SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 11, 1999 was 15,114,654 shares.
<PAGE>
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 1
Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30,
1999 and September 30, 1998 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and
September 30, 1998 4
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 13
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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 518,934 $ 124,188
Accounts receivable, net 21,150,524 18,248,984
Notes receivable 1,158,163 561,608
Inventories and supplies 53,615 1,329,329
Prepaid expenses 3,090,395 1,617,900
Deferred tax asset 2,539,100 2,740,200
------------- -------------
Total current assets 28,510,731 24,622,209
------------- -------------
PROPERTY AND EQUIPMENT:
Land and improvements 6,076,180 6,037,741
Buildings and improvements 6,220,092 5,970,919
Furniture and fixtures 3,756,728 3,169,514
Shop and service equipment 1,319,512 1,217,370
Revenue equipment 113,813,467 93,672,070
Leasehold improvements 519,375 469,037
------------- -------------
131,705,354 110,536,651
Less: Accumulated depreciation (31,626,481) (25,964,744)
------------- -------------
PROPERTY AND EQUIPMENT, net 100,078,873 84,571,907
------------- -------------
NOTES RECEIVABLE - long-term 7,881,652 2,846,008
OTHER ASSETS 5,582,080 4,918,096
------------- -------------
$ 142,053,336 $ 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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,493,040 $ 7,143,476
Accrued liabilities 4,406,488 5,220,372
Claims accrual 4,189,067 3,724,385
Line of credit 9,500,000 3,500,000
Current portion of long-term debt 1,870,696 1,791,981
------------ ------------
Total current liabilities 30,459,291 21,380,214
LONG - TERM DEBT, less current portion 6,507,070 7,919,647
DEFERRED INCOME TAXES 21,008,928 17,012,285
------------ ------------
Total liabilities 57,975,289 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 15,107,757 and 14,981,482
shares respectively 151,078 149,814
Additional paid-in capital 26,601,983 24,509,012
Retained earnings 57,324,986 45,987,248
------------ ------------
Total shareholders' equity 84,078,047 70,646,074
------------ ------------
$142,053,336 $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 Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 38,054,052 $ 32,861,739 $ 108,270,581 $ 91,489,378
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Salaries, wages and benefits 11,233,318 9,346,431 31,914,819 26,197,664
Fuel 3,861,586 3,331,291 10,530,444 9,052,947
Operations and maintenance 2,254,981 2,090,818 6,318,185 5,519,352
Insurance and claims 996,989 745,378 2,781,985 2,454,207
Operating taxes and licenses 1,460,753 1,386,575 4,033,630 3,741,833
Communications 289,615 249,584 897,247 697,760
Depreciation and amortization 3,280,782 3,244,731 10,362,573 9,051,981
Purchased transportation 7,230,737 5,591,984 19,964,382 15,842,763
Miscellaneous operating
expenses 953,014 802,992 2,581,403 2,099,709
------------- ------------- ------------- -------------
31,561,775 26,789,784 89,384,668 74,658,216
------------- ------------- ------------- -------------
Income from operations 6,492,277 6,071,955 18,885,913 16,831,162
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 253,835 34,772 583,083 55,910
Interest expense (265,267) (113,369) (696,258) (196,202)
------------- ------------- ------------- -------------
(11,432) (78,597) (113,175) (140,292)
------------- ------------- ------------- -------------
Income before income taxes 6,480,845 5,993,358 18,772,738 16,690,870
INCOME TAXES (2,560,000) (2,475,000) (7,435,000) (6,890,000)
------------- ------------- ------------- -------------
Net income $ 3,920,845 $ 3,518,358 $ 11,337,738 $ 9,800,870
============= ============= ============= =============
Net income per common share
and common share equivalent:
Basic $ 0.26 $ 0.24 $ 0.75 $ 0.66
============= ============= ============= =============
Diluted $ 0.26 $ 0.23 $ 0.74 $ 0.64
============= ============= ============= =============
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 15,107,933 14,946,820 15,070,839 14,938,433
============= ============= ============= =============
Diluted 15,313,810 15,206,761 15,350,009 15,236,805
============= ============= ============= =============
</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)
Nine Months Ended
September 30
----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,337,738 $ 9,800,870
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 10,362,573 9,051,981
Allowance for doubtful accounts 163,308 46,068
Deferred income taxes 4,197,743 2,248,815
Changes in assets and liabilities,
net of business acquired:
Increase in receivables (8,290,546) (6,149,581)
Decrease (increase) in inventories
and supplies 1,314,639 (1,149,217)
Increase in prepaid expenses (1,439,603) (1,685,557)
Decrease (increase) in other assets (228,131) 297,466
(Decrease) increase in accounts payable (948,689) 1,672,609
(Decrease) increase in accrued liabilities
and claims accrual (640,710) 3,458,227
------------ ------------
Net cash provided by operating activities 15,828,322 17,591,681
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (18,204,743) (21,134,552)
Cash received from business acquired 64,501 --
------------ ------------
Net cash used in investing activities $(18,140,242) $(21,134,552)
------------ ------------
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)
Nine Months Ended
September 30
--------------------------
1999 1998
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing on line of credit, net 6,000,000 5,644,844
Payments of long-term debt (1,333,862) (14,171)
Decrease in accounts payable - equipment (2,220,780) (2,735,115)
Proceeds from exercise of stock options 261,308 249,757
----------- -----------
Net cash provided by
financing activities 2,706,666 3,145,315
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 394,746 (397,556)
CASH AND CASH EQUIVALENTS,
Beginning of period 124,188 512,339
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 518,934 $ 114,783
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Non-cash investing and financing transactions:
Equipment acquired by
accounts payable $ 6,483,909 $ 6,446,198
Cash Flow Information:
Income taxes paid $ 5,298,770 $ 3,439,916
Interest paid 655,025 196,255
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 certain estimates and assumptions. Such estimates and assumptions affect
the reported amounts of assets and liabilities, and the 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 nine months ended September 30, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding - Basic 15,107,933 14,946,820 15,070,839 14,938,433
Effect of stock options 205,877 259,941 279,170 298,372
----------- ----------- ----------- -----------
Weighted average common share
and common share equivalents
outstanding -
Diluted 15,313,810 15,206,761 15,350,009 15,236,805
=========== =========== =========== ===========
Net income $ 3,920,845 $ 3,518,358 $11,337,738 $ 9,800,870
Net income per common share and
common share equivalent
Basic $ 0.26 $ 0.24 $ 0.75 $ 0.66
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.23 $ 0.74 $ 0.64
=========== =========== =========== ===========
</TABLE>
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 its 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 operating 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 three operating divisions; rather
the Company's consolidated financial statements are presented as 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 nine months ended September 30, 1999,
increased by 18.3% to $108.3 million from $91.5 million over the same period in
1998. For the three months ended September 30, 1999, operating revenue increased
by 15.8% to $38.1 million from $32.9 million during 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 40 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 24.4%
to 1,142 tractors (including 275 owned by independent contractors) as of
September 30, 1999, from 918 tractors (including 216 owned by independent
contractors) as of September 30, 1998. As of September 30, 1999, 24.1% of the
Company's fleet was operated by independent contractors, compared to 23.5% as of
September 30, 1998.
Salaries, wages and benefits increased as a percentage of operating revenue to
29.5% for the nine months ended September 30, 1999, from 28.6% for the same
period in 1998. For the three months ended September 30, 1999, salaries, wages
and benefits increased as a percentage of operating revenue to 29.5% from 28.4%
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 9.7% for the nine
months ended September 30, 1999, from 9.9% for the same period in 1998. This
decrease was primarily the result of the usage of fuel inventory purchased in
advance at costs lower than current market prices, along with the increase in
the percentage of independent contractors to Company drivers for the 1999
period. Independent contractors pay for their own fuel costs. For the three
months ended September 30, 1999, fuel expense as a percentage of operating
revenue increased to 10.2% from 10.1% for the same period in 1998. This increase
was primarily the result of recent higher fuel costs per gallon.
Operations and maintenance expense decreased as a percentage of operating
revenue to 5.8% for the nine months ended September 30, 1999, from 6.0% for the
corresponding period in 1998. For the three months ended September 30, 1999,
operations and maintenance expense as a percentage of operating revenue
decreased to 5.9% from 6.4% for the same period in 1998. These decreases
resulted from the increase in the relative percentage of independent contractors
in 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 2.6% for the nine months ended September 30, 1999, from 2.7% for the
same period in 1998. For the three months ended September 30, 1999, insurance
and claims expense increased as a percentage of operating revenue to 2.6% from
2.3% for the same period in 1998. These changes reflect the effects of the
changes in frequency and severity of claims activity during these periods.
9
<PAGE>
Operating taxes and licenses decreased as a percentage of operating revenue to
3.7% for the nine months ended September 30, 1999, from 4.1% for the same period
in 1998. For the three month period ended September 30, 1999, operating taxes
and licenses as a percentage of operating revenue decreased to 3.8%, compared to
4.2% 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 24.1% as of September 30, 1999, from 23.5% as of September 30, 1998, as
well as an increase in the miles driven in lower taxing states. Independent
contractors are required to pay their own mileage taxes.
Communications expense as a percentage of operating revenue for both the nine
month and three month periods ended September 30, 1999, was slightly higher than
for the same periods in 1998 as a result of the legislated surcharge
administered by pay phone providers. The Company's drivers frequently use pay
phones to communicate with operations personnel.
Depreciation and amortization expense as a percentage of operating revenue
decreased to 9.6% for the nine month period ended September 30, 1999, from 9.9%
for the same period in 1998. For the three month period ended September 30,
1999, depreciation and amortization decreased as a percentage of operating
revenue to 8.6% compared to 9.9% for the corresponding period in 1998. These
decreases were due to the increase in the percentage of independent contractors
in the Company's fleet and adjustments to estimates on certain equipment.
Purchased transportation increased as a percentage of operating revenue to 18.4%
for the nine month period ended September 30, 1999, from 17.3% for the same
period in 1998. For the three month period ended September 30, 1999, purchased
transportation as a percentage of operating revenue increased to 19.0%, from
17.0% for the same period in 1998. These increases were due to the increase in
the ratio of independent contractors to company drivers to 24.1% as of September
30, 1999, from 23.5% as of September 30, 1998. Independent contractors are
compensated by the Company at a fixed rate per mile.
Miscellaneous operating expenses, as a percentage of operating revenue, were
slightly higher for the three and nine month periods ended September 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 nine month period ending
September 30, 1999, increased to 82.6% from 81.6% for the same period in 1998.
The Company's operating ratio for the three month period ended September 30,
1999, increased to 82.9% from 81.5% 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 nine and three month periods ended September 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 additional long-term debt
incurred for the purchase of new 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 10.5% for the nine months ended September 30, 1999,
compared to 10.7% for the same period in 1998 and 10.3% for the three months
ended September 30, 1999, compared to 10.7% 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 $15.8 million for
the nine month period ended September 30, 1999, compared to $17.6 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 $24.7 million for the nine
month period ended September 30, 1999, compared to $27.6 million for the same
period in 1998.
Net cash provided by financing activities was approximately $2.7 million for the
nine month period ended September 30, 1999 compared to $3.1 million for the same
period in 1998. Net cash provided by financing activities during the nine month
period ended September 30, 1999 was used by the Company to fund the expansion of
its equipment fleet.
The Company maintains a $25 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 $9.5 million at September 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 pre-determined amount; 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 October 2003. The interest is at a fixed
percentage of 5.75%, with principal and interest paid monthly. The note is
unsecured and had an outstanding balance of $8,377,766 as of September 30, 1999.
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 Company's 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 the seasonal weather in those regions.
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
nine months ended September 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 continue to 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 99% 99%
NON-IT SYSTEMS 99% 99%
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 has developed a contingency plan to provide for the most reasonably
likely worst case scenarios regarding Year 2000 compliance.
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 adverse effect on the Company's financial condition, based upon the
level of debt carried by the Company as of September 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
intended to stabilize the cost of fuel and provide some degree of protection
against future price increases. These purchases also create some exposure if
fuel prices should decrease.
Where possible, the Company seeks to participate in tire testing programs with
tire manufacturers 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 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, as of September 30, 1999, operated between twenty to thirty tractors.
In August 1998, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of the Company's common stock, at management's
discretion and based on management's assessment of the Company's liquidity and
the price of its common stock. On October 26, 1999, the Company's Board of
Directors authorized the Company to purchase up to a total of 1,000,000 shares
of the Company's common stock on the same terms and conditions. As of November
11, 1999, the Company had purchased approximately 500,000 shares of its common
stock at an average price of $11.68 per share.
On November 10, 1999, the Board of Directors elected Mr. Mark A. Scudder to fill
a vacancy on the Board of Directors. Mr. Scudder is an attorney who practices
law in Lincoln, Nebraska and is a member of the Board of Directors of Covenant
Transportation, Inc. Mr. Scudder was elected to the Company's Audit Committee
and replaces Mr. Keith Turley, who resigned as a member of the Audit Committee
for health reasons.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
----------- -----------
Exhibit 3 Articles of Incorporation and By-Laws
(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.)
14
<PAGE>
Exhibit 4 Instruments defining the rights of security holders,
including indentures
(4.1) Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1994.)
(4.2) Sections 2 and 5 of the Amended and Restated 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
September 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: November 11, 1999 By: /s/ Kevin P. Knight
------------------------------------
Kevin P. Knight
Chief Executive Officer
Date: November 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 September 30, 1999
Commission File No. 0-24946
17
<PAGE>
KNIGHT TRANSPORTATION, INC.
INDEX TO EXHIBITS TO FORM 10-Q
Sequentially
Numbered
Exhibit No. Description 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.
18
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 518,934
<SECURITIES> 0
<RECEIVABLES> 21,150,524
<ALLOWANCES> 732,699
<INVENTORY> 53,615
<CURRENT-ASSETS> 28,713,831
<PP&E> 131,705,354
<DEPRECIATION> (31,626,481)
<TOTAL-ASSETS> 142,053,336
<CURRENT-LIABILITIES> 30,459,291
<BONDS> 0
0
0
<COMMON> 151,078
<OTHER-SE> 83,926,969
<TOTAL-LIABILITY-AND-EQUITY> 142,053,336
<SALES> 0
<TOTAL-REVENUES> 108,270,581
<CGS> 0
<TOTAL-COSTS> 89,384,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (113,175)
<INCOME-PRETAX> 18,772,738
<INCOME-TAX> 7,435,000
<INCOME-CONTINUING> 11,337,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,337,738
<EPS-BASIC> .75
<EPS-DILUTED> .74
</TABLE>
