-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GJMpqdEI26YNKyRAnaBTyS3LPP6jB59TokWnJz12dfjmaMKgdR04R/JtDWRXaDwC MtlOtW9VwsWYvkB+bcRCWQ== 0000950147-00-000482.txt : 20000331 0000950147-00-000482.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950147-00-000482 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNIGHT TRANSPORTATION INC CENTRAL INDEX KEY: 0000929452 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 860649974 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24946 FILM NUMBER: 586182 BUSINESS ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 BUSINESS PHONE: 6022692000 MAIL ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 10-K405 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/99 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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) (602) 269-2000 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, $0.01 par value NASDAQ-NMS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 27, 2000 , was $106,819,016 (based upon $16.625 per share being the closing sale price on that date as reported by the National Association of Securities Dealers Automated Quotation System-National Market System ("NASDAQ-NMS")). In making this calculation, the issuer has assumed, without admitting for any purpose, that all executive officers and directors of the company, and no other persons, are affiliates. The number of shares outstanding of the registrant's common stock as of March 27, 2000 was 14,641,049. The Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2000, is incorporated into this Form 10-K Part III by reference. ================================================================================ TABLE OF CONTENTS KNIGHT TRANSPORTATION, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 PAGES PART I .................................................................... 1 Item 1. Business...................................................... 1 Item 2. Properties.................................................... 7 Item 3. Legal Proceedings............................................. 8 Item 4. Submission of Matters to a Vote of Security Holders........... 8 PART II ................................................................... 8 Item 5. Market for Company's Common Equity and Related Shareholder Matters.......................................... 8 Item 6. Selected Financial Data....................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 10 Item 7a. Quantitative and Qualitative Disclosures about Market Risk.... 18 Item 8. Financial Statements and Supplementary Data................... 19 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure................................................... 19 Item 10. Directors and Executive Officers of the Company............... 19 Item 11. Executive Compensation........................................ 19 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 19 Item 13. Certain Relationships and Related Transactions................ 19 PART IV ................................................................... 19 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................................... 19 SIGNATURES................................................................. 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................... F-1 CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES................... F-2 -i- PART I ITEM 1. BUSINESS Except for the historical information contained herein, the discussion in this Annual Report contains forward-looking statements that involve risks, assumptions and uncertainties which are difficult to predict. Words such as "believe," "may," "could," "expects" and "likely," variations of these words, and similar expressions, are intended to identify such forward-looking statements. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections below entitled "Factors That May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed in this Part and elsewhere in this Annual Report. GENERAL Knight Transportation, Inc. ("Knight" or the "Company") is a short-to-medium haul, dry van truckload carrier headquartered in Phoenix, Arizona. The Company transports general commodities, including consumer goods, packaged foodstuffs, paper products, beverage containers and imported and exported commodities. The Company provides truckload carrier service to the Western United States through its Phoenix, Arizona headquarters; to the Central and Rocky Mountain regions through its Salt Lake City, Utah office; to the Texas and Louisiana region through its regional facilities in Katy and Corsicana, Texas, and in the Midwest and on the East Coast through its regional facilities in Indianapolis, Indiana, and Charlotte, North Carolina. The Company's stock has been publicly traded since October 1994. From 1992 to 1999, Knight's revenue has grown to $151.5 million from $19.6 million, and net income has increased to $15.5 million from $1.9 million. This growth has resulted from expansion of the Company's customer base and increased volume from existing customers, and was facilitated by the continued expansion of the Company's fleet, including an increase in the Company's independent contractor fleet. OPERATIONS Knight's operating strategy focuses on four key elements: growth, regional operations, customer service, and operating efficiencies. * GROWTH. Knight's objective is to achieve significant growth by increasing high quality service to existing customers and developing new customers in its expanded market areas. The Company has developed an independent contractor program to increase its tractor fleet and provide additional service to customers, while minimizing capital investment by the Company. The Company believes that there are significant opportunities to continue to increase its business in the short-to-medium haul market by pursuing existing strategies and expanding its dedicated service operations. * REGIONAL OPERATIONS. The Company's headquarters and facilities are in Phoenix, Arizona. From Phoenix and the Company's new facilities in Salt Lake City, Utah, the Company serves the Western and Central and Rocky Mountain regions of the United States. The Company has also established operations near Houston and Dallas, Texas to serve customers in the Louisiana and Texas region. The Company has also established operations in Indianapolis, Indiana, and, in 1999, in Charlotte, North Carolina, from which it provides regional and dedicated service in the Mid-West and on the East Coast. Knight expects that its five regional operating bases will provide a platform for future growth, and intends to expand its regional operations from those bases. -1- * CUSTOMER SERVICE. Knight's operating strategy is to provide a high level of service to customers, establishing the Company as a preferred or "core carrier" for customers who have time sensitive, high volume or high weight requirements. The Company's services include multiple pick-ups and deliveries, dedicated equipment and personnel, on-time pickups and deliveries within narrow time frames, specialized driver training, and other services tailored to meet its customers' needs. The Company has adopted an equipment configuration that meets a wide variety of customer needs and facilitates customer shipping flexibility. The Company uses light weight tractors and high cube trailers capable of handling both high volume and high weight shipments. * 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 maintaining a generally compatible fleet of tractors and trailers that facilitates Knight's ability to serve a broad range of customer needs and thereby maximize equipment utilization and efficiencies in equipment maintenance and positioning. The Company also seeks to maintain a modern tractor and trailer fleet, in order to obtain fuel and other operating efficiencies. See Revenue Equipment, below. MARKETING AND CUSTOMERS The Company's sales and marketing function is led by its senior management, who are assisted by other sales professionals. The Company's marketing team emphasizes the Company's high level of service and ability to accommodate a variety of customer needs. The Company's marketing efforts are designed to take advantage of the trend among shippers toward private fleet conversions, outsourcing transportation requirements, and the use of core carriers to meet shippers' needs. Knight has a diversified customer base. For the year ended December 31, 1999, the Company's 25 largest customers represented 49.4% of operating revenue; its ten largest customers represented 33% of operating revenue; and its five largest customers represented 21.9% of the Company's 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 cancelable on 30 days notice. The loss of one or more large customers could have a materially adverse effect on the Company's operating results. Knight seeks to provide consistent, timely, flexible and cost efficient service to shippers. The Company's objective is to develop and service specified traffic lanes for customers who ship on a consistent basis, thereby providing a sustained, predictable traffic flow and ensuring high equipment utilization. The short-to-medium haul segment of the truckload carrier market demands timely pickup and delivery and, in some cases, response on short notice. The Company seeks to obtain a competitive advantage by providing high quality service to customers at competitive prices. To be responsive to customers' and drivers' needs, the Company often assigns particular drivers and equipment to prescribed routes, providing better service to customers, while obtaining higher equipment utilization. Knight's standard dedicated fleet services also 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 customer's in-house transportation department. The Company furnishes these services through Company provided revenue equipment and drivers, and independent contractors. Each of the Company's five regional operations centers is linked to the Company's Phoenix headquarters by an IBM AS/400 computer system. The capabilities of this system enhance the Company's operating efficiency by -2- providing cost effective access to detailed information concerning equipment and shipment status and specific customer requirements, and also permit the Company to respond promptly and accurately to customer requests. The system also assists the Company in matching available equipment and loads. The Company also provides electronic data interchange ("EDI") services to shippers requiring such service. DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS As of December 31, 1999, Knight employed 1,488 persons, including 1,223 drivers. None of the Company's employees is represented by a labor union. The recruitment, training and retention of qualified drivers is essential to support the Company's continued growth and to meet the service requirements of the Company's customers. Drivers are selected in accordance with specific objective Company quality guidelines relating primarily to safety history, driving experience, road test evaluations, and other personal evaluations, including physical examinations and mandatory drug and alcohol testing. The Company seeks to maintain a qualified driver force by providing attractive and comfortable equipment, direct communication with senior management, competitive wages and benefits, and other incentives designed to encourage driver retention and long-term employment. Many drivers are assigned to dedicated or semi-dedicated fleet operations, enhancing job predictability. Drivers are also recognized for providing superior service and developing good safety records. Knight's drivers are compensated on the basis of miles driven and length of haul. Drivers also are compensated for additional flexible services provided to the Company's customers. Drivers participate in Knight's 401(k) program and in Company-sponsored health, life and dental plans. Knight's drivers and other employees who meet eligibility criteria also participate in the Company's Stock Option Plan. The Company also maintains an independent contractor program. Because independent contractors provide their own tractors, the independent contractor program provides the Company with an alternate method of obtaining additional revenue equipment. The Company intends to continue to use independent contractors. As of December 31, 1999, the Company had agreements for 281 tractors which are owned and operated by independent contractors. Each independent contractor enters into a contract with the Company pursuant to which it is required to furnish a tractor and a driver exclusively to transport, load and unload goods carried by the Company. Independent contractors are paid a fixed level of compensation based on total of trip-loaded and empty miles and are obligated to maintain their own tractors and pay for their own fuel. The Company provides trailers for each independent contractor. The Company also provides maintenance services for its independent contractors for a charge. The Company also offers financing at market interest rates to qualified independent contractors to assist them in acquiring revenue equipment. Company loans are secured by a lien on the independent contractor's revenue equipment. As of December 31, 1999, the Company had outstanding loans of approximately $10.0 million to independent contractors. REVENUE EQUIPMENT As of December 31, 1999, the Company operated a fleet of 53-foot long, high cube trailers, including 50 refrigerated trailers in its fleet as of March 27, 2000. As of December 31, 1999, the Company operated 931 company tractors with an average age of 1.1 years and 3,350 trailers with an average age of 2.2 years. The Company also had under contract, as of December 31, 1999, 281 tractors, operated by independent contractors. 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 -3- "drop-and-hook" basis, increasing asset utilization and providing better service to customers. Knight maintains a high trailer to tractor ratio, targeting a ratio of 2.7 to 1. Management believes maintaining this ratio promotes efficiency and allows it to serve a large variety of customers' needs without significantly changing or modifying equipment. Growth of the Company's tractor and trailer fleets is determined by market conditions, and the Company's experience and expectations regarding equipment utilization. In acquiring revenue equipment, the Company considers a number of factors, including economy, price, technology, warranty terms, manufacturer support, driver comfort and resale value. 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 38-44 months after the date of purchase and to replace its trailers over a five to ten year period. Actual replacement depends upon the condition of particular equipment, its resale value and other factors. 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. As of December 31, 1999, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price of approximately $46 million for delivery throughout 2000. The Company employs a continuous preventive maintenance program designed to minimize equipment down time, facilitate customer service, and enhance trade value when equipment is replaced. TECHNOLOGY The Company, through a limited liability company subsidiary, has made a minority investment in Terion, Inc., a communications company that provides two-way digital wireless communication services which enable customers such as the Company to communicate with manned and unmanned transportation assets via the Internet. The Company's investment is intended to assure access to low cost communication services which are capable of meeting the needs of the Company and its customers. The Company expects to equip substantially all of its fleet with new Terion communications equipment during 2000. The Company elected to use Terion technology due to its cost advantages and the likelihood of obtaining wide area coverage. Because the technology is new, the Company may encounter some initial operational problems, but the Company believes that over the long term the technology will assist the Company in reducing the cost of communications, dealing with customers, and monitoring the performance of its revenue equipment. Other investors in Terion include Penske Capital Partners, Delphi Electronics Corporation, Detroit Diesel Corporation and an affiliate of Harris Corporation. SAFETY AND RISK MANAGEMENT The Company is committed to ensuring the safety of its operations. The Company regularly communicates with drivers to promote safety and instill safe work habits through Company media and safety review sessions. The Company conducts quarterly safety training meetings for its drivers and independent contractors. In addition, the Company has an innovative recognition program for driver safety performance, and emphasizes safety through its equipment specifications and maintenance programs. The Company's Vice President of Safety is involved in the review of all accidents. The Company requires prospective drivers to meet higher qualification standards than those required by the United States Department of Transportation ("DOT"). The DOT requires the Company's drivers to obtain national commercial drivers' licenses pursuant to regulations promulgated by the DOT. The DOT also requires that the Company implement a drug and alcohol testing program in accordance with DOT regulations. The Company's program includes pre-employment, random, and post-accident drug testing. -4- The Company's Chief Financial Officer and Vice President of Safety are responsible for securing appropriate insurance coverages at cost effective rates. The primary claims arising in the Company's business consist of cargo loss and damage and auto liability (personal injury and property damage). The Company is self-insured for personal injury and property damage up to a maximum limit of $100,000 per occurrence; and separatly for collision, comprehensive, and cargo liability up to $12,500 each per occurrence; and for workers' compensation up to $250,000 per occurrence. The Company establishes reserves to cover these self-insured liabilities and maintains insurance to cover liabilities in excess of those amounts. The Company's insurance policies provide for general liability coverage up to $4,900,000 per occurrence; automobile liability coverage up to $4,900,000 per occurrence; cargo insurance up to $4,987,500 per occurrence; and additional umbrella liability coverage up to $20,000,000. The Company also maintains primary and excess coverage for employee medical expenses and hospitalization, and damage to physical properties. The Company carefully monitors claims and participates actively in claims estimates and adjustments. The estimated costs of the Company's self-insured claims, which include estimates for incurred but unreported claims, are accrued as liabilities on the Company's balance sheet. Management believes that the Company's insurance coverages are adequate to protect the Company from any significant losses. COMPETITION The entire trucking industry is highly competitive and fragmented. The Company competes primarily with other regional short-to-medium haul truckload carriers, logistics providers and national carriers. Railroads and air freight also provide competition, but to a lesser degree. Competition for the freight transported by the Company is based on freight rates, service, efficiency, size and technology. The Company also competes with other motor carriers for the services of drivers and independent contractors. A number of the Company's competitors have greater financial resources, own more equipment, and carry a larger volume of freight than the Company. The Company believes that the principal competitive factors in its business are service, pricing (rates), and the availability and configuration of equipment that meets a variety of customers' needs. Knight, in addressing its markets, believes that its principal competitive strength is its ability to provide timely, flexible and cost-efficient service to shippers. In general, increased competition has created downward pressure on rates and increased the need to provide higher levels of service to customers. REGULATION Generally, the trucking industry is subject to regulatory and legislative changes that can have a materially adverse effect on operations. Historically, the Interstate Commerce Commission ("ICC") and various state agencies regulated truckload carriers' operating rights, accounting systems, rates and charges, safety, mergers and acquisitions, periodic financial reporting, and other matters. In 1995, federal legislation was passed that preempted state regulation of prices, rates, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the Department of Transportation ("DOT"), but a lack of regulations implementing such transfers currently prevents the Company from assessing the full impact of this action. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Matters such as weight and dimensions of equipment are also subject to federal and state regulation. In 1988, the DOT began requiring national commercial drivers' licenses for interstate truck drivers. The Company's motor carrier operations are also subject to environmental laws and regulations, including laws and regulations dealing with underground fuel storage tanks, the transportation of hazardous materials and other environmental matters. The Company has initiated programs to comply with all applicable environmental regulations. As part of its safety and risk management program, the Company periodically performs an internal environmental review so that the Company can achieve environmental compliance and avoid environmental risk. The Company's Phoenix and Indianapolis facilities were -5- 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 transports a minimum amount of environmentally hazardous substances and, to date, has experienced no significant claims for hazardous substance shipments. If the Company should fail to comply with applicable regulations, the Company could be subject to substantial fines or penalties and to civil and criminal liability. The Company's operations involve certain inherent environmental risks. The Company's Phoenix facility is located on land identified as potentially having groundwater contamination beneath it allegedly resulting from the release of hazardous substances by persons who have operated in the general vicinity. The area has been classified as a state superfund site. The Company has been located at its present Phoenix facility since 1990 and, during such time, has not been identified as a potentially responsible party with regard to the groundwater contamination. The Company has installed a fuel island at its Phoenix, Arizona headquarters and maintains above-ground bulk fuel storage to provide fuel for this facility. The Company's Phoenix bulk fuel storage facility has been designed to minimize environmental risk. There are two underground storage tanks located on the Company's Indianapolis property. The tanks are subject to regulation under both federal and state law and are currently being leased to and operated by an independent, third party fuel distributor. The Company assumed the lessor's interest in the lease, in connection with its purchase of the Indianapolis property. The lessee has agreed to carry environmental impairment liability insurance, naming the Company, as lessor, as an insured, covering the spillage, seepage or other loss of petroleum products, hazardous wastes, or similar materials onto the leased premises and has agreed to indemnify the Company, as lessor, against damage from such occurrences. The Indianapolis property is located approximately 0.1 mile east of Reilly Tar and Chemical Corporation ("Reilly"), a federal superfund site listed on the National Priorities List for clean-up. The Reilly site has known soil and groundwater contamination. There are also other sites in the general vicinity of 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's contamination. The Company believes it is currently in material compliance with applicable laws and regulations and that the cost of compliance has not materially affected results of operations. See "Legal Proceedings," below for additional information regarding certain regulatory matters. OTHER INFORMATION The Company periodically examines investment opportunities in areas related to the truckload carrier business. The Company's investment strategy is to add to shareholder value by investing in industry related businesses that will assist the Company in strengthening its overall position in the transportation industry, minimize the Company's exposure to start-up risk and provide the Company with an opportunity to realize a substantial return on its investment. In April 1999, the Company acquired a 17% interest in KNGT Logistics, Inc. ("KNGT"), with the intent of investing in the non-asset transportation business. The Company's investment in KNGT was approved by a majority of the Company's independent directors. The Company holds non-voting Class A Preferred Stock which is preferred in the event of liquidation, dissolution sale or merger and with respect to dividends over all other classes of stock, including stock held by other members of the Knight family. The Company has preferential rights in the event KNGT issues additional shares and limited voting rights with respect to merger, consolidation, sale of substantially all of KNGT's assets, and certain other major corporate events. The Company, through a limited liability company, has agreed to lend up to a maximum of $935,000 to KNGT pursuant to a promissory note to fund start-up costs. The note is convertible into KNGT's Class A Preferred Stock and is secured by a lien on KNGT's assets. Other investors in KNGT include Randy, Kevin, Gary and Keith Knight, who collectively own 43% of KNGT's issued and outstanding stock and through the same limited liability company affiliate may lend up to a maximum of $4,565,000 to KNGT pursuant to a promissory note convertible into KNGT's Class B Preferred Stock to fund KNGT's start-up costs. -6- The loans to KNGT made by the Company and the Knights are on a parity basis with regard to security. The Company's investment has been structured to limit its exposure to KNGT start-up losses and business risk. The Company has also acquired a minority interest in Terion, Inc., a company that provides two-way digital wireless communication and trailer-tracking services. See "Technology," above. ITEM 2. PROPERTIES The Company's headquarters and principal place of business is located at 5601 West Buckeye Road, Phoenix, Arizona on approximately 43 acres. The Company owns approximately 35 acres and the remaining 8 acres are leased from Mr. L. Randy Knight, a director of the Company and one of its principal shareholders. See "Certain Relationships and Related Transactions," below, for additional information. The Company has constructed a bulk fuel storage facility and fueling islands at its Phoenix headquarters to obtain greater operating efficiencies and in June of 1998, completed the expansion of its headquarters facilities. The Company owns and operates a 9.5 acre regional facility in Indianapolis, Indiana. The facility includes a truck terminal, administrative offices, and dispatching and maintenance services, as well as room for future expansion. The Indianapolis facility will serve as a base for the Company's operations in the Midwest. The Company completed its initial expansion of this facility in October, 1998. The Company's operations near Houston are currently located on the premises of one of the Company's significant customers, for whom it provides dedicated services. These facilities also support the Company's non-dedicated operations in the Texas and Louisiana region. The Company has acquired property in Katy, Texas for its South Central regional headquarters and construction of the Company's regional facility is expected to be completed in May 2000. In March 1999, the Company entered into a lease for terminal facilities in Corsicana, Texas, from which the Company will operate in order to provide dedicated services to one of its larger customers. The Company's operations in Corsicana, Texas will be coordinated through the Company's regional headquarters located in Katy, Texas. In June 1999, the Company opened a new leased terminal facility in Charlotte, North Carolina to serve the Southeastern region. In February 2000, the Company purchased 20 acres in Charlotte, which include an existing terminal facility. In 1999, the Company also opened a regional facility in Salt Lake City, Utah to serve the Western Central and Rocky Mountain region. The Company has leased its terminal facilities. The Company also leases office facilities in California and Oklahoma, which it uses for fleet maintenance, record keeping, and general operations. The Company purchased property during 1998 in Fontana, California to serve as a trailer drop and dispatching facility to support the Company's operations in California. The Company also leases space in various locations for temporary trailer storage. Management believes that replacement space comparable to these facilities is readily obtainable, if necessary. As of December 31, 1999, the Company's aggregate monthly rent for all leased properties was approximately $60,000. The Company believes that its current facilities and those under expansion are suitable and adequate for its present needs. The Company periodically seeks to improve its facilities or identify favorable new locations. The Company has not encountered any significant impediments to the location or addition of new facilities. -7- ITEM 3. LEGAL PROCEEDINGS The Company is a party to ordinary, routine litigation and administrative proceedings incidental to its business. These proceedings primarily involve personnel matters, including equal employment opportunity claims, and claims for personal injury or property damage incurred in the transportation of freight. The Company maintains insurance to cover liabilities arising from the transportation of freight in amounts in excess of self-insured retentions. See "Business -- Safety and Risk Management" above. It is the Company's policy to comply with applicable equal employment opportunity laws and the Company periodically reviews its policies and practices for equal employment opportunity compliance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market of The NASDAQ Stock Market under the symbol KNGT. The following table sets forth, for the period indicated, the high and low bid information per share of the Company's common stock as quoted through the NASDAQ-NMS. Such quotations reflect inter-dealer prices, without retail markups, markdowns or commissions and, therefore, may not necessarily represent actual transactions. High Low ---- --- 1998 First Quarter $21.33 $16.33 Second Quarter $21.92 $15.00 Third Quarter $19.88 $12.88 Fourth Quarter $28.50 $14.75 1999 First Quarter $25.00 $16.87 Second Quarter $23.00 $16.50 Third Quarter $22.00 $12.50 Fourth Quarter $18.87 $10.75 As of March 27, 2000, the Company had 71 shareholders of record and approximately 1,664 beneficial owners in security position listings of its common stock. The Company has never paid cash dividends on its Common Stock, and it is the current intention of management to retain earnings to finance the growth of the Company's business. Future payment of cash dividends will depend upon financial condition, results of operations, cash requirements, and certain corporate law requirements, as well as other factors deemed relevant by the Board of Directors. -8- ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of, each of the years in the three-year period ended December 31, 1999, are derived from the Company's Consolidated Financial Statements, included herein, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report. The information for the years ended December 31, 1995 and 1996 is from the Company's Consolidated Financial Statement for those years which were also audited by Arthur Andersen LLP. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," below, and the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K.
Years Ended December 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- -------- (Dollar amounts in thousands, except per share amounts and operating data) STATEMENTS OF INCOME DATA: Operating revenue $ 151,490 $ 125,030 $ 99,428 $ 77,504 $ 56,170 Operating expenses 125,580 102,049 81,948 64,347 45,569 Income from operations 25,910 22,981 17,480 13,157 10,601 Net interest expense and other (296) (259) (18) (346) (196) Income before income taxes 25,614 22,722 17,462 12,810 10,406 Net income 15,464 13,346 10,252 7,510 5,806 Diluted net income per share(1) 1.02 .87 .68 .52 .43 BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit) $ (13,110) $ 3,242 $ 2,044 $ 4,141 $ (293) Total assets 164,545 116,958 82,690 64,118 43,099 Long-term obligations, net of current 11,736 7,920 -- 53 981 Shareholders' equity 82,814 70,899 56,798 45,963 24,732 OPERATING DATA (UNAUDITED): Operating ratio(2) 82.9% 81.6% 82.4% 83.0% 81.1% Average revenue per mile $ 1.23 $ 1.24 $ 1.22 $ 1.24 $ 1.26 Average length of haul (miles) 491 489 500 489 494 Empty mile factor 10.5% 10.0% 9.6% 9.6% 10.3% Tractors operated at end of period3 1,212 933 772 575 425 Trailers operated at end of period 3,350 2,809 2,112 1,529 1,044
- ---------- (1) Net income per share for all periods presented has been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" and reflects the May 1998 three for-two stock split which was effected in the form of a 50 percent stock dividend. (2) Operating expenses as a percentage of operating revenue. (3) Includes 281 independent contract operated vehicles at December 31, 1999; includes 231 independent contractor operated vehicles at December 31, 1998; includes 192 independent contractor operated vehicles at December 31, 1997; includes 158 independent contractor operated vehicles at December 31, 1996; and includes 115 independent contractor operated vehicles at December 31, 1995. -9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION. Except for the historical information contained herein, the discussion in this Annual Report contains forward-looking statements that involve risks, assumptions and uncertainties which are difficult to predict. Words such as "believe," "may," "could," "expects," "likely," variations of these words, and similar expressions, are intended to identify such forward-looking statements. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in the section entitled "Factors That May Affect Future Results," as well as those discussed in this Item and elsewhere in this Annual Report. GENERAL The following discussion of the Company's financial condition and results of operations for the three-year period ended December 31, 1999, should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto contained elsewhere in this report. Knight was incorporated in 1989 and commenced operations in July 1990. For the five-year period ended December 31, 1999, the Company's operating revenue grew at a 32.6% compounded annual rate, while net income increased at a 26.1% compounded annual rate. The Company has established regional operations in Phoenix, Arizona; Indianapolis, Indiana; Katy, Texas; Charlotte, North Carolina; and Salt Lake City, Utah. The Company's headquarters facilities in Phoenix, Arizona, as well as the Salt Lake City facility, serve the Western, Central and Rocky Mountain regions of the United States. The Company's operations in Indianapolis and Charlotte allow the Company to serve customers in the Midwest and on the East Coast and provide a platform for the expansion of the Company's operations in those regions. The Company's operations in Katy, Texas were undertaken to provide dedicated service to a large customer and to provide a base for the expansion of operations in the Texas and Louisiana regions. To support its growth, the Company initiated an independent contractor program in 1994. The Company's decision to utilize independent contractors as part of the Company's fleet expansion was based on several factors, including reduced Company capital requirements, since independent contractors provide their own tractors. The Company expanded its Company-owed fleet during 1999. As of December 31, 1999, the Company had contracts for 281 tractors owned and operated by independent contractors, which represented approximately 23% of the 1212 total tractors in the Company's fleet, compared to 231 tractors operated by independent contractors at December 31, 1998, representing approximately 25% of the Company's total fleet of 933 tractors. -10- RESULTS OF OPERATIONS The following table sets forth the percentage relationships of the Company's expense items to operating revenue for the three-year period indicated below: Years ended December 31, --------------------------- 1999 1998 1997 ---- ---- ---- Operating revenue 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses: Salaries, wages and benefits 29.5 28.7 28.2 Fuel 10.4 9.7 10.2 Operations and maintenance 5.8 5.9 5.6 Insurance and claims 2.6 2.5 2.5 Operating taxes and licenses 3.7 4.2 4.1 Communications .9 .8 .6 Depreciation and amortization 9.4 10.0 9.6 Purchased transportation 18.2 17.4 19.2 Miscellaneous operating expenses 2.4 2.4 2.4 ----- ----- ----- Total operating expenses 82.9 81.6 82.4 ----- ----- ----- Income from operations 17.1 18.4 17.6 Net interest expense .2 .2 -- ----- ----- ----- Income before income taxes 16.9 18.2 17.6 Income taxes 6.7 7.5 7.3 ----- ----- ----- Net Income 10.2% 10.7% 10.3% ===== ===== ===== FISCAL 1999 COMPARED TO FISCAL 1998 Operating revenue increased by 21.2% to $151.5 million in 1999 from $125.0 million in 1998. 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 1999 compared to 1998. The Company's fleet increased by 29.9% to 1,212 tractors (including 281 owned by independent contractors) as of December 31, 1999, from 933 tractors (including 231 owned by independent contractors) as of December 31, 1998. Average revenue per mile decreased to $1.23 per mile for the year ended December 31, 1999, from $1.24 per mile for the same period in 1998. Equipment utilization averaged 116,500 miles per tractor in 1999, down slightly when compared to an average of 120,500 miles per tractor in 1998. These changes reflect increased competition in the short-to-medium truckload sector of the transportation business. Salaries, wages and benefits expense increased as a percentage of operating revenue to 29.5% in 1999 from 28.7% in 1998 primarily as the result of market adjustments implemented in the driver payroll rate structure during 1999. This increase was also due to the increase in the ratio of Company drivers to independent contractors. As of December 31, 1998, 24.7% of the Company's fleet was operated by independent contractors, compared to 23.2% at December 31, 1999. Also, lower revenue per mile for 1999 compared to 1998 contributed to the increase in salaries, wages and benefits as a percentage of operating revenue. For its drivers, the Company records accruals for workers' compensation benefits as a component of its claim accrual, and the related expense is reflected in salaries, wages and benefits in its consolidated statements of income. Fuel expense increased as a percentage of operating revenue to 10.4% for 1999 from 9.7% in 1998 due mainly to higher average fuel prices during 1999 compared to 1998. The Company believes that higher fuel prices will continue to be felt throughout most of 2000. See "Factors that May Affect Future Results," -11- below. Also, the increase in the ratio of Company drivers to independent contractors in 1999 compared to 1998 contributed to this increase. Independent contractors pay for their own fuel. Operations and maintenance expense decreased as a percentage of operating revenue to 5.8% for 1999 from 5.9% in 1998. This decrease was the result of improvements experienced in the Company's equipment maintenance programs. Insurance and claims expense increased as a percentage of operating revenue to 2.6% for 1999 compared to 2.5% for 1998 as a result of lower revenue per mile. Operating taxes and license expense decreased as a percentage of operating revenue to 3.7% for 1999 from 4.2% for 1998. The decrease resulted primarily from a relative increase in miles run in lower tax rate states for the 12 month period ended December 31, 1999. Communications expenses increased slightly as a percentage of operating revenue in 1999 compared to 1998. The increase resulted primarily from an overall decrease in revenue per mile for the 12 month period ended December 31, 1999 Depreciation and amortization expense decreased to 9.4% for 1999 from 10.0% in 1998. The decrease resulted from adjustments to residual value estimates on certain equipment during the period ended December 31, 1999, compared to the same period in 1998. Purchased transportation expense increased to 18.2% in 1999 from 17.5% in 1998 due to a combination of the decrease in the Company's revenue per mile in and the market adjustments in the Company's independent contractor pay structure implemented during 1999. Miscellaneous operating expenses remained steady, with no significant change taking place in 1999. As a result of the above factors, the Company's operating ratio (operating expenses expressed as a percentage of operating revenue) was 82.9% for 1999, compared to 81.6% for 1998. Net interest expense remained constant as a percentage of operating revenue at 0.2% for both 1999 and 1998, although the Company's average borrowings increased to $20.7 million for 1999 from $6.4 million for 1998. Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense decreased as a percentage of revenue to 6.7% for the year ended December 31, 1999 from 7.5% for the year ended December 31, 1998 primarily due to a decrease in overall tax rates to 39.6% in 1999 compared to 41.3% in 1998, as well as the increase in the Company's operating ratio to 82.9% for 1999 compared to 81.6% for 1998. As a result of the preceding changes, the Company's net income as a percentage of operating revenue was 10.2% for 1999 compared to 10.7% in 1998. FISCAL 1998 COMPARED TO FISCAL 1997 Operating revenue increased by 25.7% to $125.0 million in 1998 from $99.4 million in 1997. 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 1998 compared to 1997. The Company's fleet increased by 20.9% to 933 tractors (including 231 owned by independent contractors) as of December 31, 1998, from 772 tractors -12- (including 192 owned by independent contractors) as of December 31, 1997. Average revenue per mile increased to $1.24 per mile for the year ended December 31, 1998, from $1.22 per mile for the same period in 1997, reflecting higher demand for the Company's services resulting in continued upward pressure on rates in all of the Company's operating regions. Equipment utilization averaged 120,500 miles per tractor in 1998, down slightly when compared to an average of 121,459 miles per tractor in 1997. This change reflects increased competition in the short-to-medium truckload carrier business. Salaries, wages and benefits expense increased as a percentage of operating revenue to 28.7% for 1998 from 28.2% for 1997 primarily as the result of the expansion of the Company-owned tractor/trailer fleet. For its drivers, the Company records accruals for workers' compensation benefits as a component of its claim accrual, and the related expense is reflected in salaries, wages and benefits expenses in its consolidated statements of income. Fuel expense decreased as a percentage of operating revenue to 9.7% for 1998 from 10.2% in 1997 due mainly to lower average fuel prices during 1998 compared to 1997. Operations and maintenance expense increased as a percentage of operating revenue to 5.9% for 1998 from 5.6% in 1997. This increase was the result of the decrease in the number of independent contractors as a percentage of the Company's entire fleet to 24.8% in 1998, compared to 24.9% in 1997, and a decrease in equipment utilization during 1998. Insurance and claims expense remained constant as a percentage of operating revenue at 2.5% for both 1998 and 1997. Operating taxes and license expense increased slightly as a percentage of operating revenue to 4.2% for 1998 from 4.1% for 1997. The increase resulted primarily from the decrease in the number of independent contractors as a percentage of the Company's entire fleet during 1998 as independent contractors are responsible for paying their own mileage taxes, the increased cost associated with the licensing of trailers for use in states with higher licensing fees, and a decrease in equipment utilization during 1998. Communications expenses increased as a percentage of operating revenue to 0.8% in 1998 compared to 0.6% in 1997. The increase resulted primarily from an increase in the Company's overall business volume, and a decrease in equipment utilization during 1998. Depreciation and amortization expense increased to 10.0% for 1998 from 9.6% in 1997. The increase resulted from the decrease in the number of independent contractors as a percentage at the Company's entire fleet during 1998, and a decrease in equipment utilization during 1998. Purchased transportation expense decreased to 17.5% in 1998 from 19.2% in 1997 due to a combination of the increase in the Company's revenue per mile and the decrease in the number of independent contractors as a percentage of the Company's entire fleet during 1998. Miscellaneous operating expenses remained steady, with no significant change taking place in 1998. As a result of the above factors, the Company's operating ratio (operating expenses expressed as a percentage of operating revenue) was 81.6% for 1998, compared to 82.4% for 1997. Net interest expense increased as a percentage of operating revenue to 0.2% for 1998 from less than 0.1% in 1997 as a result of the purchase during 1998 of debt financed revenue equipment to expand the Company's fleet. -13- Income taxes have been provided at the statutory federal and state rates, adjusted for certain permanent differences in income for tax purposes. Income tax expense increased as a percentage of revenue to 7.5% for the year ended December 31, 1998 from 7.3% for the year ended December 31, 1997 primarily due to the decrease in the Company's operating ratio. As a result of the preceding changes, the Company's net income as a percentage of operating revenue increased to 10.7% in 1998, from 10.3% in 1997. 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 capital has been funds provided by operations and term borrowings to finance equipment purchases, and the Company's line of credit . Net cash provided by operating activities totaled approximately $18.9 million, $24.3 million, and $23.6 million for the years ended December 31, 1999, 1998, and 1997, respectively. Capital expenditures for the purchase of revenue equipment, office equipment and leasehold improvements totaled approximately $41.5 million, $31.5 million, and $26.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Company expects that capital expenditures, net of trade-ins, will be approximately $46 million for 2000, to be used primarily to acquire new revenue equipment. Net cash provided by financing activities and net direct equipment financing was approximately $22.6 million for the year ended December 31, 1999 and $8.9 million for the year ended December 31, 1998. Net cash used in financing activities and net direct equipment financing was approximately $0.8 million for the year ended December 31, 1997. The change between 1999 and 1998 was due to the Company borrowing approximately $32.2 million in 1999; the change between 1998 and 1997 was due to the Company borrowing approximately $11.5 million during 1998. The Company maintains a $40 million revolving line of credit with its lender and uses that line to finance the acquisition of revenue equipment and other corporate purposes to the extent the Company's need for capital is not provided by funds from operations. Under the Company's line of credit, the Company is obligated to comply with certain financial covenants. The rate of interest on borrowings against the line of credit will vary depending upon the interest rate election made by the Company, based on either the London Interbank Offered Rate ("LIBOR") plus an adjustment factor, or the prime rate. At December 31, 1999, and March 27, 2000, the Company had $29.0 million and $36.5 million, respectively, in borrowings under its revolving line of credit . The line of credit expires in July 2001. Management believes the Company will be able to renew or renegotiate its line of credit on terms at least as favorable as the current terms of the line of credit, subject to adjustments for any interest rate increases. During 1998 the Company borrowed $10 million under a long-term unsecured Promissory Note with its lender. As of December 31, 1999, $7,919,648 was currently owed under the Note, with monthly principal and interest payments of $192,558 payable through October 2003. Management believes that the cash flow from operations and the availability of 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 additional 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 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. -14- SEASONALITY To date, the Company's revenue has not shown any significant seasonal pattern. Because the Company operates primarily in Arizona, California and the Western United States, winter weather generally has not adversely affected the Company's business. Expansion of the Company's operations in the Midwest, on the East Coast, and in the Texas and Louisiana regions, could expose the Company to greater operating variances due to seasonal weather in these regions. SELECTED QUARTERLY FINANCIAL DATA The following table sets forth certain unaudited information about the Company's revenue and results of operations on a quarterly basis for 1998 and 1999: 1998 ----------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 ----------- ----------- ----------- ----------- Operating revenue $28,258,506 $30,369,133 $32,881,739 $33,540,867 Income from operations 5,023,581 5,735,627 6,071,955 6,150,014 Net income 2,929,335 3,353,177 3,518,358 3,545,272 Earnings per common share: Basic $ 0.20 $ 0.22 $ 0.24 $ 0.24 Diluted $ 0.19 $ 0.22 $ 0.23 $ 0.23 1999 ----------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 ----------- ----------- ----------- ----------- Operating revenue $33,522,165 $36,694,364 $38,054,052 $43,219,248 Income from operations 5,913,929 6,479,704 6,492,277 7,024,104 Net income 3,523,746 3,893,144 3,920,845 4,126,165 Earnings per common share: Basic $ 0.23 $ 0.26 $ 0.26 $ 0.28 Diluted $ 0.23 $ 0.25 $ 0.26 $ 0.28 INFLATION Many of the Company's operating expenses, including fuel costs and fuel taxes, are sensitive to the effects of inflation and changing prices, which could result in higher operating costs and lower income from operations. The effect of inflation on the Company's business during 1999, 1998 and 1997 generally was not significant. In late 1999, the Company began to experience increases in fuel prices, as a result of conditions in the petroleum industry. The Company has also begun to experience some wage increases for drivers. Increases in fuel costs and driver compensation are expected to continue during 2000 and may affect the Company's operating income, unless the Company is able to pass those increased costs to customers through rate hikes or fuel surcharges. See "Factors That May Affect Future Results, below. The Company has initiated an aggressive program to obtain surcharges and rate increases from customers in order to cover increased costs due to increases in fuel prices, driver compensation, and other expenses. -15- YEAR 2000 ISSUES. For the year ended December 31, 1999, the "Year 2000 Issue" did not present any significant operational problems for the Company and did not materially effect the Company's relationships with customers, vendors and others. 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 implemented various modifications to ensure that its computer equipment and software functioned 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 contacted its significant vendors, service providers, and customers, particularly those with whom electronic data information ("EDI") transactions are exchanged, to determine and resolve any Year 2000 issues. All internal and external costs associated with the Company's Year 2000 compliance activities were expenses as incurred. The Company believes that the costs of addressing the Year 2000 issue did not have a material impact on its financial position. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, to be applied prospectively, is effective for the Company's quarter ending March 31, 2000. In June 1999, the FSAB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133. This statement deferred the effective date of SFAS No. 133 to the Company's quarter ending March 31, 2001. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. On January 1, 1999, the Company adopted Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-up Activities. This SOP provides guidance on the financial reporting of start-up costs and organization costs. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Application of SOP 98-5 did not have a material impact on the Company's financial condition or results of operations. SEGMENT INFORMATION In January 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which established 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 in 1999 the Company had five geographical operating segments, which are managed based on the regions of the United States in which each operates, each segment has similar economic characteristics. Each regional operating segment provides short to medium haul truckload carrier services of general commodities to a similar class of customers and to some of the same customers. In addition, each segment exhibits similar financial performance, including average revenue per mile and operating ratio. As a result of the -16- foregoing, the Company has determined that it is appropriate to aggregate its geographical operating segments into one reportable segment for financial accounting purposes consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its geographical operating segments as the Company's consolidated financial statements present its one reportable segment. FACTORS THAT MAY AFFECT FUTURE RESULTS A number of factors over which the Company has little or no control may affect the Company's future results. Fuel prices, insurance costs, liability claims, interest rates, the availability of qualified drivers, fluctuations in the resale value of revenue equipment, and customers' business cycles and shipping demands are economic factors over which the Company has little or no control. Significant increases or rapid fluctuations in fuel prices, as have occurred recently, and increases in interest rates, insurance costs or liability claims, and drivers' compensation, to the extent not offset by increases in freight rates, reduce the Company's profitability. Although the Company's independent contractors are responsible for paying for their own equipment, significant increases in fuel and other operating costs could cause them to seek higher compensation from the Company or to pursue contractual opportunities with other carriers. Due to competitive factors within the transportation industry, the Company may not be able to pass such increased costs through to its customers. Difficulty in attracting or retaining qualified drivers, including independent contractors, or a downturn in customers' business cycles or shipping demands also could have a material adverse effect on the growth and profitability of the Company. If a shortage of drivers should occur in the future or if the Company were unable to continue to attract and contract with independent contractors, the Company could be required to increase its driver compensation package, which could adversely affect the Company's profitability if not offset by a corresponding increase in rates. The Company has begun to experience the effects of fuel and driver wage increases and is seeking to recover such charges through rate increases and customer surcharges. By increasing its rates and imposing fuel surcharges, the Company could lose customers who are unwilling to pay the increases. The Company's growth has been made possible through the addition of new revenue equipment. Difficulty in financing or obtaining new revenue equipment (for example, delivery delays from manufacturers or the unavailability of independent contractors) could restrict future growth. 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. Current developments in the tractor resale market indicate a large supply of used tractors on the market and the Company may be unable to obtain as favorable terms on tractors the Company sells or exchanges for new equipment. The Company has experienced significant and rapid growth in revenue and profits since the inception of its business in 1990. There can be no assurance that the Company's business will continue to grow in a similar fashion in the future or that the Company can effectively adapt its management, administrative and operational systems to respond to any future growth. Further, there can be no assurance that the Company's operating margins will not be adversely affected by future changes in and expansion of the Company's business or by changes in economic conditions. Recent increases in interest rates may result in increased borrowing costs for the Company, for example, for borrowings used to acquire new revenue equipment. Such increased borrowing costs could adversely affect the Company's earnings if such costs are not offset by rate increases. Currently, 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 more significant portion of its revenues from markets in the Texas and Louisiana regions and the Midwest and on the East Coast in the -17- near future, its growth and profitability could be materially adversely affected by general economic declines or natural disasters in those markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations"; and "Business -- Operations and Marketing and Customers," above. The Company has established operations near Houston, Texas to provide dedicated services to one of its larger customers and to commence regional service in the Texas and Louisiana regions and has initiated operations in Indianapolis, Indiana and Charlotte, North Carolina 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. Should the growth in the Company's operations near Houston, Texas, in Indianapolis, Indiana or Charlotte, North Carolina slow or stagnate, the results of Company operations could be adversely affected. The Company may encounter operating conditions in these new markets that differ substantially from those previously experienced in its Western United States markets. There can be no assurance that the Company's regional operating strategy, as employed in the Western United States, can be duplicated successfully in the Midwest or the East Coast and in the South East or that it will not take longer than expected or require a more substantial financial commitment than anticipated. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Under 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 on 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. During 1999 interest rates rose and may continue to do so. In the opinion of management, an increase in short-term interest rates could have an adverse effect on the Company's financial condition, if interest expenses is not offset by rate increases or other items. 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, Arizona facility which enable it to purchase fuel at "rack" prices, saving pumping charges. The Company purchases fuel as inventory in advance and such purchases may over the short term level out the effect of significant changes in the price of fuel. 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 customers through rate increases, such increases could adversely affect the Company's financial position and results of operations. -18- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of Knight Transportation, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 1999, together with the related notes and report of Arthur Andersen LLP, independent public accountants, are set forth at pages F-1 through F-16, below. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Company hereby incorporates by reference the information contained under the heading "Election of Directors" from its definitive Proxy Statement to be delivered to shareholders of the Company in connection with the 2000 Annual Meeting of Shareholders to be held May 10, 2000. ITEM 11. EXECUTIVE COMPENSATION The Company incorporates by reference the information contained under the heading "Executive Compensation" from its definitive Proxy Statement to be delivered to shareholders of the Company in connection with the 2000 Annual Meeting of Shareholders to be held May 10, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company incorporates by reference the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" from its definitive Proxy Statement to be delivered to shareholders of the Company in connection with the 2000 Annual Meeting of Shareholders to be held May 10, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company incorporates by reference the information contained under the heading "Certain Relationships and Related Transactions" from its definitive Proxy Statement to be delivered to shareholders of the Company in connection with the 2000 Annual Meeting of Shareholders to be held May 10, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report on Form 10-K at pages F-1 through F-16, below. 1. Consolidated Financial Statements: KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Report of Arthur Andersen LLP, Independent Public Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 -19- Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedule 2, required to be filed by Item 8 and Paragraph (d) of Item 14: Schedules not listed have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein. 3. Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed at paragraph (c), below, and at the Exhibit Index beginning at page 24. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report on Form 10-K. (c) Exhibits: The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below: -20- Exhibit Number Description - ------ ----------- 3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the period ending December 31, 1996). 4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.) 4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.) 10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March 1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight Transportation, Inc. and certain other parties dated March 11, 1994 (assigning the lessor's interest to the R. K. Trust). 10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight Transportation, Inc., dated as of September 1, 1997. 10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of October 1994, between the Company and Knight Deer Valley, L.L.C., an Arizona limited liability company. (Incorporated by reference to Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.4 Loan Agreement and Revolving Promissory Note each dated March, 1996 between First Interstate Bank of Arizona, N.A. and Knight Transportation, Inc. and Quad K Leasing, Inc. (superseding prior credit facilities) (Incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-K for the period ending December 31, 1996). 10.4.1 Modification Agreement between Wells Fargo Bank, N.A., as successor by merger to First Interstate Bank of Arizona, N.A., and the Company and Quad-K Leasing, Inc. dated as of May 15, 1997. (Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-K for the period ending December 31, 1997.) -21- Exhibit Number Description - ------ ----------- 10.4.2* Credit Agreement and Revolving Line of Credit Note each dated November 24, 1999, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior revolving line of credit facilities) 10.4.3* Term Note dated November 24, 1999 between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facility) 10.5 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the Company's Notice and Information Statement on Schedule 14(c) for the period ending December 31, 1997.) 10.6 Amended Indemnification Agreements between the Company, Don Bliss, Clark A. Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D. Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997 (Incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the period ending December 31, 1996). 10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the Company, Swift Transportation Co., Inc. and United Title Agency of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight Transportation, Inc., Knight Acquisition Corporation, Action Delivery Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis. (Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on March 25, 1999.) 10.11* Master Equipment Lease Agreement dated as of October 28, 1998, between Knight Transportation Midwest, Inc., formerly known as "Knight Transportation Indianapolis, Inc." and Quad-K Leasing, Inc. 10.12* Consulting Agreement dated as of March 1, 2000 between Knight Transportation, Inc. and LRK Management, L.L.C. 21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to the Company's report on Form 10-K for the period ending December 31, 1995.) 23* Consent of Arthur Andersen LLP 27* Financial Data Schedule - ---------- * Filed herewith. -22- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Knight Transportation, Inc. has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. KNIGHT TRANSPORTATION, INC. By: /s/ Kevin P. Knight, --------------------------------- Kevin P. Knight, Date: March 28, 2000. Chairman of the Board Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature and Title Date ------------------- ---- /s/ Randy Knight March 28, 2000 - -------------------------------------------- Randy Knight Director /s/ Kevin P. Knight March 28, 2000 - -------------------------------------------- Kevin P. Knight Chairman of the Board, Chief Executive Officer, Director /s/ Gary J. Knight March 27, 2000 - -------------------------------------------- Gary J. Knight President, Director /s/ Keith T. Knight March 28, 2000 - -------------------------------------------- Keith T. Knight Executive Vice President, Director /s/ Clark A. Jenkins March 28, 2000 - -------------------------------------------- Clark A. Jenkins Chief Financial Officer, Secretary, Director Executive Vice President, Finance /s/ Donald A. Bliss March 27, 2000 - -------------------------------------------- Donald A. Bliss Director /s/ G.D. Madden March 28, 2000 - -------------------------------------------- G.D. Madden Director /s/ Mark Scudder March 28, 2000 - -------------------------------------------- Mark Scudder Director -23- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Public Accountants.................................... F-1 Consolidated Balance Sheets as of December 31, 1998 and 1998................ F-2 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997........................................ F-3 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997........................................ F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997........................................ F-5 Notes to Consolidated Financial Statements.................................. F-6 Report of Independent Public Accountants.................................... S-1 Schedule II - Valuation and Qualifying Accounts and Reserves For the Years Ended December 31, 1999, 1998 and 1997.................... S-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Knight Transportation, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of KNIGHT TRANSPORTATION, INC. (an Arizona corporation) AND SUBSIDIARIES (the Company) as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Knight Transportation, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona, January 18, 2000. F-1 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 1999 and 1998
ASSETS 1999 1998 ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 3,294,827 $ 124,188 Trade receivables, net of allowance for doubtful accounts of approximately $688,432 and $662,700, respectively 25,192,447 18,248,984 Notes receivable, net 1,558,950 561,608 Inventories and supplies 589,827 1,329,329 Prepaid expenses 1,570,023 1,617,900 Deferred tax assets 2,678,218 2,740,200 ------------- ------------- Total current assets 34,884,292 24,622,209 ------------- ------------- PROPERTY AND EQUIPMENT: Land and improvements 6,123,958 6,037,741 Buildings and improvements 6,241,858 5,970,919 Furniture and fixtures 3,909,744 3,169,514 Shop and service equipment 1,292,536 1,217,370 Revenue equipment 127,265,376 93,672,070 Leasehold improvements 516,411 469,037 ------------- ------------- 145,349,883 110,536,651 Less: accumulated depreciation (32,150,943) (25,964,744) ------------- ------------- PROPERTY AND EQUIPMENT, net 113,198,940 84,571,907 ------------- ------------- NOTES RECEIVABLE 8,425,019 2,846,008 ------------- ------------- OTHER ASSETS, net 8,036,333 4,918,096 ------------- ------------- $ 164,544,584 $ 116,958,220 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,133,119 $ 7,143,476 Accrued liabilities 3,450,147 4,967,370 Current portion of long-term debt 2,733,688 1,791,981 Line of credit 29,036,970 3,500,000 Claims accrual 4,639,993 3,724,385 ------------- ------------- Total current liabilities 47,993,917 21,127,212 LONG-TERM DEBT, net of current portion 11,735,651 7,919,647 DEFERRED TAX LIABILITIES 22,001,375 17,012,285 ------------- ------------- 81,730,943 46,059,144 ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value; 50,000,000 shares authorized -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 15,115,955 and 14,981,482 shares issued at December 31, 1999 and 1998; 14,619,155 and 14,981,482 shares outstanding at December 31, 1999 and 1998 14,981,482 shares outstanding at December 31, 1998 151,160 149,814 Additional paid-in capital 27,025,315 24,762,014 Retained earnings 61,451,148 45,987,248 Less - treasury stock, at cost (496,800 shares) (5,813,982) -- ------------- ------------- Total shareholders' equity 82,813,641 70,899,076 ------------- ------------- $ 164,544,584 $ 116,958,220 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-2 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------- ------------- ------------- OPERATING REVENUE $ 151,489,829 $ 125,030,245 $ 99,428,693 ------------- ------------- ------------- OPERATING EXPENSES: Salaries, wages and benefits 44,688,774 35,890,806 27,990,073 Fuel 15,800,611 12,156,740 10,182,487 Operations and maintenance 8,776,253 7,438,511 5,584,178 Insurance and claims 4,005,111 3,092,169 2,524,823 Operating taxes and licenses 5,646,079 5,236,401 4,114,145 Communications 1,190,164 965,019 597,728 Depreciation and amortization 14,179,613 12,446,438 9,560,569 Purchased transportation 27,585,318 21,771,073 19,038,834 Miscellaneous operating expenses 3,707,892 3,051,911 2,355,504 ------------- ------------- ------------- 125,579,815 102,049,068 81,948,341 ------------- ------------- ------------- Income from operations 25,910,014 22,981,177 17,480,352 ------------- ------------- ------------- OTHER INCOME (EXPENSE): Interest income 901,332 160,228 49,747 Interest expense (1,197,446) (419,263) (67,576) ------------- ------------- ------------- (296,114) (259,035) (17,829) ------------- ------------- ------------- Income before income taxes 25,613,900 22,722,142 17,462,523 INCOME TAXES (10,150,000) (9,376,000) (7,211,000) ------------- ------------- ------------- Net income $ 15,463,900 $ 13,346,142 $ 10,251,523 ============= ============= ============= BASIC EARNINGS PER SHARE $ 1.03 $ .89 $ .69 ============= ============= ============= DILUTED EARNINGS PER SHARE $ 1.02 $ .87 $ .68 ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 14,990,159 14,968,967 14,875,746 ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 15,232,555 15,262,865 15,150,510 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-3 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1999, 1998 and 1997
Common Stock Treasury Stock --------------------- Additional --------------------- Shares Paid-in Retained Shares Issued Amount Capital Earnings Issued Amount Total ---------- -------- ----------- ----------- ------- ----------- ----------- BALANCE, December 31, 1996 14,856,750 $148,567 $23,425,009 $22,389,583 -- $ -- $45,963,159 Exercise of stock options 67,078 670 572,333 -- -- -- 573,003 Issuance of 594 shares of common stock (Note 8) 594 6 10,044 -- -- -- 10,050 Early disposition of incentive stock options -- -- 135,954 -- -- -- 135,954 Net income -- -- -- 10,251,523 -- -- 10,251,523 ---------- -------- ----------- ----------- ------- ----------- ----------- BALANCE, December 31, 1997 14,924,422 149,243 24,143,340 32,641,106 -- -- 56,933,689 Exercise of stock options 56,100 561 484,137 -- -- -- 484,698 Issuance of 960 shares of common stock (Note 8) 960 10 17,489 -- -- -- 17,499 Early disposition of incentive stock options -- -- 117,048 -- -- -- 117,048 Net income -- -- -- 13,346,142 -- -- 13,346,142 ---------- -------- ----------- ----------- ------- ----------- ----------- BALANCE, December 31, 1998 14,981,482 149,814 24,762,014 45,987,248 -- -- 70,899,076 Exercise of stock options 36,400 365 322,643 -- -- -- 323,008 Issuance of shares for business acquisition (Note 3) 97,561 976 1,831,951 -- -- -- 1,832,927 Issuance of 512 shares of common stock (Note 8) 512 5 9,995 -- -- -- 10,000 Early disposition of incentive stock options -- -- 98,712 -- -- -- 98,712 Purchase of treasury stock, at cost -- -- -- -- 496,800 (5,813,982) (5,813,982) Net income -- -- -- 15,463,900 -- -- 15,463,900 ---------- -------- ----------- ----------- ------- ----------- ----------- BALANCE, December 31, 1999 15,115,955 $151,160 $27,025,315 $61,451,148 496,800 $(5,813,982) $82,813,641 ========== ======== =========== =========== ======= =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,463,900 $ 13,346,142 $ 10,251,523 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 14,179,613 12,446,438 9,560,569 Non-cash compensation expense for issuance of common stock to certain members of board of directors 10,000 17,499 10,050 Provision for allowance for doubtful accounts 320,610 205,100 139,600 Deferred income taxes, net 5,051,072 3,694,800 3,470,127 Changes in assets and liabilities: Increase in trade receivables (6,857,572) (6,519,721) (1,659,831) Increase in notes receivable (6,576,353) (3,407,616) -- Decrease (increase) in inventories and supplies 778,426 (927,253) (73,251) Decrease (increase) in prepaid expenses 80,769 (923,466) (185,349) (Increase) decrease in other assets (1,640,016) 1,099,346 (195,811) (Decrease) increase in accounts payable (1,086,359) 2,828,741 1,069,469 (Decrease) increase in accrued liabilities and claims accrual (798,411) 2,399,022 1,218,964 ------------ ------------ ------------ Net cash provided by operating activities 18,925,679 24,259,032 23,606,060 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (37,273,468) (29,326,223) (23,548,158) Investment in communications company (879,000) (4,000,000) -- Investment in other companies (250,000) (250,000) -- Cash received from business acquired 64,501 -- -- ------------ ------------ ------------ Net cash used in investing activities (38,337,967) (33,576,223) (23,548,158) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on line of credit, net 25,536,970 1,500,000 2,000,000 Borrowings of long-term debt 6,645,895 10,000,000 -- Payments of long-term debt (1,888,184) (302,543) (433,511) Payments of accounts payable - equipment (2,220,780) (2,753,115) (2,929,800) Purchase of treasury stock, at cost (5,813,982) -- -- Proceeds from exercise of stock options 323,008 484,698 573,003 ------------ ------------ ------------ Net cash provided by (used in) financing activities 22,582,927 8,929,040 (790,308) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,170,639 (388,151) (732,406) CASH AND CASH EQUIVALENTS, beginning of year 124,188 512,339 1,244,745 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 3,294,827 $ 124,188 $ 512,339 ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Noncash investing and financing transactions: Equipment acquired by accounts payable $ 4,261,659 $ 2,220,780 $ 2,753,115 Issuance of common stock to certain members of board of directors 10,000 17,499 10,050 Early disposition of incentive stock options 98,712 117,048 135,954 Cash flow information: Income taxes paid $ 6,002,000 $ 4,898,131 $ 3,945,579 Interest paid 1,117,787 372,009 69,161
The accompanying notes are an integral part of these consolidated financial statements. F-5 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS Knight Transportation, Inc. and subsidiaries (the Company) is a short to medium-haul, truckload carrier of general commodities. The operations are based in Phoenix, Arizona, where the Company has its corporate offices, fuel island, truck terminal, dispatching and maintenance services. The Company also has its operations in Katy, Texas and Indianapolis, Indiana. During 1999, the Company expanded its operations by opening new facilities in Charlotte, North Carolina and Salt Lake City, Utah. The Company operates in one industry, road transportation, which is subject to regulation by the Department of Transportation and various state regulatory authorities. The Company continues to develop its owner-operator program. Owner-operators are independent contractors who provide their own tractors. The Company views owner-operators as an alternative method of obtaining additional revenue equipment. The Company had 281 and 231 owner-operators at December 31, 1999 and 1998, respectively. This represents approximately 23% and 25% of the Company's tractor fleet at December 31, 1999 and 1998, respectively. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the parent company Knight Transportation, Inc., and its wholly owned subsidiaries, Knight Administrative Services, Inc., Quad-K Leasing, Inc., KTTE Holdings, Inc., QKTE Holdings, Inc., Knight Management Services, Inc., Knight Transportation Midwest, Inc., KTeCom, L.L.C. and Knight Transportation South Central Ltd. Partnership. All material intercompany items and transactions have been eliminated in consolidation. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain reclassifications have been made to the December 31, 1998 and 1997 consolidated financial statements to conform with the December 31, 1999 presentation. CASH EQUIVALENTS - The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. F-6 NOTES RECEIVABLE - Included in notes receivable are amounts due from independent contractors under a program whereby the Company finances tractor purchases for its independent contractors. These notes receivable are collateralized by revenue equipment and are due in monthly installments, including principal and interest, over periods generally ranging from three to five years. INVENTORIES AND SUPPLIES - Inventories and supplies consist of tires and spare parts which are stated at the lower of cost, using the first-in, first-out (FIFO) method, or net realizable value. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation on property and equipment is calculated by the straight-line method over the following estimated useful lives: Years ----- Land improvements 5 Buildings and improvements 20-30 Furniture and fixtures 5 Shop and service equipment 5-10 Revenue equipment 5-7 Leasehold improvements 10 The Company expenses repairs and maintenance as incurred. For the years ended December 31, 1999, 1998 and 1997, repairs and maintenance expense totaled approximately $4,240,000, $3,446,000, and $2,442,000, respectively and is included in operations and maintenance expense in the accompanying consolidated statements of income. Revenue equipment is depreciated to salvage values of 15% to 30% for all tractors. Trailers are depreciated to salvage values of 10% to 40%. The Company periodically reviews and adjusts its estimates related to useful lives and salvage values for revenue equipment. Tires on revenue equipment purchased are capitalized as a part of the equipment cost and depreciated over the life of the vehicle. Replacement tires and recapping costs are expensed when placed in service. OTHER ASSETS - Included in other assets is an investment in a company with advanced communications technology which the Company began utilizing in 1999. This investment has been recorded at a cost of $4,879,000 and represents less than a 20% ownership interest at December 31, 1999. Also included in other assets is an investment in a logistics company and an Internet trucking parts company, both of which have been recorded at a cost of $250,000 each and represent less than a 20% ownership interest at December 31, 1999, respectively. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of long-lived assets, including equipment, leasehold improvements, goodwill and purchased contracts, by determining whether the assets can be recovered from undiscounted future cash flows. The amount of impairment, if any, is measured based on projected future cash flows (using a discount rate reflecting the Company's average cost of funds) compared to the carrying value of those assets. F-7 Recoverability of long-lived assets is dependent upon, among other things, the Company's ability to continue to achieve profitability, in order to meet its obligations when they become due. In the opinion of management, based upon current information, long-lived assets will be recovered over the period of benefit. REVENUE RECOGNITION - The Company's typical customer delivery is completed one day after pickup. The Company recognizes operating revenues when the freight is picked up for delivery and accrues the estimated direct costs to complete the delivery. This method of revenue recognition is not materially different from recognizing revenue based on completion of delivery as the hauls are primarily short-term, usually 2 to 3 days. INCOME TAXES - The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. STOCK-BASED COMPENSATION - The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion (APB) No. 25, under which no compensation cost is recognized. In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 requiring companies that account for stock-based compensation as prescribed by APB No. 25 to disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted and certain disclosures with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. FINANCIAL INSTRUMENTS - The Company's financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable and notes payable. Due to the short-term nature of cash equivalents, accounts receivable and accounts payable, the fair value of these instruments approximates their recorded value. In the opinion of management, based upon current information, the fair value of notes receivable and notes payable approximates market value. The Company does not have material financial instruments with off-balance sheet risk. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company's three largest customers for each of the years 1999, 1998 and 1997, represent 16%, 15% and 17% of operating revenues, respectively. The single largest customer's revenues represent approximately 7%, 6%, and 8% of operating revenues for the years 1999, 1998 and 1997, respectively. RECAPITALIZATION AND STOCK SPLIT - On April 22, 1998, the Company's Board of Directors approved a three for two stock split, effected in the form of a 50 percent stock dividend. The stock dividend was paid on May 18, 1998, to stockholders of record as of 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. All share amounts and earnings per share amounts have been retroactively adjusted to reflect the stock split. F-8 EARNINGS PER SHARE - In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which supersedes APB No. 15, EARNINGS PER SHARE, the previous authoritative guidance. SFAS No. 128 modifies the calculation of primary and fully diluted earnings per share (EPS) and replaces them with basic and diluted EPS. All prior period EPS data presented has been restated. A reconciliation of the numerators (net income) and denominators (weighted average number of shares outstanding) of the basic and diluted EPS computations for 1999, 1998 and 1997, is as follows:
1999 1998 1997 ----------------------------------- ---------------------------------- --------------------------------- Net Income Shares Per Share Net Income Shares Per Share Net Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ ----------- ------------ ------ Basic EPS $15,463,900 14,990,159 $1.03 $13,346,142 14,968,967 $ .89 $10,251,523 14,875,746 $ .69 ===== ===== ===== Effect of stock options -- 242,396 -- 293,898 -- 274,764 ----------- ---------- ----------- ---------- ----------- ---------- Diluted EPS $15,463,900 15,232,555 $1.02 $13,346,142 15,262,865 $ .87 $10,251,523 15,150,510 $ .68 =========== ========== ===== =========== ========== ===== =========== ========== =====
SEGMENT INFORMATION - In January 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which established revised standards for the reporting of financial and descriptive information about operating segments in financial statements. Although the Company has six operating segments, it has determined that it has one reportable segment. Five of the segments are managed based on the regions of the United States in which each operates; each segment has similar economic characteristics. Each of the five regional operating segments provides short to medium haul truckload carrier service of general commodities to a similar class of customers. In addition, each segment exhibits similar financial performance, including average revenue per mile and operating ratio. The remaining segment is not reported because it does not meet the materiality thresholds in SFAS No. 131. As a result, the Company has determined that it is appropriate to aggregate its operating segments into one reportable segment consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its operating segments as the Company's consolidated financial statements present its one reportable segment. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, to be applied prospectively, is effective for the Company's quarter ending March 31, 2000. In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133. This statement deferred the effective date of SFAS No. 133 to the Company's quarter ending March 31, 2001. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. On January 1, 1999, the Company adopted Statement of Position 98-5 (SOP 98-5), REPORTING ON THE COSTS OF START-UP ACTIVITIES. This SOP provides guidance on the financial reporting of start-up costs and organization costs. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. F-9 SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Application of SOP 98-5 did not have a material impact on the Company's financial condition or results of operations. (2) INCOME TAXES: Income tax expense consists of the following: 1999 1998 1997 ----------- ----------- ----------- Current income taxes: Federal $ 4,198,003 $ 4,464,200 $ 2,904,400 State 900,925 1,217,000 836,473 ----------- ----------- ----------- 5,098,928 5,681,200 3,740,873 ----------- ----------- ----------- Deferred income taxes: Federal 4,044,413 3,040,700 2,840,200 State 1,006,659 654,100 629,927 ----------- ----------- ----------- 5,051,072 3,694,800 3,470,127 ----------- ----------- ----------- $10,150,000 $ 9,376,000 $ 7,211,000 =========== =========== =========== The effective income tax rate is different than the amount which would be computed by applying statutory corporate income tax rates to income before income taxes. The differences are summarized as follows: 1999 1998 1997 ----------- ----------- ----------- Tax at the statutory rate (34%) $ 8,708,726 $ 7,725,500 $ 5,937,300 State income taxes, net of federal benefit 1,259,006 1,234,900 967,800 Other 182,268 415,600 305,900 ----------- ----------- ----------- $10,150,000 $ 9,376,000 $ 7,211,000 =========== =========== =========== The net effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998, are as follows: 1999 1998 ----------- ----------- Short-term deferred tax assets: Claims accrual $ 1,981,998 $ 1,549,800 Other 696,220 1,190,400 ----------- ----------- Short-term deferred tax assets $ 2,678,218 $ 2,740,200 =========== =========== Long-term deferred tax liabilities: Property and equipment depreciation $20,307,452 $16,314,885 Prepaid expenses deducted for tax purposes 1,693,923 697,400 ----------- ----------- Long-term deferred tax liabilities $22,001,375 $17,012,285 =========== =========== F-10 (3) 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 No. 16, BUSINESS COMBINATIONS. 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: Common stock $1,832,927 Assumption of liabilities 330,631 ---------- Total $2,163,558 ========== The fair value of the assets purchased has been allocated as follows: Cash $ 64,501 Accounts receivable 406,501 Property and equipment 1,148,500 Inventory 38,924 Prepaids 32,892 Other assets 472,240 ---------- Total $2,163,558 ========== The following unaudited pro forma information is not indicative of the actual results, which would have occurred had the acquisition been consummated at the beginning of such periods or of future consolidated operations of the Company. The unaudited pro forma financial information is based on the purchase method of accounting and reflects adjustments to eliminate nonrecurring expenses, to amortize the excess purchase price over the underlying value of net assets acquired and to adjust income taxes for the unaudited pro forma adjustments. Year Ended December 31, ----------------------------- 1999 1998 ------------ ------------ (Unaudited) (Unaudited) Total revenues $152,394,294 $130,637,602 Net income 15,529,922 13,229,995 Basic earnings per share 1.03 .88 Diluted earnings per share 1.02 .87 Weighted average shares outstanding Basic 15,011,542 14,990,350 Diluted 15,253,938 15,284,248 F-11 (4) LINE OF CREDIT AND LONG-TERM DEBT: Long-term debt consists of the following at December 31:
1999 1998 ----------- ----------- Note payable to financial institution with monthly principal and interest payments of $192,558 through October 2003; the note is unsecured with interest at a fixed rate of 5.75%. $ 7,919,648 $ 9,711,628 Notes payable to a commercial lender with monthly principal and interest payments of $105,311 through October 2002, and a final payment of $4,007,065 in November 2002. The notes are secured by certain revenue equipment with interest rates from 6.95% to 6.99%. 6,549,691 -- ----------- ----------- 14,469,339 9,711,628 Less - current portion (2,733,688) (1,791,981) ----------- ----------- $11,735,651 $ 7,919,647 =========== ===========
Long-term debt maturities are as follows: 2000 $ 2,733,688 2001 2,908,682 2002 6,951,769 2003 1,875,200 ----------- $14,469,339 =========== The Company has a $40,000,000 revolving line of credit (see Note 6) with principal due at maturity, July 2001, and interest payable monthly at two options (prime or LIBOR plus .625%). In management's opinion, the Company will have sufficient liquidity to pay off, or will be able to renew, its line of credit at maturity. Under the terms of the line of credit, the Company is required to maintain certain financial ratios such as net worth and funded debt to earnings before income taxes, depreciation and amortization. The Company is also required to maintain certain other covenants relating to corporate structure, ownership and management. (5) COMMITMENTS AND CONTINGENCIES: PURCHASE COMMITMENTS As of December 31, 1999, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price, net of estimated trade-in values, of approximately $46,000,000 for delivery throughout 2000. Although the Company expects to take delivery of this revenue equipment, delays in the availability of equipment could occur due to factors beyond the Company's control. Any future delay or interruption in the availability of equipment could have a material adverse effect on the Company. F-12 DISABILITY PLAN The Company has a disability plan for certain of its key employees. The plan provides disability benefits of $75,000 annually for five years if a key employee terminates employment by reason of disability. The plan is subject to termination at any time by the Board of Directors. OTHER The Company is involved in certain legal proceedings arising in the normal course of business. In the opinion of management, the Company's potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements. (6) CLAIMS ACCRUAL: The Company acts as a self-insurer for bodily injury and property damage claims up to $100,000 per occurrence. The Company is self-insured for workers' compensation claims up to $250,000 per occurrence. The Company is also self-insured for loss of revenue equipment up to $12,500 per occurrence and cargo liability up to $12,500 per occurrence. Liability in excess of these amounts is covered by a third party underwriter up to $25 million. The claims accrual represents accruals for the estimated uninsured portion of pending claims including adverse development of known claims and incurred but not reported claims. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near term. Liabilities in excess of the self insured amounts are collateralized by letters of credit totaling $2,300,000. These letters of credit reduce the available borrowings under the Company's line of credit (see Note 4). (7) RELATED PARTY TRANSACTIONS: The Company leases approximately eight acres and facilities from a shareholder and director, (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 September 1997, the lease was amended to include additional acreage and the monthly payment was increased to approximately $5,923. In March 1999, the first renewal option was exercised and the monthly payment will increase to $6,100. In addition to base rent, the lease requires the Company to pay its share of all expenses, utilities, taxes and other charges. Rent expense paid to the Shareholder was approximately $84,600, $75,000, $60,200 during 1999, 1998 and 1997, respectively. The Company paid approximately $90,000, $90,000, and $80,000 for certain of its key employees' life insurance premiums during 1999, 1998, and 1997, respectively. A portion of the premiums paid are included in other assets in the accompanying consolidated balance sheets. The life insurance policies provide for cash distributions to the beneficiaries of the policyholders upon death of the key employee. The Company is entitled to receive the total premiums paid on the policies at distribution prior to any beneficiary distributions. F-13 During 1999, the Company purchased approximately $375,000 of communications equipment from the advanced communications technology company which it has an investment in. During 1999, the Company paid approximately $13,000 for legal services to a firm whose member is also a member of the Company's Board of Directors. As of July 31, 1999, the Company entered into a consulting agreement with a former employee and officer of the Company to provide services related to marketing and consulting and paid this former employee approximately $21,000 for the year ended December 31, 1999. Total Warehousing, Inc. (Total), a company owned by a shareholder and director of the Company provided general warehousing services to the Company in the amount of approximately $9,400, $9,000, and $11,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (8) SHAREHOLDERS' EQUITY: In August 1998, the Board of Directors authorized the repurchase from time to time of up to 500,000 shares of the Company's common stock on the open market or in negotiated transactions depending upon market conditions and other factors. In October 1999, the Board authorized the repurchase of an additional 500,000 shares of the Company's common stock in accordance with the same terms as the repurchase authorized in August 1998. During 1999, the Company purchased 496,800 shares under the repurchase program at a total cost of $5.8 million. During 1997, all non-employee Board of Director members received their director fees of $2,500 each through the issuance of common stock in equivalent shares to each board member. The Company issued a total of 594 shares of common stock during 1997 to certain directors. During 1998, certain non-employee Board of Director members received their director fees of $5,000 each through the issuance of common stock in equivalent shares to each board member. The Company issued a total of 960 shares of common stock during 1998 to certain directors. During 1999, two non-employee Board of Director members received their director fees of $5,000 each through the issuance of common stock in equivalent shares to each board member. The Company issued a total of 512 shares of common stock during 1999 to certain directors. (9) EMPLOYEE BENEFIT PLANS: 1994 STOCK OPTION PLAN The Company established the 1994 Stock Option Plan (1994 Plan) with 975,000 shares of common stock reserved for issuance thereunder. In February 1998, the 1994 Plan was amended and restated to increase the number of shares reserved for issuance to 1,500,000. The 1994 Plan will terminate on August 31, 2004. The Compensation Committee of the Board of Directors administers the 1994 Plan and has the discretion to determine the employees, officers and independent directors who receive awards, the type of awards to be granted (incentive stock F-14 options, nonqualified stock options and restricted stock grants) and the term, vesting and exercise price. Incentive stock options are designed to comply with the applicable provisions of the Internal Revenue Code (the Code) and are subject to restrictions contained in the Code, including a requirement that exercise prices are equal to at least 100% of the fair market value of the common shares on the grant date and a ten-year restriction on the option term. Independent directors are not permitted to receive incentive stock options. Non-qualified stock options may be granted to directors, including independent directors, officers, and employees and provide for the right to purchase common stock at a specified price, which may not be less than 85% of the fair market value on the date of grant, and usually become exercisable in installments after the grant date. Non-qualified stock options may be granted for any reasonable term. The 1994 Plan provides that each independent director may receive, on the date of appointment to the Board of Directors, non-qualified stock options to purchase not less than 2,500 nor more than 5,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of the grant. As permitted under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to account for stock transactions with employees and directors pursuant to the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Had compensation cost for the 1994 Plan been recorded consistent with SFAS No. 123, the Company's net income and EPS amounts would have been reduced to the following pro forma amounts for the years ended December 31: 1999 1998 1997 ----------- ----------- ----------- Net income: As reported $15,463,900 $13,346,142 $10,251,523 Pro forma 15,094,132 13,154,007 10,140,346 Earnings per share: As reported - Diluted EPS $ 1.02 $ .87 $ .68 Pro forma - Diluted EPS .99 .86 .67 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997; risk free interest rate of 5.77%, expected life of six years, expected volatility of 42%, expected dividend rate of zero, and expected forfeitures of 15.68%. The following weighted average assumptions were used for grants in 1998; risk free interest rate of 5.75%, expected life of six years, expected volatility of 45%, expected dividend rate of zero, and expected forfeitures of 23.36%. The following weighted average assumptions were used for grants in 1999; risk free interest rate of 6.87%, expected life of six years, expected volatility of 48.24%, expected dividend rate of zero, and expected forfeitures of 3.75%. F-15 Because SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost disclosed above may not be representative of that had such options been considered.
1999 1998 1997 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ------ ------- ------ ------- ------ Outstanding at beginning of year 704,150 $11.69 791,396 $11.25 $540,000 $ 8.51 Granted 203,550 16.94 39,750 18.58 380,325 14.38 Exercised (41,414) 8.84 (56,100) 8.47 (67,078) 8.53 Forfeited (56,100) 14.61 (70,896) 13.49 (61,851) 9.43 ------- ------ -------- ------ -------- ------ Outstanding at end of year 810,186 $12.88 704,150 $11.69 791,396 $11.25 ======= ====== ======== ====== ======== ====== Exercisable at end of year 230,021 $ 8.30 129,129 $ 8.20 71,834 $ 8.06 ======= ====== ======== ====== ======== ====== Weighted average fair value of options granted during the period $ 9.68 $ 9.65 $ 7.08 ======= ======== ========
Options outstanding at December 31, 1999, have exercise prices between $8.00 and $21.33. There are 302,511 options outstanding with exercise prices ranging from $8.00 to $9.25 with weighted average exercise prices of $8.42 and weighted average remaining contractual lives of 5.27 years. There are 507,675 options outstanding with exercise prices ranging from $9.26 to $21.33 with weighted average exercise prices of $15.54 and weighted average contractual lives of 7.77 years. 401(k) PROFIT SHARING PLAN The Company has a 401(k) profit sharing plan (the Plan) for all employees who are 19 years of age or older and have completed one year of service with the Company. The Plan, as amended in 1995, provides for a mandatory matching contribution equal to 50% of the amount of the employee's salary deduction not to exceed $625 annually per employee. The Plan also provides for a discretionary matching contribution. In 1999, 1998 and 1997, 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 $105,000, $110,000 and $93,000 in 1999, 1998 and 1997, respectively. The Company's matching contribution, included in accrued liabilities in the accompanying consolidated balance sheets, was approximately $150,000 and $125,000 at December 31, 1999 and 1998, respectively. F-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Knight Transportation, Inc. and Subsidiaries: We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements of KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES (the Company) included in this Annual Report filed on Form 10-K and have issued our report thereon dated January 18, 2000. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule on page S-2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona, January 18, 2000. S-1 SCHEDULE II KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves For the Years Ended December 31, 1999, 1998 and 1997
Balance at Charged Balance at Beginning Expense to Other End of Period Recorded Accounts Other of Period --------- -------- -------- ----- --------- Allowance for doubtful accounts: Year ended December 31, 1999 $ 662,700 $ 219,759 $ -- $ (194,027) (1) $ 688,432 Year ended December 31, 1998 457,600 366,000 -- (160,900) (1) 662,700 Year ended December 31, 1997 318,080 192,000 -- (52,480) (1) 457,600 Allowance for doubtful notes receivable: Year ended December 31, 1999 -- 101,000 -- -- 101,000 Year ended December 31, 1998 -- -- -- -- -- Year ended December 31, 1997 -- -- -- -- -- Insurance and claims reserves: Year ended December 31, 1999 3,724,385 3,632,994 -- (2,717,386) (2) 4,639,993 Year ended December 31, 1998 3,463,322 2,998,459 -- (2,737,396) (2) 3,724,385 Year ended December 31, 1997 3,040,672 2,242,418 -- (1,819,768) (2) 3,463,322
- ---------- (1) Writeoff of bad debts (2) Cash paid for claims S-2 EXHIBITS TO KNIGHT TRANSPORTATION, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 -24- KNIGHT EXHIBIT INDEX Exhibit Number Description - ------ ----------- 3.1 Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the period ending December 31, 1996). 4.1 Articles 4, 10 and 11 of the Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.) 4.2 Sections 2 and 5 of the Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.) 10.1 Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of March 1, 1994, between Randy Knight, the Company, and Lawyers Title of Arizona. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.1 Assignment and First Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.1.2 Second Amendment to Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.1.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2 Net Lease and Joint Use Agreement between Randy Knight and the Company dated as of March 1, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.2.1 Assignment and First Amendment to Net Lease and Joint Use Payment between L. Randy Knight, Trustee of the R. K. Trust dated April 1, 1993, and Knight Transportation, Inc. and certain other parties dated March 11, 1994 (assigning the lessor's interest to the R. K. Trust). 10.2.2 Second Amendment to Net Lease and Joint Use Agreement between L. Randy Knight, as Trustee of the R. K. Trust dated April 1, 1993 and Knight Transportation, Inc., dated as of September 1, 1997. 10.3 Form of Purchase and Sale Agreement and Escrow Instructions (All Cash) dated as of October 1994, between the Company and Knight Deer Valley, L.L.C., an Arizona limited liability company. (Incorporated by reference to Exhibit 10.4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 No. 33-83534.) 10.4 Loan Agreement and Revolving Promissory Note each dated March, 1996 between First Interstate Bank of Arizona, N.A. and Knight Transportation, Inc. and Quad K Leasing, Inc. (superseding prior credit facilities) (Incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-K for the period ending December 31, 1996). -25- Exhibit Number Description - ------ ----------- 10.4.1 Modification Agreement between Wells Fargo Bank, N.A., as successor by merger to First Interstate Bank of Arizona, N.A., and the Company and Quad-K Leasing, Inc. dated as of May 15, 1997. (Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-K for the period ending December 31, 1997.) 10.4.2* Credit Agreement and Revolving Line of Credit Note each dated November 24, 1999, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior revolving line of credit facilities) 10.4.3* Term Note dated November 24, 1999 between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facility) 10.5 Amended and Restated Knight Transportation, Inc. Stock Option Plan, dated as of February 10, 1998. (Incorporated by reference to Exhibit 1 to the Company's Notice and Information Statement on Schedule 14(c) for the period ending December 31, 1997.) 10.6 Amended Indemnification Agreements between the Company, Don Bliss, Clark A. Jenkins, Gary J. Knight, Keith Knight, Kevin P. Knight, Randy Knight, G. D. Madden, Minor Perkins and Keith Turley, and dated as of February 5, 1997 (Incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the period ending December 31, 1996). 10.7 Master Equipment Lease Agreement dated as of January 1, 1996, between the Company and Quad-K Leasing, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8 Purchase Agreement and Escrow Instructions dated as of July 13, 1995, between the Company, Swift Transportation Co., Inc. and United Title Agency of Arizona. (Incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.8.1 First Amendment to Purchase Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.8.1 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.9 Purchase and Sale Agreement dated as of February 13, 1996, between the Company and RR-1 Limited Partnership. (Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the period ended December 31, 1995.) 10.10 Asset Purchase Agreement dated March 13, 1999, by and among Knight Transportation, Inc., Knight Acquisition Corporation, Action Delivery Service, Inc., Action Warehouse Services, Inc. and Bobby R. Ellis. (Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on March 25, 1999.) 10.11* Master Equipment Lease Agreement dated as of October 28, 1998, between Knight Transportation Midwest, Inc., formerly known as "Knight Transportation Indianapolis, Inc." and Quad-K Leasing, Inc. 10.12* Consulting Agreement dated as of March 1, 2000 between Knight Transportation, Inc. and LRK Management, L.L.C. 21.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to the Company's report on Form 10-K for the period ending December 31, 1995.) 23* Consent of Arthur Andersen LLP 27* Financial Data Schedule - ---------- * Filed herewith. -26- EX-10.4.2 2 CREDIT AGREEMENT DATED 11/24/99 CREDIT AGREEMENT THIS AGREEMENT is entered into as of November 24, 1999, by and between KNIGHT TRANSPORTATION, INC., an Arizona corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodations described below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to provide the Credits to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDITS SECTION 1.1. LINE OF CREDIT. (a) LINE OF CREDIT. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including July 15, 2001, not to exceed at any time the aggregate principal amount of Forty Million Dollars ($40,000,000.00) ("Line of Credit"), the proceeds of which shall be used to finance Borrower's working capital requirements. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue standby letters of credit for the account of Borrower to finance Borrower's working capital requirements (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Two Million Five Hundred Thousand Dollars ($2,500,000.00). Each Letter of Credit shall be issued for a term not to exceed three hundred sixty (360) days, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any draft is paid by Bank, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any demand deposit account maintained by Borrower with Bank for the amount of any such draft. (c) BORROWING AND REPAYMENT. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. TERM LOAN. (a) TERM LOAN. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of Eight Million Seventy-three Thousand Six Hundred Eight-nine and 28/100 Dollars ($8,073,689.28) ("Term Loan"), the proceeds of which shall be used to finance Borrower's working capital requirements. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note substantially in the form of Exhibit B attached hereto ("Term Note"), all terms of which are incorporated herein by this reference. Bank's commitment to grant the Term Loan shall terminate on December 24, 1999. (b) REPAYMENT. The principal amount of the Term Loan shall be repaid in accordance with the provisions of the Term Note. (c) PREPAYMENT. Borrower may prepay principal on the Term Loan solely in accordance with the provisions of the Term Note. -2- SECTION 1.3. INTEREST/FEES. (a) INTEREST. The outstanding principal balance of the Line of Credit and Term Loan shall bear interest at the rate of interest set forth in the Line of Credit Note and Term Note (collectively, the "Notes"). (b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Notes. (c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to sixty-two hundredths percent (.0620) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the 15th day of each January, April, July and October. (d) LETTER OF CREDIT FEES. Borrower shall pay to Bank (i) fees upon the issuance of each Letter of Credit equal to nine tenths percent (0.9000) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the payment or negotiation by Bank of each draft under any Letter of Credit and fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal and interest due under each Credit by charging Borrower's demand deposit account number 4159-518950 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. -3- SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of Arizona, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated September 30, 1999, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. -4- SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any. other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a -5- release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to grant any of the Credits is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the granting of each of the Credits shall be satisfactory to Bank's counsel. (b) DOCUMENTATION. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Notes. (ii) Articles of Incorporation. (iii) Corporate Resolution: Borrowing. (iv) Certificate of Incumbency. (v) Such other documents as Bank may require under any other Section of this Agreement. (c) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. -6- (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement, statement of cash flow and all footnotes; (b) not later than 60 .days after and as of the end of each fiscal quarter, a financial statement of Borrower, prepared by Borrower, to include balance sheet, income statement, statement of cash flow and all footnotes; (c) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. -7- SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Net Worth not less than $70,000,000.00 plus 50% of positive net income and not reduced for any net losses, measured quarterly commencing September 30, 1999, with "Net Worth" defined as total stockholders' equity. (b) EBITDA Coverage Ratio not less than 3.00 to 1.0 as of each fiscal quarter end, determined on a rolling four-quarter basis, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt plus dividends and distributions. -8- (c) Funded Debt to EBITDA ratio not at any time greater than 1.50 to 1.0, on a trailing four-quarter basis, as of each fiscal quarter end, with "Funded Debt to EBITDA Ratio" defined as Funded Debt divided by EBITDA, and with "Funded Debt" defined as the aggregate of both the long-term and current portions (without duplication) of all indebtedness or liabilities. resulting from borrowings, loans or advances and capitalized lease obligations, plus the stated amounts of any issued and outstanding Letters of Credit, and with "EBITDA" as defined and calculated above. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of. Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: -9- SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits except for the purposes stated in Article I hereof. SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several in excess of an aggregate of $10,000,000.00, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank-prior to, the date hereof. SECTION 5.6. DIVIDEND, DISTRIBUTIONS. Declare or pay any dividend or distribution in excess of fifty percent (50%) of Borrower's net income in any fiscal year either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase in excess of $15,000,000.00 in any 12 month period effective as of the date of this Agreement, or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except for transaction currently being contemplated between KTI and Volvo and approved by Bank. -10- ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against . Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower. (f) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower -11- shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower by any court of competent jurisdiction. under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The dissolution or liquidation of Borrower; or Borrower or any of its directors, stockholders or members, shall take. action seeking to effect the dissolution or liquidation of Borrower. (i) Any change in ownership during the term of this Agreement. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any -12- kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: KNIGHT TRANSPORTATION, INC. 5601 W. Buckeye Road Phoenix, AZ 85043 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Arizona RCBO 100 West Washington Phoenix, AZ 85003 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposiin the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior -13- written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any of the Credits, Borrower or its business, [any guarantor hereunder or the business of such guarantor,] or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona. SECTION 7.11. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, -14- claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in Arizona selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. A11 statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration 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 bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) NO WAIVER; PROVISIONAL REMEDIES SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. (d) ARBITRATOR OUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Arizona State Bar or retired judges of the state or -15- federal judiciary of Arizona with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (I) shall resolve all Disputes in accordance with the substantive law of the state of Arizona, (ii) may grant any remedy or relief that a court of the state of Arizona could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Arizona Rules of Civil Procedure or other applicable law. Any Dispute in which the amount controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (I) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Arizona, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of Arizona. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Arizona. (f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by -16- a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, KNIGHT TRANSPORTATION, INC. NATIONAL ASSOCIATION By: /s/ Clark Jenkins By: /s/ Jeffrey Lowe --------------------------------- --------------------------------- Title: CFO Jeffrey Lowe Vice President -17- WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE $40,000,000.00 Phoenix, Arizona November 24, 1999 FOR VALUE RECEIVED, the undersigned KNIGHT TRANSPORTATION, INC. (Borrower') promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank') at its office at ARIZONA RCBO #03839, 100 WEST WASHINGTON, PHOENIX, AZ 85003, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $40,000,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth AFTER each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in Arizona are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for 1, 2, 3 OR 6 MONTHS, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $100,000.00; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof, If any Fixed Rate Term would end on a day which is flat a Business Day, then such Fixed Rate term shall be extended to the next succeeding Business Day. (c) "USDA" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR Reserve Percentage. (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Sank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Sank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market, (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation 0 of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest ate calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) INTEREST. The outstanding principal balance of this Note shall bear interest (computed, on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum EQUAL TO the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be .62500%, above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may lie given by telephone so long as, with respect to each LIBOR selection, (A) Bank receives written confirmation from Borrower not later than 3 Business Days after such telephone notice is given, and (B) such notice is given to Bank prior to 10:00 am., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 n.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 am., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) ADDITIONAL LIBOR PROVISIONS. (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be cortclusive and binding upon Borrower. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or. change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (d) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on the 15TH day of each MONTH, commencing DECEMBER 15, 1999. (e) DEFAULT INTEREST. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) BORROWING AND REPAYMENT. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of the Credit Agreement between Borrower and Bank defined below; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on JULY 15, 2001. (b) ADVANCES. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (i) L. RANDY KNIGHT OR KEVIN P. KNIGHT OR CLARK JENKINS OR GARY KNIGHT, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any 8orrower. (c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) PRIME RATE. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) DETERMINE the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) SUBTRACT from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.000% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of NOVEMBER 24, 1999, as amended from time to time (the "Credit Agreement). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default as defined in the Credit Agreement, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the state of Arizona. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. KNIGHT TRANSPORTATION, INC. By: /s/ Clark Jenkins ------------------------ Title: CFO --------------------- WELLS FARGO BANK CORPORATE RESOLUTION: BORROWING TO: WELLS FARGO BANK, NATIONAL ASSOCIATION RESOLVED: That this corporation, Knight Transportation, Inc., proposes to obtain credit from time to time, or has obtained credit, from Wells Fargo Bank, National Association ("Bank'). BE IT FURTHER RESOLVED, that any one of the following officers: Chairman or Chief Executive Officer or President or Chief Financial Officer together with any one of the following officers: None of this corporation be and they are hereby authorized and empowered for and on behalf of and in the name of this corporation and as itp corporate act and deed: (a) To borrow money from Bank and to assume any liabilities of any other person or entity to Bank, in such form and on such terms and conditions as shall be agreed upon by those authorized above and Bank, and to sign and deliver to Bank such promissory notes and other evidences of indebtedness for money borrowed or advanced and/or for indebtedness assumed as Bank shall require: such promissory notes or other evidences of indebtedness may provide that advances be requested by telephone communication and by any officer, employee or agent of this corporation so long as the advances are deposited into any deposit account of this corporation with Bank; this corporation shall be bound to Bank by, and Bank may rely upon, any communication or act, including telephone communications, purporting to be done by any officer, employee or agent of this corporation provided that Bank believes, in good faith, that the same is done by such person. (b) To contract for the issuance by Bank of letters of credit, to discount with Bank notes, acceptances and evidences of indebtedness payable to or due this corporation, to endorse the same and execute such contracts and instruments for repayment thereof to Bank as Bank shall require, and to enter into foreign exchange transactions with or through Bank. (c) To mortgage, encumber, pledge, convey, grant, assign or otherwise transfer all or any part of this corporation's real or personal property for the purpose of securing the payment of any of the promissory notes, contracts, instruments and `other': evidences of indebtedness authorized hereby,, and to. execute and deliver to Bank such deeds of trust, mortgages, pledge agreements, security agreements' and/or other related documents as Bank shall require. (d) To perform all acts and to execute and deliver all documents described above and all other contracts and instruments which Bank deems necessary or convenient to accomplish the purposes of this resolution and/or to perfect or continue the rights, remedies and security interests to be given to Bank pursuant hereto, including without limitation, any modifications, renewals and/or extensions of any of this corporations obligations to Bank, however evidenced; provided that the aggregate principal amount of all sums borrowed and credits established pursuant to this resolution shall not at any time exceed the sum of $49,000,000.00 outstanding and unpaid. Loans made pursuant to a special resolution and loans made by offices of Bank other than the office to which this resolution is delivered shall be in addition to foregoing limitation. BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition to that conferred by any other resolution heretofore or hereafter delivered by this corporation to Bank and shall continue in full force and effect until Bank shall have received notice in writing, certified by the Secretary of this corporation, of the revocation hereof by a resolution duly adopted by the Board of Directors of this corporation. Any such revocation shall be effective only as CORPORATE RESOLUTION: BORROWING (11/97) PAGE 1 to credit which is extended or committed by Bank, or actions which are taken by this corporation pursuant to the resolutions contained herein, subsequent to Bank's receipt of such notice. The authority hereby conferred shall be deemed retroactive, and any and all acts authorized herein which were performed prior to the passage of this resolution are hereby approved and ratified. CERTIFICATION I, Clark Jenkins , Secretary of Knight Transportation, Inc., a corporation created and existing under the laws of the state of Arizona, do hereby certify and declare that the foregoing is a full, true and correct copy of the resolutions duly passed and adopted by the Board of Directors of said corporation, by written consent of all Directors of said corporation or at a meeting of said Board duly and regularly called, noticed and held on _______________________________, at which meeting a quorum of the Board of Directors was present and voted in favor of said resolutions; that said resolutions are now in full force and effect; that there is no provision in the Articles of Incorporation or Bylaws of said corporation, or any shareholder agreement, limiting the power of the Board of Directors of said corporation to pass the foregoing resolutions and that such resolutions are in conformity with the provisions of such Articles of Incorporation and Bylaws; and that no approval by the shareholders of, or of the outstanding shares of. said corporation is required with respect to the matters which are the subject of the foregoing resolutions. IN WITNESS WHEREOF, I have hereunto set my hand and, if required by Bank affixed the corporate seal of said corporation, as of - ----------------------------. /s/ Clark Jenkins ---------------------------------------- Secretary (SEAL) CORPORATE RESOLUTION: BORROWING (11/97) Page 2 EX-10.4.3 3 TERM NOTE DATED 11/24/99 WELLS FARGO BANK TERM NOTE $8,073,889.28 Phoenix, Arizona November 24, 1999 FOR VALUE RECEIVED, the undersigned KNIGHT TRANSPORTATION INC. (`Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (`Bank') at its office at ARIZONA RCBO #03839, 100 WEST WASHINGTON, PHOENIX, AZ 85003, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $8,073,889.28, with interest thereon as set forth herein. INTEREST: (a) INTEREST. The outstanding principal balance of this Note shall bear interest at the rate of 5.75000% per annum (computed on the basis of a 360-day year, actual days elapsed. (b) DEFAULT INTEREST. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. REPAYMENT AND PREPAYMENT: (a) REPAYMENT. Principal and interest shall be payable on the 1ST day of each MONTH in installments of $192,558.23 each, commencing DECEMBER 1, 1999, and continuing up to and including SEPTEMBER 1, 2003, with a final installment consisting of all remaining unpaid principal and accrued interest due and payable in full on OCTOBER 1, 2003. (b) APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. (c) PREPAYMENT. Borrower may prepay principal on this Note at any time in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance hereof. In consideration of Bank providing this prepayment option to Borrower, or if this Note shall become due and payable at any time prior to the maturity date hereof by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each mono, from the month of prepayment through the month in which this Note matures, calculated as follows for each such month: (i) DETERMINE the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the scheduled maturity date hereof. (ii) SUBTRACT from the amount determined in U) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of this Note at the Money Market Funds Rate in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) It the result obtained in (ii) for any month is greater than zero, discount that difference by the Money Market Funds Rate used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.000% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. The "Money Market Funds Rate" shall mean the rate per annum which Bank estimates and quotes to its borrowers as the rate, adjusted for reserve requirements, federal deposit insurance, and any other amount which Bank deems appropriate, at which funds in the amount of a loan and for a period of time comparable to the term of such loan are available for purchase in the money market on the date such loan is made, with the understanding that the Money Market Funds Rate is Bank's estimate only and that Bank is under no obligation to actually purchase and/or match funds for any transaction. This rate is not fixed by or related in any way to any rate Bank quotes or pays for deposits accepted through its branch system. All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of NOVEMBER 24, 1999, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default as defined in the Credit Agreement, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several (c) GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the state of Arizona. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. KNIGHT TRANSPORTATION, INC. By: /s/ Clark Jenkins ------------------------ Title: CFO --------------------- EX-10.11 4 MASTER EQUIPMENT LEASE MASTER EQUIPMENT LEASE AGREEMENT Quad-K Leasing, Inc., an Arizona corporation ("Lessor"), 5601 West Buckeye Road, Phoenix, Arizona 85043, and Knight Transportation Indianapolis, Inc., an Arizona corporation ("Lessee"), 5601 West Buckeye Road, Phoenix, Arizona 85043, hereby enter into the following agreement. 1. Lease. Lessor hereby leases to Lessee, and Lessee agrees to lease from Lessor that certain Equipment described in Exhibit "A" hereto. Lessor hereby agrees to lease to Lessee and Lessee agrees to Lease from Lessor any additional Equipment listed on Exhibit "A" hereto from time to time and any Equipment shown in Lessor's records as leased to the Lessee. Lessor is a licensed motor vehicle carrier (MC #227271). Lessor shall be responsible for obtaining and paying any motor vehicle carrier license or tax on any of the Equipment. 2. Possession and Use. The Equipment shall be kept in Lessee's possession and Lessee shall be responsible for the care and maintenance of all such Equipment. The Equipment shall be used solely in connection with Lessee's medium to short haul truckload carrier business and shall be stored and maintained at Lessee's principal place of business located at 23623 Colonial Parkway, Katy, Texas. The Equipment shall be used solely in the loading and transportation of personal property in connection with Lessee's truckload carrier business. 3. Lease Term. The Lease shall govern the lease of equipment between Lessor and Lessee from and after October 1, 1998. The initial term of this Lease shall expire on September 30, 1999. The Lease shall be automatically renewed for successive additional one year terms, without action by Lessor or Lessee, unless Lessee notifies Lessor within 30 days prior to the expiration of any Lease term (or renewal thereof) that it is terminating this Lease. 4. Rent. In consideration for this Lease, Lessee shall pay to Lessor an amount equal to all Lessor's costs of operations, including equipment maintenance, and such other amounts as Lessor may be required to pay with respect to the Equipment leased hereby, except as otherwise provided in Section 13. Lessor shall bill Lessee and Lessee shall pay monthly the Rent due hereunder. As additional rent, Lessee agrees to pay Lessor 100% of all detention and accessorial service charges. 5. Loading and Unloading. Lessee shall be solely responsible for loading and unloading the Equipment. In the event Lessor loads the Lessee's Equipment, Lessor shall be entitled to assess Lessee a reasonable charge therefor. 6. Return of the Equipment. At the expiration of the term of this Lease, Lessee shall, at its own cost and expense, return the Equipment to Lessor at to a place designated by Lessor, in as good condition and repair as it presently is, reasonable wear and tear and normal depreciation excepted. Lessee shall not be obligated to replace, return or repair any loss or total damage covered by insurance which Lessee is obligated to provide and carry pursuant to this Lease, if Lessee elects to pay such insurance proceeds to Lessor. In that event, the Equipment shall be removed from this Lease and Lessor shall not be entitled to any rental from such removed Equipment, after payment of all insurance proceeds to Lessor. 7. Driver Requirements. Lessee shall be solely responsible for maintaining all driver logs, cargo manifests, driver records, delivery records and any other documentation required by the United States Department of Transportation ("DOT"). Lessee shall at all times comply with all federal, state and local laws relating to or governing the Equipment or its operation. Lessee acknowledges that motor carriers are required to use drivers who are qualified under the safety regulations set forth at 49 CFR ss.ss. 391.63 through 391.65. In addition, Lessee acknowledges that 49 CFR ss. 395.8(j)(2) requires a motor carrier who uses a driver intermittently to obtain from that driver a signed statement giving the total time on duty during the immediately preceding seven days from the time at which the driver was last relieved from duty prior to beginning work for the motor carrier. Lessee agrees to comply at all times with all laws applicable to the operation of the Equipment and applicable to Lessee as a truck-load motor carrier, including, without limitation, any state and federal laws governing safety, use, weight or size requirements or governing the nature of the cargo which may be transported or the financial responsibility requirements relating to the operation of a motor carrier including, without limitation, any requirements relating to insurance or self-insurance. 8. Title. Title to the Equipment shall remain in Lessor and the Equipment shall constitute the personal property of Lessor. Lessee agrees to keep the Equipment free and clear of any and all liens, encumbrances or claims created by, through or as a result of Lessee's use of the Equipment during the term of this Lease. Lessor may lien or encumber the Equipment at any time and to any extent. 9. Insurance. Lessee shall, at its own expense, insure the Equipment against loss by fire, theft and extended risk coverage, including collision and property damage and personal liability insurance. Property damage insurance shall be in an amount equal to the full value of the Equipment as determined by Lessor. In addition, Lessee shall obtain and maintain in force and effect insurance coverage for personal injury, collision, and comprehensive damage and property damage not less than $1,000,000 per occurrence, with an aggregate limit of not less than $1,000,000 per occurrence. Lessor may self-insure claims for personal injury, collision, comprehensive damage and property damage up to a maximum limit of $250,000 per occurrence and for collision, comprehensive, and cargo liability and up to a combined limit of $50,000 per occurrence. Lessee shall cause Lessor to be named on such policies as an additional insured. Lessee shall provide evidence of such coverage to Lessor at Lessor's written request. Lessee shall pay all premiums for such insurance prior to delinquency and shall not permit coverage to lapse or be terminated during the term of this Lease. 10. Indemnity. Lessee hereby agrees to indemnify and hold Lessor harmless for, from and against any and all actions, claims, demands, liabilities, damages or costs or expenses, including attorneys' fees and costs of court, expert's fees and other fees or costs, arising from or in connection with any claim brought or asserted against Lessor by any person or entity on account of or in connection with Lessee's operation of the Equipment, whether such claim results from personal injury, death, or damage to property or cargo, so long as such claim is caused in whole or in part by Lessee's use or operation of the Equipment during the term of this Lease. Lessor's indemnification rights hereunder shall be in addition to any contractual or other rights it may have against Lessee under the terms and conditions of this Lease. -2- 11. Inspection of Equipment. Lessee shall, upon Lessor's request, permit Lessor or its representative to inspect the Equipment at any location where it is stored and Lessee shall provide Lessor with reasonable access to the Equipment from time to time in order to determine its condition and whether Lessee is maintaining the Equipment in accordance with the terms and conditions of this Lease. 12. Maintenance and Repair. Lessor shall perform all maintenance and repair of the Equipment including, without limitation, day-to-day maintenance and the replacement of engines or other capital items. Lessee shall cooperate with Lessor to establish a regular maintenance schedule for each piece of Equipment subject to this Lease. 13. Taxes and Assessments. Lessee shall reimburse Lessor for all taxes, excise taxes, business privilege taxes, rental taxes, license or franchise fees, personal property taxes, assessments, and any and all other governmental charges, fees, fines, penalties or levies whatsoever whether assessable with respect to the Equipment, whether payable by Lessor or Lessee relating to the Equipment or the use, rental, transportation or delivery or operation thereof or of any cargo carried thereby; provided, however, that Lessor shall have the sole obligation to pay, and shall pay, the Arizona motor carrier tax, the federal highway use tax and all use taxes levied with respect to the Equipment, including the use tax payable on purchase of the Equipment. 14. Default. The occurrence of any one or more of the following events shall constitute a material default under and a breach of this Lease: a. Failure by Lessee to pay, when due, the rent provided herein or to make any other payment of money required by Lessor. b. Failure to pay, when due, any tax, assessment, premium or other amount provided herein and designated as the responsibility of Lessee. c. Failure to observe or perform any covenant, agreement, condition or provision of this Lease. d. The levy under execution, attachment by legal process, or filing or creation of the lien against Lessee's interest in the Equipment. e. Lessee becomes insolvent, bankrupt, or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a trustee or receiver. f. The institution of any bankruptcy, reorganization, arrangement, insolvency, or liquidation proceedings, or other proceedings for relief under the bankruptcy law, or similar law for the relief of creditors, by or against Lessee and, if instituted against Lessee by another, such proceedings are (i) allowed against it, (ii) consented to by Lessee, or (iii) not dismissed within 60 days after the institution of such proceedings. -3- g. The attachment, execution or other judicial seizure of substantially all Lessee's assets, if such seizure is not discharged within 30 days. 15. Lessor's Remedies. In the event of a default hereunder which is not cured within 30 days after the occurrence of such default, Lessor shall have the right to exercise any one or more of the following remedies: a. Terminate this Lease, by giving Lessee notice of termination, in which event this Lease shall end and all right, title and interest of Lessee in the Equipment shall expire and terminate. b. Terminate the right of Lessor to the Equipment without terminating this Lease by giving notice to Lessee that Lessee's right of possession shall end as of the date stated in the termination notice. c. Enforce the provisions of this Lease and protect the rights of Lessor hereunder by action in law or equity. d. Seek any other relief, whether available at law or in equity. e. If Lessor terminates the right of Lessee to possession without terminating this Lease, such termination shall not release Lessee, in whole or in part, from Lessee's obligation to pay rent or any other amounts due hereunder. In the event of the termination of this Lease, together with Lessor's termination of Lessee's right to possession, Lessor shall be entitled to recover all rent due as of the time of termination, all expenses required to be paid by Lessee through the date of termination, plus any and all damages Lessor may incur. f. In the event of any default under this Lease, Lessee shall pay Lessor's costs, charges and expenses, including reasonable costs and attorney's fees, and any costs of court, including expert's fees and accounting fees. In the event of any default hereunder, Lessor shall have the right to enter Lessee's premises and reclaim possession of the Equipment. 16. Waivers. Lessor may waive any default hereunder without waiving any other then existing or future default. All remedies of Lessor hereunder are cumulative and are in addition to any other remedies available at law or in equity that Lessor may have and Lessor may, to the extent permitted by law, exercise such remedies concurrently or separately, and exercise of any one remedy shall not be deemed an election of such a remedy to preclude the exercise of any other remedy. 17. Legal Costs and Attorneys' Fees. In the event suit or other legal action is initiated by either party to enforce its rights hereunder, the party who does not prevail agrees to pay to the prevailing party its reasonable attorneys' fees and costs of court. -4- 18. Time. Time is of the essence of this Lease and every covenant, term and condition hereof. 19. Controlling Law. The substantive laws of the State of Arizona shall govern the validity, performance and enforcement of this Lease without respect to any choice of law provisions. 20. Notices. Any notice required to be given under this Lease shall be in writing and may be delivered personally or by courier or sent by United States mail, postage prepaid, addressed to the party at the address shown in this Lease, unless a written notice of change of address is given, in which event notice shall be sent to the address given in such change. Any notice, which is mailed in accordance with the preceding sentence, shall be deemed to be delivered three business days after the date such notice is deposited in the United States mail, postage prepaid. 21. Counterparts and Supersession. This Lease may be executed in one or more counterparts and, when so executed, those executed counterpart shall constitute a single, binding agreement between and among those parties signatory thereto. This Lease amends and supersedes all prior equipment leases between Lessor and Lessee. DATED this 28th day of October, 1998. LESSOR: QUAD-K LEASING, INC., an Arizona corporation, By /s/ Kevin P. Knight ----------------------------- Its President -------------------------- By /s/ Clark Jenkins ----------------------------- Its Secretary -------------------------- LESSEE: KNIGHT TRANSPORTATION INDIANAPOLIS, INC., an Arizona corporation By /s/ Kevin P. Knight ----------------------------- Its President -------------------------- -5- EXHIBIT A All Lessor's tractors and trailers, as more particularly reflected on Lessor's records. EX-10.12 5 CONSULTING AGREEMENT DATED 3/1/00 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is entered into as of the 1st day of March, 2000 ("Effective Date"), by and between Knight Transportation, Inc., an Arizona corporation (the "Corporation"), and LRK Management, L.LC (the "Consultant"). RECITALS: A. Since his retirement as Chairman of the Corporation on July 31, 1999, the Consultant has provided consulting services to the Corporation under an arrangement approved by the Corporations' Board of Directors. B. Corporation desires to continue to retain Consultant as an independent contractor to provide consulting services to Corporation as provided in this Agreement and wish to memorialize that agreement in writing. Consultant is willing to provide such services under the terms and conditions as set forth in this Agreement. AGREEMENT: 1. TERM OF AGREEMENT. This Agreement shall commence on the Effective Date and shall terminate as provided in Section 7. 2. SCOPE OF SERVICES. The Corporation and Consultant agree that Consultant will, at the Corporation's request, provide marketing and consulting services to the Company described in Section 4. 3. CORPORATION'S RULES. Consultant shall comply with all reasonable rules, regulations and policies adopted by Corporation from time to time relating to the business operations of Corporation. 4. CONSULTANT'S GENERAL DUTIES. Consultant shall perform the following services for Corporation: (i) assist the Corporation with respect to customer presentations, including, without limitation, the retention of all existing customers and obtaining new customers; and (ii) assist the Corporation in establishing business relations with new customers; and (iii) providing marketing advice to the Corporation. Corporation agrees that it will provide the Company with any assistance it may require to perform his duties hereunder, as reasonably requested by Consultant, including attendance at and participation in meetings with customers, vendors, and employees. Consultant will use his best good faith efforts to carry out the terms and conditions of this Agreement. The Consultant's duties will be performed by Randy Knight personally or by another individual approved in writing by the Chief Executive office of the Corporation. 5. REMUNERATION. The Consultant will receive an annual fee of $50,000, payable quarterly. The Consultant shall not be entitled to any other compensation. 6. TIME COMMITMENT. Consultant shall not be required to consult full-time for the Corporation during the Consulting Period. Consultant is required to devote such time as is reasonably necessary for the proper performance of Consultant's duties under this Agreement, but not more than 90 days per year. As an independent contractor, Consultant shall have control of and discretion as to establishing the method by which he will perform services and when the services required of him under this Agreement will be performed. 7. RIGHT OF TERMINATION. This Agreement shall be terminable at any time by either party. If a party wishes to terminate this Agreement, it shall give written notice of termination to the other party. Termination shall be effective upon receipt of notice. In the event of termination, Consultant's fee shall be prorated through the date of termination. 8. ASSIGNMENT. This Agreement and the duties, obligations and benefits under it are not assignable or delegable by Consultant without Corporation's prior written consent. This Agreement shall be binding upon and inure to the benefit of Corporation and its respective successors and assigns. 9. NOTICE. Any notice required to be given by this Agreement shall be in writing and shall be considered as given and received upon personal delivery, one day after being sent when sent by a professional overnight courier service, two days after posting when sent by United States registered or certified mail, or the date of transmission if sent by telecopier, addressed as follows: If to Consultant: L. Randy Knight 6529 N. 31st Place Phoenix, Arizona 85016 If to Corporation: Knight Transportation, Inc. Attn: Kevin P. Knight, Chief Executive Officer 5601 W. Buckeye Road Phoenix, Arizona 85043 10. INDEPENDENT CONTRACTOR STATUS. Consultant's relationship to Corporation shall be that of an independent contractor and not an employee. Any federal, state and local taxes required to be paid by Consultant. Nothing contained in this Agreement shall be construed so as to make Consultant an officer or employee of Corporation. Neither Consultant nor Corporation shall have the authority to bind the other party in any respect. 11. CONFIDENTIALITY. During the term of the Agreement and thereafter, Consultant shall hold in confidence and shall not disclose, directly or indirectly, to any third person any Confidential Information unless such isclosure is authorized in writing by the Corporation or is required by law. For purposes of this Agreement, "Confidential Information" means any and all -2- confidential or proprietary information regarding the Corporation's personnel, products, customers, customer lists, prospects, business plans, lists of actual or prospective customers, pricing, trade secrets, pay practices, suppliers, financing arrangements, or other information relating to the operations or business of the Corporation or any parent, subsidiary and affiliated companies, regardless of whether such confidential information is known or available to, or developed by, Consultant before or during the term of the Agreement. Confidential Information shall not include any information clearly in the public domain, provided that such information did not come into public domain by reason of the Consultant's violation of this Agreement. Consultant acknowledges that the information described above is proprietary and confidential and will be kept confidential. Consultant agrees that all right, title and interest in any such Confidential Information shall be and shall remain the exclusive property of the Corporation. Consultant agrees to execute any agreements or documents and to do all other things reasonably requested by the Corporation in order to vest in the Corporation all ownership rights in the Confidential Information. Upon termination of the Agreement, Consultant agrees to turn over to the Corporation all notes, data, tapes, reference items, sketches, drawings, memoranda, calendars, records and other materials in Consultant's possession or control. 12. MISCELLANEOUS. a. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Arizona. b. Amendments, modifications and changes to this Agreement shall be valid only if in writing and signed by both parties to this Agreement. c. This Agreement contains the entire understanding of the parties with regard to the matters contained herein and supersedes any prior or contemporaneous written or oral agreements of the parties. d. The waiver of either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. If either party retains an attorney to enforce the terms of this Agreement, the prevailing party to any action or enforcement proceeding shall be reimbursed by the other party for all costs and expenses thereof, whether or not assessable. -3- The undersigned have executed this Agreement as of the Effective Date. LRK Management, L.LC "CONSULTANT" By: /s/ L. Randy Knight ---------------------------------- L. Randy Knight Its: Manager --------------------------------- "CORPORATION" Knight Transportation, Inc., an Arizona corporation By: /s/ Kevin P. Knight ---------------------------------- Kevin P. Knight Its: President --------------------------------- -4- EX-23 6 CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 18, 2000, included in this Form 10-K, into the previously filed Registration Statement on Form S-8 (File No. 333-72377). /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona, March 24, 2000. EX-27 7 FINANCIAL DATA SCHEDULE
5 THE 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. U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 3,294,827 0 26,751,397 688,432 589,827 34,884,292 145,349,883 (32,150,943) 164,544,584 47,993,917 0 0 0 151,160 82,662,481 164,544,584 0 151,489,829 0 125,579,815 0 0 (296,114) 25,613,900 10,150,000 15,463,900 0 0 0 15,463,900 1.03 1.02
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