similar statute
now or hereafter in effect; the entry of an order for relief under such
laws with respect to Borrower; or the appointment of a receiver,
trustee, custodian or conservator of all or any part of the assets of
Borrower;
(e) The insolvency of Borrower; or the execution by Borrower
of an assignment for the benefit of creditors; or the convening by
Borrower of a meeting of its creditors, or any class thereof, for
purposes of effecting a moratorium upon or extension or composition of
its debts; or the failure of Borrower to pay its debts as they mature;
or if Borrower is generally not paying its debts as they mature;
(f) The admission in writing by Borrower that it is unable to
pay its debts as they mature or that it is generally not paying its
debts as they mature;
(g) The liquidation, termination or dissolution of Borrower;
(h) The occurrence of any default under the Notes or any
document or instrument given by Borrower in connection with any other
indebtedness of Borrower to Lender and the expiration of any grace
period provided therein;
(i) The failure of Borrower to comply with any Financial
Covenant at the end of any fiscal quarter; or
(j) The occurrence of any adverse change in the financial
condition of Borrower that Lender, in its reasonable discretion, deems
material, or if Lender in good faith shall believe that the prospect of
payment or performance of the Loan is impaired.
Section 9.2 Remedies and Cure Period. Upon the occurrence of any Event
of Default and at any time thereafter while such Event of Default is continuing,
subject to the provisions of subparagraphs (b) and (c) hereof, Lender may do one
or more of the following:
(a) Cease making Advances or extensions of financial
accommodations in any form to or for the benefit of Borrower and
declare the entire Loans immediately due and payable, without notice or
demand;
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<PAGE>
(b) Proceed to protect and enforce its rights and remedies
under this Agreement and the Notes; and
(c) Avail itself of any other relief to which Lender may be
legally or equitably entitled.
ARTICLE 10
ACTION UPON AGREEMENT
---------------------
Section 10.1 Third Party. This Agreement is made for the sole
protection and benefit of the parties hereto, their successors and assigns, and
no other person or organization shall have any right of action hereon. No
representation of any kind is made to third parties by the execution hereof, by
the existence or form of the indebtedness treated herein, or by any performance,
or failure or waiver thereof, by any party of the terms hereof. Specifically,
without limitation of the foregoing, the Lender makes no representation to any
third party as to the solvency of the Borrower or of the commercial
practicability of any business enterprise to which or for which the Loans are
made.
Section 10.2 Entire Agreement. This Agreement embodies the entire
Agreement of the parties with regard to the subject matter hereof. There are no
representations, promises, warranties, understandings or agreements express or
implied, oral or otherwise, in relation thereto, except those expressly referred
to or set forth herein. Borrower acknowledges that the execution and the
delivery of this Agreement is its free and voluntary act and deed, and that said
execution and delivery have not been induced by, nor done in reliance upon, any
representations, promises, warranties, understandings or agreements made by
Lender, its agents, officers, employees or representatives.
Section 10.3 Writing Required. No promise, representation, warranty or
agreement made subsequent to the execution and delivery hereof by either party
hereto, and no revocation, partial or otherwise, or change, amendment, addition,
alteration or modification of this Agreement shall be valid unless the same
shall be in writing signed by all parties hereto.
Section 10.4 No Partnership. Lender and Borrower each have separate and
independent rights and obligations under this Agreement. Nothing contained
herein shall be construed as creating, forming or constituting any partnership,
joint venture, merger or consolidation of Borrower and Lender for any purpose or
in any respect.
ARTICLE 11
GENERAL
-------
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<PAGE>
Section 11.1 Survival. This Agreement shall survive the making of the
Loans and shall continue so long as any part of the Loans, or any extension or
renewal thereof, or any Letter of Credit remains outstanding.
Section 11.2 Context. This Agreement shall apply to the parties hereto
according to the context hereof, and without regard to the number or gender of
words or expressions used herein.
Section 11.3 Time. Time is expressly made of the essence of this
Agreement.
Section 11.4 Notices. All notices required or permitted to be given
hereunder shall be in writing, and shall become effective immediately if
personally delivered or effective twenty-four (24) hours after such are
deposited in the United States mail, certified or registered, postage prepaid,
addressed as shown above, or to such other address as such party may from time
to time designate in writing. Any notice sent to Borrower shall be sent to the
attention of its chief financial officer.
Section 11.5 Costs. Borrower shall pay all costs and expenses arising
from the preparation of this Agreement, the Notes, the closing of the Loans, the
making of Advances thereunder, and the enforcement of Lender's rights hereunder,
including but not limited to, accounting fees, appraisal fees, attorneys' fees
and any charges that may be imposed on Lender as a result of this transaction.
At the option of Lender and upon written notice to Borrower, RLC Advances may be
made and disbursed from time to time by Lender directly in payment of such costs
and expenses.
Section 11.6 Law. This Agreement shall be construed according to the
laws of the State of Arizona.
Section 11.7 Successors. This Agreement shall, except as herein
otherwise provided, be binding upon and inure to the benefit of the successors
and assigns of the parties, hereto.
Section 11.8 Headings. The headings or captions of sections in this
Agreement are for convenience and reference only, and in no way define, limit or
describe the scope or intent of this Agreement or the provisions of such
sections.
Section 11.9 Arbitration.
(a) Binding Arbitration. Upon the demand of Borrower or Lender
(collectively, the "parties"), whether made before the institution of
any judicial proceeding or not more than 60 days after service of a
complaint, third party complaint, cross-claim or counterclaim or any
answer thereto or any amendment to any of the above, any Dispute (as
defined below) shall be resolved by binding arbitration in accordance
with the terms of this arbitration clause. A "Dispute" shall include
any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now
existing or
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<PAGE>
hereafter occurring between the parties arising out of, pertaining to
or in connection with this Agreement or any related agreements,
documents, or instruments (the "Documents"). The parties understand
that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather than being decided through litigation
in court before a judge or jury and that once decided by an arbitrator
the claims involved cannot be brought, filed or pursued in court.
(b) Governing Rules. Arbitrations conducted pursuant to this
Agreement, including selection of arbitrators, shall be administered by
the American Arbitration Association ("Administrator") pursuant to the
Commercial Arbitration rules of the Administrator. Arbitrations
conducted pursuant to the terms hereof shall be governed by the
provisions of the Federal Arbitration Act (Title 9 of the United States
Code), and to the extent the foregoing are inapplicable, unenforceable
or invalid, the laws of the State of Arizona. Judgment upon any award
rendered hereunder may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be
a waiver by any party that is a Lender of the protections afforded to
it under 12 U.S.C. ss. 91 or similar governing state law. Any party who
fails to submit to binding arbitration following a lawful demand by the
opposing party shall bear all costs and expenses, including reasonable
attorney's fees, incurred by the opposing party in compelling
arbitration of any Dispute.
(c) No Waiver, Preservation of Remedies, Multiple Parties. No
provision of, nor the exercise of any rights under, this arbitration
clause shall limit the right of any party to (1) foreclose against any
real or personal property collateral or other security, (2) exercise
self-help remedies (including repossession and set off rights) or (3)
obtain provisional or ancillary remedies such as injunctive relief,
sequestration, attachment, replevin, garnishment, or the appointment of
a receiver from a court having jurisdiction. Such rights can be
exercised at any time except to the extent such action is contrary to a
final award or decision in any arbitration proceeding. The institution
and maintenance of an action as described above shall not constitute a
waiver of the right of any party, including the plaintiff, to submit
the Dispute to arbitration, nor render inapplicable the compulsory
arbitration provisions hereof. Any claim or Dispute related to exercise
of any self-help, auxiliary or other exercise of rights under this
section (c) shall be a Dispute hereunder.
(d) Arbitrator Powers and Qualifications: Awards.
Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive a Arbitrator(s) may make an award of attorneys'
fees and expenses if permitted by law or the agreement of the parties.
All statutes of limitation applicable to any Dispute shall apply to any
proceeding in accordance with this arbitration clause. Any arbitrator
selected to act as the only arbitrator in a Dispute shall be required
to be a practicing attorney with not less than 10 years practice in
commercial law in the State of Arizona. With
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respect to a Dispute in which the claims or amounts in controversy do
not exceed five hundred thousand dollars ($500,000), a single
arbitrator shall be chosen and shall resolve the Dispute. In such case
the arbitrator shall have authority to render an award up to but not to
exceed five hundred thousand dollars ($500,000) including all damages
of any kind whatsoever, costs, fees and expenses. Submission to a
single arbitrator shall be a waiver of all parties' claims to recover
more than five hundred thousand dollars ($500,000). A Dispute involving
claims or amounts in controversy exceeding five hundred thousand
dollars ($500,000) shall be decided by a majority vote of a panel of
three arbitrators ("Arbitration Panel"). An Arbitration Panel shall be
composed of one arbitrator who would be qualified to sit as a single
arbitrator in a Dispute decided by one arbitrator, one who has at least
ten years experience in commercial lending and one who has at least ten
years experience in the trucking industry. Arbitrator(s) may, in the
exercise of their discretion, at the written request of a party in any
Dispute, (1) consolidate in a single proceeding any multiple party
claims that are substantially identical and all claims arising out of a
single loan or series of loans including claims by or against
borrower(s) guarantors, sureties and or owners of collateral if
different from the Borrower, and (2) administer multiple arbitration
claims as class actions in accordance with Rule 23 of the Federal Rules
of Civil Procedure. The arbitrator(s) shall be empowered to resolve any
dispute regarding the terms of this Agreement or the arbitrability of
any Dispute or any claim that all or any part (including this
provision) is void or voidable but shall have no power to change or
alter the terms of this Agreement. The award of the arbitrator(s) shall
be in writing and shall specify the factual and legal basis for the
award.
(e) Miscellaneous. To the maximum extent practicable, the
Administrator, the Arbitrator(s) and the parties shall take any action
necessary to require that an arbitration proceeding hereunder be
concluded within 180 days of the filing of the Dispute with the
Administrator. The arbitrator(s) shall be empowered to impose sanctions
for any party's failure to proceed within the times established herein.
Arbitration proceedings hereunder shall be conducted in Arizona at a
location determined by the Administrator. In any such proceeding a
party shall state as a counterclaim any claim which arises out of the
transaction or occurrence or is in any way related to the Documents
which does not require the presence of a third party which could not be
joined as a party in the proceeding. The provisions of this arbitration
clause shall survive any termination, amendment, or expiration of the
Documents and repayment in full of sums owed to Lender by Borrower
unless the parties otherwise expressly agree in writing. Each party
agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information required in the
ordinary course of business of the parties or as required by applicable
law or regulation.
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<PAGE>
IN WITNESS WHEREOF, these presents have been executed as of the day and
year first set forth above.
FIRST INTERSTATE BANK OF ARIZONA, N.A.
By_________________________________________
Its________________________________________
LENDER
KNIGHT TRANSPORTATION, INC., an Arizona
corporation
By:________________________________________
Name:______________________________________
Its:_______________________________________
QUAD-K LEASING, INC., an Arizona corporation
By:________________________________________
Name:______________________________________
Its:_______________________________________
BORROWER
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<PAGE>
Each party hereby acknowledges that it has read the Arbitration
provisions contained in Section 11.9 of this Agreement.
FIRST INTERSTATE BANK OF ARIZONA, N.A.
By_______________________________________
Its_____________________________________
LENDER
KNIGHT TRANSPORTATION, INC., an Arizona
corporation
By:_______________________________________
Name:____________________________________
Its:_______________________________________
QUAD-K LEASING, INC., an Arizona corporation
By:_______________________________________
Name:____________________________________
Its:_______________________________________
BORROWER
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<PAGE>
EXHIBIT "A"
____________________
Mr. ___________________
Vice President
Commercial Banking Division
First Interstate Bank of Arizona, N.A.
P.O. Box 53456
Phoenix, Arizona 85072-3456
Dear Mr. _____________:
Enclosed are the required financial statements for the [month] [fiscal
year] ending ___________ for Borrower as required under Section 7.5 of the Loan
Agreement dated _____________, 1996 (the "Agreement").
To the best of my knowledge in all material respects, no "Event of
Default," as defined in the Agreement, exists and no event has occurred and no
condition exists that, after notice or passage of time, or both, would
constitute an Event of Default.
Very truly yours,
<PAGE>
EXHIBIT "B"
TO: FIRST INTERSTATE BANK OF ARIZONA, N.A.
Certificate of Borrower's Covenant Compliance with Section 7.5(f)
of the Loan Agreement dated ________________, 1996 between
Knight Transportation, Inc., an Arizona corporation and
Quad-K Leasing, Inc., an Arizona corporation
and First Interstate Bank of Arizona, N.A.
Date _________
The undersigned officer of Knight Transportation, Inc., an Arizona corporation,
and Quad-K Leasing, Inc., an Arizona corporation, Borrower under said Loan
Agreement, hereby certifies that as of the date written above, the following
computations were true and correct:
<TABLE>
<S> <C> <C> <C>
I. Section 8.4 - Debt/Worth
Numerator: Total Liabilities A
divided by: ------
Denominator: Net Worth B
------
equals A/B
======
maximum 1.0x
II. Section 8.5 - TFCC ======
Numerator: Long-term debt (with CPLTD)
------
plus: RLC balance
------
Equals A
------
divided by:
Denominator: Net profit
------
plus: depreciation
------
plus: amortization
------
= Cash Flow B
------
A divided by B equal ======
maximum 3.0x
======
<PAGE>
III. Section 8.6 - Debt/Cash Flow
Numerator: Net Profit
------
plus: Depreciation
------
plus: Amortization
------
plus: Interest Expense
------
plus: Operating Lease Rent Expense
------
plus: Deferred Income Tax Expense
------
EBITDA A
------
divided by:
Denominator: CPLTD
------
plus: Operating Leases Rent Expense
------
plus: Interest Expense
------
= Current Portion B
------
A divided by B equal A/B
======
minimum 3.0x
======
IV. Section 8.7 - Current Ratio
Numerator: Cash
------
plus: Accounts Receivable
------
Equals
------
plus: Interest Expense A
------
divided by:
Denominator: Current liabilities
------
excluding: any RLC Advances outstanding
------
Equals B
------
A divided by B equals A/B
======
minimum 1.0x
======
</TABLE>
KNIGHT TRANSPORTATION, INC., an Arizona
corporation
By:_________________________________________
Name:_______________________________________
Its:________________________________________
QUAD-K LEASING, INC., an Arizona corporation
By:_________________________________________
Name:_______________________________________
Its:________________________________________
[WELLS FARGO LETTERHEAD]
June 13, 1996
Clark Jenkins, Controller
Knight Transportation, Inc.
5601 W. Buckeye Rd.
Phoenix, AZ 85043
RE: Covenant Waiver
Dear Clark:
Pursuant to the Loan Agreement by and between Knight Transportation, Inc. and
First Interstate Bank of Arizona, N.A. dated November 30, 1994, as ammended,
certain Financial Covenants are required under Section 8 thereof.
This letter will serve as formal waiver of the Current Ratio covenant under
section 8.7 and the Debt to Worth Covenant under section 8.4 for the quarters
ended March 31, 1996 and June 30, 1996. All other conditions remain unchanged
and in full force and effect for current and future periods. The bank does not
waive any other rights or remedies accruing therto under the loan agreement by
virtue of this waiver.
Sincerely,
Scott Spillman
Vice President
Senior Relationship Manager
LEASE
-----
THIS LEASE, made and entered into as of this 1st day of February, 1991,
by and between QUICK-FUEL, INC., a Wisconsin corporation ("Lessee"), and RR-1
LIMITED PARTNERSHIP, an Illinois limited partnership ("Lessor").
W I T N E S S E T H:
WHEREAS, Lessor is the owner of certain real estate located at 3650 W.
Minnesota St., City of Indianapolis, County of Marion, State of Indiana (the
"Premises"); and
WHEREAS, Lessor desires to lease to Lessee and Lessee desires to lease
from Lessor a portion of the Premises.
NOW, THEREFORE, Lessor and Lessee, in consideration of the mutual
agreements set forth herein, do hereby promise, covenant and agree as follows:
1. Leased Premises.
1.1 Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, that portion of the Premises (the "Leased Premises") as more
particularly described on Exhibit A attached hereto and made a part hereof,
which Leased Premises are necessary for Lessee to maintain and operate an
automated fueling site for the sale of diesel and gasoline fuel using a card
lock fuel system (the "Fueling Service"). Upon Lessor's reasonable approval,
Lessee may install such equipment as is necessary to the operation of Lessee's
Fueling Service (the "Lessee's Equipment"). Lessor further acknowledges and
agrees that Lessee is the sole owner of Lessee's Equipment and has all rights of
ownership therein which includes the right to remove such equipment upon the
termination of this Lease; provided, however, that the right to remove Lessee's
Equipment is subject to the terms and conditions of this Lease, including
Lessor's option to purchase Lessee's Equipment.
1.2 Lessor hereby acknowledges and agrees that the Leased
Premises will be used by Lessee in connection with the operation of Lessee's
Fueling Service and Lessor hereby grants Lessee and Lessee's customers the right
of occupancy of and free and unhindered ingress and agress to the Leased
Premises and free and unhindered use of and access to Lessee's Equipment and the
Fueling Service. Lessee hereby acknowledges and agrees that the Leased Premises
will only be used by Lessee in connection with the operation of Lessee's Fueling
Service and that no other use of the Leased Premises will be permitted without
Lessor's consent. Lessee will not directly or indirectly, including through the
use of vending machines, sell any other product or service.
<PAGE>
2. Leasehold Improvements.
2.1 Lessee shall at its own cost and expense construct all
improvements reasonably necessary to enable it to conduct the Fueling Service
("Leasehold Improvements"). All construction drawings, plans and specifications
relating to the construction of the Leasehold Improvements shall be submitted to
and approved by Lessor, and/or its architects or contractors, prior to beginning
construction of the Leasehold Improvements, which approval shall not be
unreasonably withheld. The Leasehold Improvements shall be constructed in a
workmanlike manner and in compliance with all applicable laws and regulations,
including but not limited to applicable zoning and other land use laws.
2.2 Lessee shall instruct its contractors to perform their
work on the Leased Premises, and in and about the Premises generally, with due
care and regard for the improvements being constructed by Lessor ("Lessor's
Improvements"), minimizing as much as possible the interference with Lessor or
its employees, agents, officers and invitees (including Lessor's contractors,
subcontractors and others providing materials ro services in connection with the
construction of Lessor's Improvements).
2.3 Lessee shall keep the Leased Premises free from any
mechanic's liens created by any act or failure to act by Lessee, its employees,
agents, officers and invitees. In the event any mechanic's lien is filed against
the Leased Premises by virtue of any act or failure to act on the part of
Lessee, Lessee shall promptly have the same removed or shall post a bond in the
amount of one hundred twenty-five percent (125%) of such lien or in an amount as
determined by a Court in order to bond over such lien. In the event Lessee doe
snot do so, Lessor shall have the right to do so and shall also have the right,
but no obligation, to pay the amount of such lien to cause its release and any
amount so paid shall be recoverable from Lessee. All mechanic's liens created by
Lessee's acts shall attach only to Lessee's interests in the Leased Premises and
not to any other interest with respect to either the Premises or Lessor's
Improvements.
2.4 All signs and advertising to be used by Lessee in
connection with the Fueling Service at the Leased Premises shall be approved by
Lessor in advance of its use. Lessor, in its sole discretion, may disapprove
such signs or advertising if it determines it to be incompatible with the "Road
Ready" image or signs.
3. Term.
3.1 The term of this Lease shall commence on the date hereof
and shall, except as it may otherwise be subject to termination hereunder,
continue thereafter for a period of ten (10) years. This Lease shall be
automatically renewed for consecutive two (2) year periods until such time as
either party terminates this Lease without further obligation by delivery to the
other party of written notice of such at least one (1) year prior to the end of
the then current lease period. Notwithstanding the foregoing ten-year term,
Lessee shall have the one-time option of terminating
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<PAGE>
this Lease upon the expiration of five (5) years, by giving written notice of
termination to Lessor at least ninety (90) days prior to the end of such
five-year period.
3.2 Except for a termination as a result of Lessee's default
under this Lease, Lessor, upon the termination of this Lease, at its sole
option, may either purchase Lessee's Equipment and/or the Leasehold Improvements
at their then fair market value as determined by an independent appraiser
mutually acceptable to the parties, or request that Lessor cause Lessee's
Equipment and/or the Leasehold Improvements to be removed. Unless otherwise
agreed by the parties, Lessor's purchase or Lessee's removal of Lessee's
Equipment and/or the Leasehold Improvements, as the case may be, shall be
completed not later than thirty (30) days following the termination of this
Lease. Any damages caused by removal of Lessee's Equipment and/or the Leasehold
Improvements shall be repaired by Lessee at Lessee's sole cost and expense.
4. Rent.
4.1 Lessee shall pay to Lessor, by check or other
consideration acceptable to Lessor, a monthly rental ("Monthly Rental")
calculated as follows: $.0275 X # of gallons of fuel sold during month. If, for
example, 150,000 gallons of fuel are sold in a month, the Monthly Rental for
such month shall equal $4,125.00 (150,000 X $.0275).
4.2 The Monthly Rental shall be payable on the fifteenth
(15th) day of each month for the preceding calendar month throughout the term of
this Lease and any extension thereof, commencing upon the date hereof. Each
payment of the Monthly Rental shall be accompanied by a written certificate in a
form acceptable to Lessor and certified by an officer of Lessee detailing the
calculation of the Monthly Rental for the month. Lessor, at its expense, shall
have the right to conduct such examinations and audits as are reasonably
required to verify the calculation of the Monthly Rental and Lessee hereby
acknowledges and agrees to grant Lessor, or its representatives, such
examination or audit. Such examination or audit shall be conducted so as to not
disturb daily business and all information obtained will be deemed confidential.
5. Warranty. Lessee warrants that as of the date hereof, Lessee's
Equipment is in good condition and, to the best of Lessee's knowledge, it
complies with all federal, state and local laws and regulations, including but
not limited to, applicable environmental laws and regulations, as of the date
hereof.
6. Utilities. Lessor shall, during the term of this Lease and any
extension thereof, be responsible for and shall promptly pay all charges for the
following utilities and services provided to the Leased Premises and used in the
operation of the Fueling Service: electricity, water and sewer charges. Any
other charges for utilities and services of any nature provided to the Leased
Premises and used in the operation of the Fueling Service shall be the
responsibility of Lessee.
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<PAGE>
7. Taxes. Lessee's share of real estate taxes, personal property taxes,
and any special taxes or assessments levied, assessed or imposed on the Leased
Premises shall be determined as follows:
7.1 Lessee shall pay all personal property taxes levied,
assessed or imposed during the term of this Lease or any extension thereof
against Lessee's Equipment or any other personal property of any kind owned by
or placed on, upon or about the Leased Premises by Lessee.
7.2 Lessor shall pay all other real estate taxes, personal
property taxes, and any special taxes or assessments levied, assessed or imposed
on the Premises and Lessee shall have no obligation or liability with respect
thereto.
8. Insurance Indemnity.
8.1 Lessee shall, during the term of this Lease and any
extension thereof, at its own expense, carry:
(a) Comprehensive general liability and fire and
extended coverage insurance in the amount of
Two Million Dollars ($2,000,000) with an
insurance company acceptable to Lessor. The
policy shall cover accident or damage in or
on the Leased Premises, and/or Lessee's
Equipment and all inventory, personal
property and other assets owned by or placed
in, upon or about the Leased Premises by the
Lessee, and/or the operation of the Fueling
Service by Lessee, and shall name the Lessor
as an additional insured and loss payee as
its interests may appear.
(b) Environmental impairment liability insurance
covering the spillage, seepage, or other
loss of petroleum products, hazardous waste,
or similar materials onto the Leased
Premises, which insurance shall be in the
amount of One Million Dollars ($1,000,000)
with an insurance company acceptable to
Lessor, and shall name Lessor as an
additional named insured and loss payee as
its interest may appear.
(c) Certificates evidencing such policies shall
be furnished to Lessor by Lessee upon
request by Lessor.
8.2 Lessor shall, during the term of this Lease and any
extension thereof, at its own expense, carry comprehensive general liability
insurance and fire and extended coverage insurance in amounts no less than the
level of insurance required to be maintained by Lessee under paragraph 8.1(a)
above. The policies shall cover accident or damage in or on the Premises
(including the Leased Premises) and any associated parking area, entranceways
and other common areas of the
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<PAGE>
Premises. Such policies shall name Lessee as an additional insured and loss
payee to the extent of insuring Lessee from any damages or claims caused
directly or indirectly from the operation of Lessor's business or from acts or
omissions of the Lessor and/or its employees, agents, officers and invitees.
Certificates evidencing such policies shall be furnished to Lessee by Lessor
upon request by Lessee.
8.3 Each party hereto shall indemnify and hold the other
harmless from and against any and all claims, actions, damages, liabilities and
expenses (including but not limited to attorney fees) in connection with (i)
loss of life, personal injury and/or damage to property arising from or out of
any occurrence in/upon or at the Leased Premises caused directly or indirectly
by such party or its employees, agents, officers and invitees; or (ii) any
breach by such party of its obligations under this Lease. In addition, Lessee
shall indemnify and hold Lessor harmless from and against any and all claims,
actions, damages, liabilities and expenses incurred by Lessor which relate to
spillage, seepage or other loss of petroleum products onto the Premises
(including the Leased Premises) or any other environmental condition arising
from the conduct of the Fueling Service during the term hereof except to the
extent that any such loss, damage, claim, action, liability or expense (i) is
the result of the negligent acts or omissions of Lessor or its employees,
agents, officers and invitees, or (ii) relates to any of the foregoing
conditions existing upon the commencement of the term hereof (including, without
limitation, surface contamination) which in each case shall be the sole
responsibility and obligation of Lessor and Lessee shall be fully indemnified
with respect thereto.
9. Destruction or Condemnation of the Leased Premises.
9.1 Should the Leased Premises, or any part thereof, be
damaged or destroyed by fire, storm, explosion or other casualty, whether or not
of the same class or kind enumerated, Lessor shall repair the Leased Premises,
or any part thereof, at Lessor's expense and Lessee shall be responsible for the
repair and restoration of Lessee's Equipment and the Leasehold Improvements. In
addition, should such damage or destruction, or repairs resulting therefrom,
require Lessee to discontinue operations of its Fueling Service at the Leased
Premises, rental shall immediately abate from the date of such closing until the
Leased Premises are again fit for operation of a Furling Service; provided,
however, that the rental shall not abate if such damage or destruction is a
result of the acts or omissions of Lessee or its employees or agents. Should
more than one-third (1/3) of the Leased Premises be destroyed or damaged, Lessee
shall have the option, exercisable by giving Lessor written notice of such
exercise within thirty (30) days after such damage or destruction, to terminate
this Lease.
9.2 Should one-tenth (1/10) or more of the Leased Premises be
taken by eminent domain by any public authority, purchased by such authority in
lieu of condemnation, or should there be a change in any law, regulation or
order, including any judicial decision, action or order, which makes operation
of the Fueling Service impracticable, Lessee may elect to terminate this Lease
by written notice within thirty (30) days of such taking or the effective date
or the date of issuance (whichever is later) of such decision, action, order or
legislation. In the event Lessee does
-5-
<PAGE>
not elect to terminate the Lease or if less than one-tenth (1/10) of the Leased
Premises is so taken, this Lease shall continue in effect; provided, however,
that the rental due hereunder shall be subject to renegotiation if the taking of
any portion of the Leased Premises materially impacts upon Lessee's ability to
provide the Fueling Service. In the event of any such taking, the entire
compensation awarded shall belong to Lessor, except for any amounts specifically
applicable to damages incurred by Lessee, and except for any amount representing
prepaid rent.
10. Quiet Enjoyment. Lessee shall peacefully and quietly have, hold and
enjoy the Leased Premises for the term of this Lease, free from lat or hindrance
by Lessor or any party claiming by or through Lessor, for so long as Lessee
faithfully performs all the duties and obligations to be performed by Lessee
under this Lease. Further, Lessee shall have reasonable access to Lessor's
Improvements to maintain and repair Lessee's computer equipment which will be
located in an area selected by Lessor.
11. Repairs and Maintenance.
11.1 Lessee shall, at all times during the term of this Lease,
make all necessary repairs to the Leased Premises and the Leasehold Improvements
located thereon at its expense; provided, however, that such repairs have not
been caused by the neglect, misuse or carelessness of Lessor or its employees,
agents, officers or invitees. Lessee shall be responsible for repairing and
maintaining Lessee's Equipment at all times during the term of this Lease;
provided, however, that such repairs and maintenance have not been caused by the
neglect, misuse or carelessness of Lessor or its employees, agents, officers or
invitees, in which event Lessor shall bear responsibility for the same.
11.2 Lessee agrees to make, at Lessee's expense, all repairs
to the Premises (including the Leased Premises) caused by the neglect, misuse or
carelessness of Lessee and its employees, agents, officers or invitees.
11.3 Lessor shall provide to Lessee at no additional charge
daily trash and litter pick-up on the Leased Premises; provided, however, Lessee
agrees to keep the Leased Premises in a clean, tenantable condition, and shall
not permit any garbage, rubbish, refuse, or dirt to accumulate in or about the
Leased Premises.
11.4 Lessor shall provide to Lessee at reasonable times
general site maintenance for the Leased Premises, including but not limited to,
snow removal, landscape maintenance, maintenance of the paved areas and site
lighting.
12. Trade Fixtures. If all rents due herein are paid in full and Lessee
is not otherwise in default hereunder, all trade fixtures installed by Lessee or
by its permitted subtenants or assigns in connection with the business conducted
by it or them on the Leased Premises may be removed by it or them during or at
the expiration of this Lease or of any removal thereof. Notwithstanding the
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<PAGE>
foregoing, all trade fixtures installed by Lessee shall be so removed by Lessee
at Lessor's request upon the expiration of this Lease. Any damages caused by
removal of such trade fixtures shall be repaired by Lessee at Lessee's sole cost
and expense.
13. Mortgage Subordination. Lessee agrees that upon the request of
Lessor it will subordinate this Lease to the lien of any present or future
mortgagee upon the Leased Premises, or any part thereof, provided that the
mortgagee agrees in writing that said mortgagee will not terminate this Lease,
or disturb the Lessee's possession of the Leased Premises or do anything which
would adversely affect the right of Lessee hereunder so long as Lessee is not in
default hereunder.
14. Transfer by Lessor. In the event of a sale or conveyance by Lessor
of the Leased Premises, the same shall operate to release Lessor from any future
liability upon any of the covenants or conditions herein contained, and in such
event Lessee agrees to look solely to the responsibility of the successor in
interest of Lessor in and to this Lease. Lessee has option of agreeing to attorn
to the purchaser or grantee, who in such case shall be obligated on this Lease
so long as it is the owner of Lessor's interest in and to this Lease.
Alternatively, upon any sale or conveyance by Lessor, Lessee may elect to
terminate this Lease within thirty (30) days of Lessee's notice of the sale or
conveyance. In the event of termination, Lessor's purchaser or grantee shall
elect to exercise one of the options set forth in Section 3.2 above.
15. Default.
15.1 This Lease may, upon five (5) days written notice, be
terminated, notwithstanding the terms contained in Paragraph 3 above, upon the
occurrence of any of the following:
(a) At the option of Lessor, exercisable by
delivery of a written notice to Lessee, if
Lessee shall:
(i) fail to pay any installment of rent
within ten (10) days after it
becomes due, except with respect to
any portion of the rent which may be
reasonably be in dispute; or
(ii) fail to perform or observe any other
term, covenant or agreement herein
to be performed or observed and any
such failure remains unremedied for
a period of ten (10) days after
receipt of notice from Lessor of
such failure.
(b) At the option of either party, exercisable
by delivery of a written notice from such
party to the other, if the other party
shall:
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<PAGE>
(i) become insolvent or take or fail to
take any action which constitutes
its admission of inability to pay
its debts as they mature; or
(ii) make an assignment for the benefit
of creditors, file a petition in
bankruptcy, petition or apply to any
tribunal for the appointment of a
custodian, receiver or trustee for
it or a substantial part of its
assets; or
(iii) commence any proceeding under any
bankruptcy, reorganization,
arrangement, readjustment of debt,
dissolution or liquidation law or
statute of any jurisdiction, whether
now or hereafter in effect; or
(iv) have filed against it any such
petition or any application in which
an order for relief is entered o
which remains undismissed for a
period of thirty (30) days or more;
or
(v) indicate its consent to, approval of
or acquiescence in any such
petition, application or proceeding
or order for relief or the
appointment of a custodian, receivor
or trustee for it or a substantial
part of its assets, or shall suffer
any such custodianship,
receivorship, or trusteeship to
continue undischarged for a period
of thirty (30) days or more.
(c) At the option of Lessee, exercisable by
delivery of a written notice to Lessor, if
(i) the Leased Premises shall be used by
Lessor for any purpose other than
primarily as an on-highway truck
preventive maintenance service
carrier.
15.2 Upon the termination of this Lease by Lessor for any of
the foregoing reasons specified in Paragraphs 15.1a) or 15.1(b), Lessor may
re-enter the Leased Premises with or without process of law, using such means as
may be necessary, and remove all persons and property from the Leased Premises;
provided, however, the Leasehold Improvements shall remain on the LEASED
Premises for the benefit of Lessor. To the extent permitted by law, Lessor shall
not be liable for damages by reason of such re-entry or termination of this
Lease. No such termination, however, shall affect the liability of Lessee for
rent and other charges hereunder; provided, however, that Lessor, at its option,
shall be entitled to take possession of Lessee's Equipment, dispose of the same
by sale or otherwise and apply the proceeds to any and all amounts due to Lessor
under this LEASE.
-8-
<PAGE>
15.3 In the event of termination by Lessor for any of the
reasons specified in Paragraphs 15.1(a) or 15.1(b), Lessor may, but shall not be
obligated to, re-let the Leased Premises. Lessee shall be liable to Lessor for
the difference between the rent and other charges herein provided and the rent
and other charges to be received from such reletting. Lessee shall also be
liable for all reasonable expenses incurred by Lessor in repossessing and
reletting the Leased Premises, including, without limitation, costs of
construction, remodeling, commissions and attorneys' fees. Any such difference
owing by Lessee for the entire remainder of he term of the Lease and Lessor's
expenses shall be due and may be recovered at once. If Lessor does not re-let
the Leased Premises, Lessee shall be liable for all rent, charges, and damages
incurred by Lessee under this Lease which shall be due and may be recovered at
once without right to set-off.
16. Other Fuel Service Sites. Lessee hereby agrees that it shall not
within the metropolitan statistical area in which the Leased Premises is located
operate any Fueling Service in association with or on the premises of any entity
whose primary business is to provide services in competition with those
currently provided by Lessor.
17. Notices. Any notice required or permitted under this Lease shall be
in writing and shall be deemed sufficiently given and received in all respect
when personally delivered or deposited in the United States mail, registered or
certified mail, postage prepaid, addressed as follows:
To Lessor: RR-1 LIMITED PARTNERSHIP
c/o Engine Service Specialists, Inc.
331 Fulton Street, Suite 1133
Peoria, Illinois 61602
Attn: L.H. Sims, President
To Lessee: QUICK-FUEL, INC,
9301 North 107th Street
Milwaukee, Wisconsin 53224
Attn: Charles D. Jacobus, Jr., President
Either party may, in writing, designate a different address to which notice
shall be subsequently sent.
18. Successors and Assigns. The terms, covenants and conditions of this
Lease shall be binding upon and inure to the benefit of the Lessor and Lessee
and their respective successors and assigns.
19. No Assignment or Sublease. Lessee hereby agrees that it shall not
assign or in any manner transfer this Lease, nor sublet the Leased Premises, or
any portion thereof, without the prior written consent of Lessor, which consent
shall not be unreasonably withheld. in the event Lessee does assign or transfer
this Lease or sublets the Leased Premises, Lessee shall in no way be released
from any of its obligations under this Lease.
-9-
<PAGE>
20. Waiver. No waiver by either party of any breach of any of the
covenants or conditions contained herein by the other party shall be construed
as a waiver of any subsequent breach of the same or any other covenant or
condition.
21. Binding Effect. This Lease shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
22. Governing Law. This Lease shall be governed and construed in
accordance with the internal laws of the state in which the Leased Premises is
located.
23. Attorneys' Fees. If any action is instituted to enforce the terms
and conditions of this Lease, the prevailing party shall be entitled to recover
reasonable attorneys' fees and costs incurred as a result of such action.
LESSOR: LESSEE:
RR-1 LIMITED PARTNERSHIP, QUICK-FUEL, INC.
an Illinois limited partnership
By: Engine Service Specialists, Inc.,
General Partner By:Charles D. Jacobus, Jr.
------------------------------
Charles D. Jacobus, Jr.
President
By: L.H. Sims
----------------------------------
L.H. Sims
President
-10-
AGREEMENT
This Agreement is entered into as of the 31 day of October, 1995, by and between
QUICK-FUEL, INC., a Wisconsin corporation ("Lessee"), and RR-1 LIMITED
PARTNERSHIP, an Illinois Limited Partnership ("Lessor").
Recitals
Lessor and Lessee are parties to four (4) leases dated: February 1, 1991,
(Bridgeview site); February 1, 1991 (South Holland site); February 1, 1991
(Indianapolis site); and March 1, 1991 (Elk Grove Village site)(collectively,
the "Leases"), pursuant to which Lessee sells fuel at four locations owned by
Lessor. Under paragraph 4 of each of the Leases, Lessee pays to Lessor a monthly
rental equal to $ .0275 time the number of gallons of fuel sold by Lessee at the
site. The parties desire to amend paragraph 4 of each of the Leases to provide
for a quarterly rental schedule based, in part, on the combined quarterly volume
of fuel sold by Lessee at the four locations.
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the parties agree as follows:
1. In satisfaction of Lessee's payment of rent under the four Leases referenced
above, Lessee shall pay the Lessor, by check or other consideration acceptable
to Lessor, a quarterly rental calculated as follows: $ .0275 times # of gallons
of fuel sold during the quarter to purchasers utilizing Lessee's proprietary
fuel charge card, plus $ .0175 times # of gallons of fuel sold during the
quarter to purchasers utilizing a third party fuel charge card. In addition, in
any calender quarter where Lessee fails to sell at any location at least 100,000
gallons of fuel to purchasers utilizing Lessee's proprietary fuel charge card,
Lessee shall pay to Lessor an amount equal to $ .0275 times (% to equal 100,000
gallons minus # of gallons actually sold at such location). The quarterly rental
shall be payable on the thirtieth (30th) day of the month following the end of
the calender quarter.
2. This Agreement shall be deemed to amend paragraph 4 of the four Leases to the
extent that the provisions herein are inconsistent with the provisions of
paragraph 4. In all other respects the terms and conditions of the Leases remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parting have executed this Agreement by their duly
authorized representatives effective as of the date first set forth above.
LESSOR: RR-1 LIMITED PARTNERSHIP, LESSEE: QUICK-FUEL, INC.
an Illinois Limited Partnership
By: Engine Service Specialists, Inc.,
General Partner
By: /s/ By: /s/ C. D. Jacobus, Jr.
--------------------------- ---------------------------
ASSIGNMENT AND ASSUMPTION OF LEASE
This Assignment entered into this 15th day of April, 1996, by
and between RR-1 Limited Partnership ("Assignor"), Knight Transportation, Inc.
("Assignee") and Quick-Fuel, Inc. ("Lessee").
W I T N E S S E T H:
WHEREAS, Assignor is the Lessor under a Lease ("Fuel Lease")
dated as of February 1, 1991, as amended on October 31, 1995, with Lessee under
which Lessee has constructed certain leasehold improvements for the operation of
the Fueling Service (as defined in the Fuel Lease) on the Leased Premises (as
defined in the Fuel Lease); and
WHEREAS, Assignor and Assignee are parties to a Purchase and
Sale Agreement ("Purchase Agreement") dated as of February 15, 1996, under which
Assignee is purchasing the property upon the Leased Premises are located.
WHEREAS, in connection with the purchase, Assignor wishes to
assign the Fuel Lease to Assignee and Assignee has agreed to accept assignment
of the Fuel Lease.
WHEREAS, Lessee has joined as a party to this Assignment to
evidence its consent to the assignment of the Fuel Lease.
NOW, THEREFORE, in consideration of the foregoing recitals and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. Assignor hereby assigns and conveys all of its right, title
and interest in and to the Fuel Lease (a copy of which is attached hereto and
made a part hereof as Exhibit "A") to Assignee and Assignee hereby accepts said
assignment and agrees to carry out and perform all the terms and conditions of
the said Fuel Lease as therein provided.
2. Lessee hereby consents to the Assignment, acknowledges its
continuing rights and obligations under the Fuel Lease and agrees to the
substitution of Assignee for Assignor in the performance of the terms and
conditions of said Fuel Lease on and after the date of this Assignment.
3. As of the date of this Assignment no event has occurred
that with notice or the passing of time would constitute a default under the
Fuel Lease.
4. This Assignment shall be binding on, and shall inure to the
benefit of, the respective heirs, personal representatives, successors, and
assigns of the parties hereto.
5. This Assignment constitutes the entire agreement between
the parties pertaining to the subject matter contained in it and supersedes all
prior or contemporaneous agreements, representations, and understandings of the
parties. No supplement, modification, or amendment to this Assignment shall be
<PAGE>
binding unless executed in writing by all the parties. No waiver of any of the
provisions of this Assignment shall be deemed or shall constitute a waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver shall be binding unless executed in writing by the
parties making the waiver.
6. This Assignment shall be governed by and construed in
accordance with the laws of the State of Indiana without reference to choice of
law principles thereof.
7. The recitals to this Assignment shall be deemed to
constitute a part of this Assignment.
8. This Assignment may be executed by the -parties in
counterparts. This Assignment may be executed with facsimile signatures which
will be promptly replaced with original signatures.
9. If any action is instituted to enforce the terms and
conditions of this Assignment, the prevailing party shall be entitled to
attorneys' fees and costs incurred as a result of such action.
IN WITNESS WHEREOF, the parties hereto have executed and
caused this Assignment to be executed as of the date and year first above
written.
RR-1 LIMITED PARTNERSHIP
By: Caterpillar, Inc.
By: \s\ David B. Thomas
-----------------------------------
David B. Thomas, Manager
KNIGHT TRANSPORTATION, INC.
By: \s\ Randy Knight
-----------------------------------
Randy Knight, President
QUICK FUEL, INC.
By: \s\ Charles D. Jacobus, Jr.
-----------------------------------
Printed: Charles D. Jacobus, Jr.
-------------------------------
Title: President
---------------------------------
-2-
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to our reports (and to all
references to our firm) included in or made a part of this Registration
Statement.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
June 13, 1996.
