SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NO. 0-24946
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 WEST BUCKEYE ROAD
PHOENIX, ARIZONA
85043
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: 602-269-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of registrant's Common Stock, par value $0.01
per share, as of August 11, 1999 was 15,105,806 shares.
<PAGE>
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 1
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 1999 and June 30, 1998 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and June 30, 1998 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6 Exhibits and Reports On Form 8-K 14
Signatures 16
Index to Exhibits 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, 1999 December 31, 1998
------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 547,921 $ 124,188
Accounts receivable, net 18,902,117 18,248,984
Notes receivable 1,037,005 561,608
Inventories and supplies 814,609 1,329,329
Prepaid expenses 3,709,770 1,617,900
Deferred tax asset 2,742,200 2,740,200
------------- -------------
Total current assets 27,753,622 24,622,209
------------- -------------
PROPERTY AND EQUIPMENT:
Land and improvements 6,068,020 6,037,741
Buildings and improvements 6,210,942 5,970,919
Furniture and fixtures 3,704,104 3,169,514
Shop and service equipment 1,333,471 1,217,370
Revenue equipment 106,694,770 93,672,070
Leasehold improvements 514,776 469,037
------------- -------------
124,526,083 110,536,651
Less: Accumulated depreciation (30,642,643) (25,964,744)
------------- -------------
PROPERTY AND EQUIPMENT, net 93,883,440 84,571,907
------------- -------------
NOTES RECEIVABLE - long-term 5,752,163 2,846,008
OTHER ASSETS 5,486,418 4,918,096
------------- -------------
$ 132,875,643 $ 116,958,220
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, 1999 December 31, 1998
------------ ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,103,537 $ 7,143,476
Accrued liabilities 4,632,618 5,220,372
Claims accrual 4,330,994 3,724,385
Line of credit 8,361,650 3,500,000
Current portion of long-term debt 1,843,474 1,791,981
------------ ------------
Total current liabilities 26,272,273 21,380,214
LONG - TERM DEBT, less current portion 6,984,473 7,919,647
DEFERRED INCOME TAXES 19,477,745 17,012,285
------------ ------------
Total liabilities 52,734,491 46,312,146
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 50,000,000 shares,
none issued and outstanding -- --
Common Stock, $0.01 par value;
authorized 100,000,000 shares; issued
and outstanding 15,105,806 and 14,981,482
shares respectively 151,058 149,814
Additional paid-in capital 26,585,955 24,509,012
Retained earnings 53,404,139 45,987,248
------------ ------------
Total shareholders' equity 80,141,152 70,646,074
------------ ------------
$132,875,643 $116,958,220
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 36,694,364 $ 30,369,133 $ 70,216,529 $ 58,627,639
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 10,725,756 8,521,137 20,681,501 16,851,233
Fuel 3,610,806 2,956,150 6,668,859 5,721,656
Operations and maintenance 2,142,449 1,727,440 4,063,204 3,428,534
Insurance and claims 837,434 904,934 1,784,996 1,708,829
Operating taxes and licenses 1,261,430 1,229,298 2,572,878 2,355,258
Communications 319,731 211,767 607,632 448,176
Depreciation and amortization 3,643,186 3,010,396 7,081,790 5,807,250
Purchased transportation 6,810,158 5,379,958 12,733,646 10,250,779
Miscellaneous operating
expenses 863,710 692,426 1,628,390 1,296,717
------------ ------------ ------------ ------------
30,214,660 24,633,506 57,822,896 47,868,432
------------ ------------ ------------ ------------
Income from operations 6,479,704 5,735,627 12,393,633 10,759,207
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 197,328 12,001 329,248 21,138
Interest expense (223,888) (34,451) (430,991) (82,833)
------------ ------------ ------------ ------------
(26,560) (22,450) (101,743) (61,695)
------------ ------------ ------------ ------------
Income before taxes 6,453,144 5,713,177 12,291,890 10,697,512
INCOME TAXES (2,560,000) (2,360,000) (4,875,000) (4,415,000)
------------ ------------ ------------ ------------
Net income $ 3,893,144 $ 3,353,177 $ 7,416,890 $ 6,282,512
============ ============ ============ ============
Net income per common share and
common share equivalent:
Basic $ 0.26 $ 0.22 $ 0.49 $ 0.42
============ ============ ============ ============
Diluted $ 0.25 $ 0.22 $ 0.48 $ 0.41
============ ============ ============ ============
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 15,100,123 14,941,392 15,051,943 14,934,956
============ ============ ============ ============
Diluted 15,407,054 15,255,300 15,359,352 15,251,497
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
---------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,416,890 $ 6,282,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,081,790 5,807,250
Allowance for doubtful accounts 108,100 56,802
Deferred income taxes 2,463,460 2,248,815
Changes in assets and liabilities, net of
business acquired:
Increase in receivables (3,736,284) (1,108,851)
Decrease (increase) in inventories and supplies 553,644 (978,534)
Increase in prepaid expenses (2,058,978) (1,930,349)
Decrease (increase) in other assets (119,839) 827,939
Decrease in accounts payable (1,514,974) (668,337)
Decrease in accrued liabilities and
claims accrual (276,652) (111,395)
------------ ------------
Net cash provided by operating activities 9,917,157 10,425,852
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (11,560,374) (10,663,525)
Cash received from business acquired 64,501
------------ ------------
Net cash used in investing activities $(11,495,873) $(10,663,525)
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended
June 30
--------------------------
1999 1998
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing on line of credit, net 4,861,650 2,326,719
Payments of long-term debt (883,681) (14,171)
Decrease in accounts payable - equipment (2,220,780) (2,735,115)
Proceeds from exercise of stock options 245,260 216,594
----------- -----------
Net cash provided by (used in)
financing activities 2,002,449 (205,973)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 423,733 (443,646)
CASH AND CASH EQUIVALENTS, Beginning of period 124,188 512,339
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 547,921 $ 68,693
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Non-cash investing and financing transactions:
Equipment acquired by
accounts payable $ 3,660,692 $ 7,874,928
Cash Flow Information:
Income taxes paid $ 4,004,259 $ 2,453,032
Interest paid 400,679 82,886
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Financial Information
The accompanying consolidated financial statements include the parent company
Knight Transportation, Inc., and its wholly owned subsidiaries, Knight
Administrative Services, Inc.; Quad-K Leasing, Inc.; KTTE Holdings, Inc., QKTE
Holdings, Inc., Knight Management Services, Inc., and Knight Transportation
Midwest, Inc.; Knight Transportation South Central Ltd.; and KTeCom, L.L.C.
(hereinafter collectively called the "Company"). All material inter-company
items and transactions have been eliminated in consolidation.
The consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"), pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures have been omitted or condensed pursuant to
such rules and regulations. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Results of operations in interim periods are
not necessarily indicative of results for a full year. These consolidated
financial statements and notes thereto should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of contingent
assets and liabilities, at the date of the accompanying consolidated financial
statements, and the reported amounts of the revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Note 2. Recapitalization and Stock Split
On April 22, 1998, the Board of Directors approved a three for two stock split,
effected in the form of a 50 percent stock dividend. The stock split was paid on
May 18, 1998 to stockholders of record at the close of business on May 1, 1998.
This stock split has been given retroactive recognition for all periods
presented in the accompanying consolidated financial statements.
6
<PAGE>
Note 3. Net Income Per Share
A reconciliation of the basic and diluted earnings per share computations for
the three months and six months ended June 30, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average common
shares outstanding - basic 15,100,123 14,941,392 15,051,943 14,934,956
Effect of stock options 306,931 313,908 307,409 316,541
----------- ----------- ----------- -----------
Weighted average common
share and common share
equivalents outstanding -
diluted 15,407,054 15,255,300 15,359,352 15,251,497
=========== =========== =========== ===========
Net income 3,893,144 3,353,177 7,416,890 6,282,512
Net income per common share
and common share equivalent
Basic $ 0.26 $ 0.22 $ 0.49 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.25 $ 0.22 $ 0.48 $ 0.41
=========== =========== =========== ===========
Note 4. Acquisition
The Company acquired the assets of a Texas-based truckload carrier during the
quarter ended March 31, 1999. The purchased assets and assumed liabilities were
recorded at their estimated fair values at the acquisition date in accordance
with APB Opinion No. 16. In conjunction with the acquisition, the Company issued
97,561 shares of common stock. Adjustments to the purchase price allocations, if
any, are not expected to have a material impact on the accompanying consolidated
financial statements.
The aggregate purchase price of the acquisition consisted of the following:
1999
-------
(in thousands)
Common Stock $ 1,833
Assumption of liabilities 331
-------
Total $ 2,164
=======
7
<PAGE>
The fair value of the assets purchased has been allocated as follows:
1999
-------
(in thousands)
Cash $ 65
Accounts receivable 407
Property and equipment 1,149
Intangible assets 200
Other assets 343
-------
Total $ 2,164
=======
Note 5. Recently Adopted Accounting Pronouncement
Effective January, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), Disclosures About Segments of an Enterprise
and Related Information, which establishes revised standards for the reporting
of financial and descriptive information about operating segments in financial
statements.
The Company has determined that it has one reportable operating segment.
Although the Company has three operating divisions which are managed based on
the regions of the United States in which each operates; each division has
similar economic characteristics. Each regional operating division provides
short to medium-haul truckload carrier services of general commodities to a
similar class of customers. In addition, each division exhibits similar
financial performance, including average revenue per mile and operating ratio.
As a result of the foregoing, the Company has determined that it is appropriate
to aggregate its operating divisions into one reportable segment consistent with
the guidance in SFAS No. 131. Accordingly, the Company has not presented
separate financial information for each of its operating divisions as the
Company's consolidated financial statements present its one reportable segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. The
words "believe," "expect," "anticipate'" and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Such forward-looking statements are within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
are not limited to, projections of revenues, income, or loss, capital
expenditures, plans for future operations, financing needs or plans, the impact
of inflation and plans relating to the foregoing. Statements in the Company's
Annual Report on Form 10-K, including Notes to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," describe factors, among others, that could contribute to
or cause such differences. Additional factors that could cause actual results to
differ materially from those expressed in such forward-looking statements are
set forth in "Business" and "Market for the Company's Common Equity and Related
Stockholder Matters" in the Company's Annual Report on Form 10-K.
8
<PAGE>
RESULTS OF OPERATIONS
The Company's operating revenue for the six months ended June 30, 1999,
increased by 19.8% to $70.2 million from $58.6 million over the same period in
1998. For the three months ended June 30, 1999, operating revenue increased by
20.8% to $36.7 million from $30.4 million over the same period in 1998. The
increase in operating revenue resulted from expansion of the Company's customer
base and increased volume from existing customers, and was facilitated by the
continued expansion of the Company's fleet, including approximately 50 tractors
acquired in the March 13, 1999 acquisition of Action Delivery Services, Inc. and
an affiliate, a Texas-based trucking company, and an increase in the Company's
independent contractor fleet. The Company's fleet increased by 20.9% to 1,047
tractors (including 272 owned by independent contractors) as of June 30, 1999,
from 866 tractors (including 212 owned by independent contractors) as of June
30, 1998.
Salaries, wages and benefits increased as a percentage of operating revenue to
29.5% for the six months ended June 30, 1999, from 28.7% for the same period in
1998. For the three months ended June 30, 1999, salaries, wages and benefits
increased as a percentage of operating revenue to 29.2% from 28.1% for the same
period in 1998. These increases were primarily the result of adjustments
implemented in the driver payroll rate structure for new drivers during the 1999
period compared to the 1998 period, which resulted in an approximate $0.01 per
mile increase in payroll costs. For Company drivers, the Company records
accruals for worker's 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 9.5% for the six
months ended June 30, 1999, from 9.8% for the same period in 1998. This decrease
was primarily the result of the usage of fuel inventory purchased in advance at
lower costs, along with the increase in the percentage of independent
contractors to Company drivers for the 1999 period. For the three months ended
June 30, 1999, fuel expense as a percentage of operating revenue increased to
9.8% from 9.7% for the same period in 1998. This increase was primarily the
result of recent higher fuel costs per gallon.
Operations and maintenance expense remained consistent as a percentage of
operating revenue at 5.8% for the six months ended June 30, 1999, and for the
corresponding period in 1998. For the three months ended June 30, 1999,
operations and maintenance expense as a percentage of operating revenue
increased to 5.8% from 5.7% for the same period in 1998. The latter increase
resulted from the decreased utilization of the Company's fleet, as well as
slightly higher maintenance costs related to the age of the Company's fleet.
The Company's insurance program for medical, liability, physical damage and
cargo damage involves self-insurance with varying risk retention levels. Claims
in excess of these risk retention levels are covered by insurance which
management considers adequate. The Company accrues the estimated cost of the
uninsured portion of pending claims. These accruals are estimated based on
management's evaluation of the nature and severity of individual claims and
estimates of future claims development based on historical claims development
trends. Insurance and claims expense decreased as a percentage of operating
revenue to 2.5% for the six months ended June 30, 1999, from 2.9% for the same
period in 1998. For the three months ended June 30, 1999, insurance and claims
expense decreased as a percentage of operating revenue to 2.3% from 3.0% for the
same period in 1998. These decreases were due to an overall decrease in the
amount of claims incurred during the periods.
9
<PAGE>
Operating taxes and licenses decreased as a percentage of operating revenue to
3.7% for the six months ended June 30, 1999, from 4.0% for the same period in
1998. For the three months ended June 30, 1999, operating taxes and licenses as
a percentage of operating revenue decreased to 3.4% compared to 4.0% for the
same period in 1998. These decreases were due to the increase in the number of
independent contractors as a percentage of the Company's entire fleet to 26% as
of June 30, 1999, from 24% as of June 30, 1998, independent contractors are
required to pay their own mileage taxes, also an increase in the miles driven in
lower taxing states.
Communications expense as a percentage of operating revenue for both the six
months and three months ended June 30, 1999 was slightly higher than the same
periods in 1998 as a result of the legislated surcharge administered by pay
phone providers.
Depreciation and amortization expense as a percentage of operating revenue
increased to 10.1% for the six month period ended June 30, 1999, from 9.9% for
the same period in 1998. This increase was due to decreased utilization of the
Company's fleet. For the three months ended June 30, 1999 and 1998, depreciation
and amortization remained consistent as a percentage of operating revenue at
9.9%.
Purchased transportation increased as a percentage of operating revenue to 18.1%
for the six months ended June 30, 1999, from 17.5% for the same period in 1998.
For the three months ended June 30, 1999, purchased transportation as a
percentage of operating revenue increased to 18.6% from 17.7% for the same
period in 1998. These increases were due to the increase in the ratio of
independent contractors to company drivers to 26% as of June 30, 1999, from 24%
as of June 30, 1998. Independent contractors are compensated at a fixed rate per
mile.
Miscellaneous operating expenses, as a percentage of operating revenue, were
slightly higher for the three and six months ending June 30, 1999 compared to
the same periods in 1998. These increases were due to decreased utilization of
the Company's fleet.
As a result of the above factors, the Company's operating ratio (operating
expenses as a percentage of operating revenues) for the six months ended June
30, 1999, increased to 82.4% from 81.6% for the same period in 1998. The
Company's operating ratio for the three months ended June 30, 1999, increased to
82.3% from 81.1% for the same period in 1998. Management believes the increase
in the operating ratio was mainly due to decreased utilization of the Company's
fleet and a corresponding decrease in revenue per mile.
For both the six months and three months ended June 30, 1999, net interest
expense increased as a percentage of revenue compared to the same periods in
1998. These increases were primarily the result of long-term debt incurred for
the purchase of 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.
As a result of the preceding, the Company's net income as a percentage of
operating revenue was 10.6% for the six months ended June 30, 1999, compared to
10.7% for the same period in 1998 and 10.6% for the three months ended June 30,
1999, compared to 11.0% for the same period in 1998.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required a significant investment in
new revenue equipment. The Company's primary source of liquidity has been funds
provided by operations and the Company's line of credit with its primary lender.
Net cash provided by operating activities was approximately $9.9 million for the
first six months of 1999, compared to $10.4 million for the corresponding period
in 1998.
Capital expenditures for the purchase of revenue equipment, net of trade-ins,
office equipment and leasehold improvements totaled $15.2 million for the first
six months of 1999 compared to $18.5 million for the same period in 1998.
Net cash provided by financing activities was approximately $2.0 million for the
first six months of 1999 compared to net cash used in financing activities of
$0.2 million for the same period in 1998. Net cash provided by financing
activities during the first six months of 1999 was the result of the Company
paying cash to fund the expansion of its equipment fleet.
The Company maintains a $15 million revolving line of credit with its primary
lender with principal due at maturity, July 2001, and interest payable monthly
under one of two options (the Prime Rate or Libor plus .625%) elected by the
Company. In management's opinion, the Company will have sufficient liquidity to
pay off, or will be able to renew on similar terms, its line of credit at
maturity. Borrowings under the line amounted to $8.4 million at June 30, 1999.
Under the terms of the line of credit, the Company is required to maintain
certain financial ratios. These ratios include: total liabilities to net worth
ratio; net worth above a minimum amoun; current ratio, and certain debt service
ratios. The Company is also required to maintain other covenants relating to
corporate structure, ownership, and management.
In October, 1998, the Company entered into a $10 million term loan with its
primary lender which will mature in 60 months. The interest is at a fixed
percentage of 5.75%. The note is unsecured and has an outstanding balance of
$8,827,947 as of June 30, 1999, with $1,843,474 due in the next 12 months.
Management believes the Company has adequate liquidity to meet its current
needs. 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. 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
In the transportation industry, results of operation frequently show a seasonal
pattern. Seasonal variations may result from weather or from customer's reduced
shipments after the busy winter holiday season. To date, the Company's revenues
have not shown any significant seasonal pattern. Because the Company has
operated primarily in Arizona, California and the western United States, winter
weather conditions have not adversely affected the Company's business. The
current expansion of the Company's operations into the Midwest, on the east
coast, and in the Texas and Louisiana regions, could expose the Company to
greater operating variances due to seasonal weather.
11
<PAGE>
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
six months ended June 30, 1999, were not significant.
YEAR 2000
The "Year 2000 Issue" arose because many existing computer programs use only the
last two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results.
The Company is in the process of reviewing, testing, and implementing various
modifications to ensure that its computer equipment and software will function
properly in the Year 2000 and beyond. For this purpose, the term "computer
equipment and software" includes systems commonly referred to as information
technology systems ("IT systems"), such as data processing, dispatch,
accounting, telephone, and other miscellaneous systems as well as systems that
are not commonly referred to as IT systems, such as fax machines, heating and
air conditioning systems, and other miscellaneous systems. The Company has been
and will be in contact with significant vendors, service providers, and
customers, particularly those with whom electronic data information ("EDI")
transactions are exchanged, to determine and resolve any Year 2000 related
issues. The Company estimates the status of the testing on these systems as
follows:
VENDOR MODIFICATIONS
BEING PERFORMED TESTING COMMENCED
-------------------- -----------------
IT SYSTEMS 98% 98%
NON-IT SYSTEMS 98% 98%
All internal and external costs associated with the Company's Year 2000
compliance activities are expensed as incurred. The Company believes that the
costs of addressing the Year 2000 issue will not have a material impact on its
financial position.
Since all major computerized systems and applications will have been reviewed
and tested as part of the Year 2000 project, the Company feels that it has
reasonably addressed all material risks that may effect its operations. The
Company presently believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified and corrected, there can be no assurance that the Year 2000
issue will not materially effect the Company's relationships with vendors,
customers, and others. Also, there can be no assurance that the Year 2000 issues
of other entities with whom the Company deals will not have a material adverse
impact on the Company's operations.
The Company is in the process of evaluating and developing a contingency plan to
provide for the most reasonably likely worst case scenarios regarding Year 2000
compliance. This contingency plan will be completed in the second half of 1999.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pursuant to Financial Accounting Reporting Release Number 48 issued by the
Securities and Exchange Commission in January, 1997, the Company is required to
disclose information concerning market risk with respect to foreign exchange
rates, interest rates, and commodity prices. The Company has elected to make
such disclosures, to the extent applicable, using a sensitivity analysis
approach, based upon hypothetical changes in interest rates and commodity
prices.
The Company has not had occasion to use derivative financial instruments for
risk management purposes and does not use them for either speculation or
trading. Because the Company's operations are confined to the United States, the
Company is not subject to foreign currency risk.
The Company is subject to interest rate risk, to the extent it borrows against
its line of credit or incurs additional debt in the acquisition of revenue
equipment. The Company attempts to manage its interest rate risk by carrying as
little debt as possible. The Company has not entered into interest rate swaps or
other strategies designed to protect it against interest rate risk. In the
opinion of management, an increase in short-term interest rates would not have a
material effect on the Company's financial condition, based upon the level of
debt carried by the Company as of June 30, 1999. Management does not foresee or
expect any significant changes in exposure to interest rate fluctuations or in
how that exposure is managed by the Company in the near future. The Company has
not issued corporate debt instruments.
The Company is subject to commodity price risk with respect to purchases of fuel
and tires. The Company has not used derivative financial instruments to manage
these risks. The Company has installed fuel islands at its Phoenix facility that
enable it to purchase fuel at "rack" prices, thereby saving pumping charges. In
the ordinary course of business, the Company purchases fuel in bulk quantities,
which it maintains in inventory for current and future use. These purchases are
not designed as hedging transactions, but do provide some degree of protection
against future price increases and exposure to future price decreases. Where
possible, the Company seeks to participate in tire testing programs to reduce
the cost of tires. It is the Company's policy to pass on price increases in
fuel, tires, or other commodities through rate increases or surcharges, to the
extent the existing market will permit such costs to be passed through to the
customer. If the Company were unable to pass increased costs on to the customers
through rate increases, such increases could adversely affect the Company's
results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to ordinary, routine litigation and administrative
proceedings incidental to its business. These proceedings primarily involving
personnel matters, including Equal Employment Opportunity Commission ("EEOC")
claims and claims for personal injury or property damage incurred in the
transportation of freight. The Company maintains insurance to cover liabilities
arising from the transportation of freight in amounts in excess of self-insured
retentions. It is the Company's policy to comply with applicable equal
employment opportunity laws and the Company periodically reviews its policies
and practices for equal employment opportunity compliance.
13
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
During April 1999, the Company acquired a minority interest in a logistics
company with the intent of developing synergies to assist in developing the
Company's asset-based truckload business. During June 1999, the Company expanded
its Indianapolis regional hub by opening a facility in Charlotte, North Carolina
that will initially operate between five to ten tractors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
----------- -----------
Exhibit 3 Instruments defining the rights of security
holders, including indentures
(3.1) Restated Articles of Incorporation of the
Company (Incorporated by reference to
Exhibit 3.1 to the Company's Registration
Statement on Form S-1. No 33-83534.)
(3.2) Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 to
the Company's report on Form 10-K for the
period ending December 31, 1996.)
Exhibit 4 Instruments defining the rights of security
holders, including indentures
14
<PAGE>
(4.1) Articles 4, 10 and 11 of the Restated
Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1 to
the Company's Report on Form 10-K for the
fiscal year ended December 31, 1994.)
(4.2) Sections 2 and 5 of the Amended and Restated
By-laws of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's
Report on Form 10-K for the fiscal year
ended December 31, 1995.)
Exhibit 11 Schedule of Computation of Net Income Per
Share (Incorporated by reference from Note
3, Net Income Per Share, in the Notes To
Consolidated Financial Statements on Form
10-Q, for the quarter ended June 30, 1999.)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on March 25, 1999, pertaining to the acquisition
of all of the assets and assumption of selected liabilities of Action
Delivery Service, Inc. and its affiliated company, Action Warehouse
Services, Inc., both based in Corsicana, Texas.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
Date: August 11, 1999 By: /s/ Kevin P. Knight
------------------------------------
Kevin P. Knight
Chief Executive Officer
Date: August 11, 1999 By: /s/ Clark Jenkins
------------------------------------
Clark Jenkins
Chief Financial Officer and
Principal Financial Officer
16
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 0-24946
<PAGE>
KNIGHT TRANSPORTATION, INC.
INDEX TO EXHIBITS TO FORM 10-Q
Sequentially
Exhibit No. Description Numbered Pages(1)
- ----------- ----------- -----------------
Exhibit 4 Instruments defining the rights of security
holders, including indentures
(a) Articles 4, 10 and 11 of the Restated
Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1
to the Company's Report on Form 10-K for
the fiscal year ended December 31, 1994.)
(b) Sections 2 and 5 of the Amended and Restated
By-laws of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's
Report on Form 10-K for the fiscal year
ended December 31, 1995.)
Exhibit 27 Financial Data Schedule
(1) The page numbers where exhibits (other than those incorporated by reference)
may be found are indicated only on the manually signed report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 547,921
<SECURITIES> 0
<RECEIVABLES> 20,620,985
<ALLOWANCES> 681,863
<INVENTORY> 814,609
<CURRENT-ASSETS> 27,753,622
<PP&E> 124,526,083
<DEPRECIATION> (30,642,643)
<TOTAL-ASSETS> 132,875,643
<CURRENT-LIABILITIES> 26,272,273
<BONDS> 0
0
0
<COMMON> 151,058
<OTHER-SE> 79,990,094
<TOTAL-LIABILITY-AND-EQUITY> 132,875,643
<SALES> 0
<TOTAL-REVENUES> 70,216,529
<CGS> 0
<TOTAL-COSTS> 57,822,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,743
<INCOME-PRETAX> 12,291,890
<INCOME-TAX> 4,875,000
<INCOME-CONTINUING> 7,416,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,416,890
<EPS-BASIC> .49
<EPS-DILUTED> .48
</TABLE>
