-----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, IMMqoBrJm5MWy+47I1IbBUkOjG7EjLOyF+fgGm9CXGdDNWL/zAmplDf6Q6teJNqB GmAZJ35ZGrt8KjF6TZ29qg== 0000950147-99-000297.txt : 19990402 0000950147-99-000297.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950147-99-000297 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNIGHT TRANSPORTATION INC CENTRAL INDEX KEY: 0000929452 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 860649974 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24946 FILM NUMBER: 99581130 BUSINESS ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 BUSINESS PHONE: 6022692000 MAIL ADDRESS: STREET 1: 5601 W BUCKEYE RD CITY: PHOENIX STATE: AZ ZIP: 85043 10-K 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/98 ================================================================================ 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, 1998 Commission File No. 0-24946 KNIGHT TRANSPORTATION, INC. (Exact name of registrant as specified in its charter) Arizona 86-0649974 (State or other jurisdiction of (i.R.S. Employer incorporation or organization) identification no.) 5601 West Buckeye Road, Phoenix, Arizona 85043 (Address of principal executive offices) (Zip Code) (602) 269-2000 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, $0.01 par value NASDAQ-NMS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 4, 1999, was $141,599,291 (based upon $21.0625 per share being the closing sale price on that date as reported by the National Association of Securities Dealers Automated Quotation System-National Market System ("NASDAQ-NMS")). In making this calculation, the issuer has assumed, without admitting for any purpose, that all executive officers and directors of the company, and no other persons, are affiliates. The number of shares outstanding of the registrant's common stock as of March 4, 1999 was 14,992,061. The Information Statement for the Annual Meeting of Shareholders to be held on May 12, 1999 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, 1998 Page ---- PART I. Item 1. Business.......................................................1 Item 2. Properties.....................................................6 Item 3. Legal Proceedings..............................................7 Item 4. Submission of Matters to a Vote of Security Holders............7 PART II. 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..................................................17 Item 8. Financial Statements and Supplementary Data...................18 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.........................................18 PART III. Item 10. Directors and Executive Officers of the Company...............18 Item 11. Executive Compensation........................................18 Item 12. Security Ownership of Certain Beneficial Owners and Management...............................................18 Item 13. Certain Relationships and Related Transactions................18 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................19 SIGNATURES..................................................................22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ...................................24 CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES....................25 INDEX TO EXHIBITS...........................................................38 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 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 out of its Phoenix, Arizona headquarters, in the Texas and Louisiana region through its facility in Katy, Texas, and in the Midwest and on the East Coast through its facility in Indianapolis, Indiana. The Company's stock has been publicly traded since October 1994. From 1992 to 1998, Knight's revenue has grown to $125.0 million from $19.6 million, and net income has increased to $13.3 million from $1.9 million. This growth 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. o GROWTH. Knight's objective is to achieve significant growth through the controlled growth of high quality service to existing customers and the development of 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 services. o REGIONAL OPERATIONS. The Company's headquarters and facilities in Phoenix, Arizona allow it to serve the Western region of the United States. The Company has also established operations near Houston, Texas to serve customers in the Louisiana and Texas region. In March 1999, the Company leased a facility in Corsicana, Texas, in order to expand its operations in the Texas and Louisiana region. The Company's operations in Corsicana are supervised through its regional headquarters near Houston. The Company has also established operations in Indianapolis, Indiana, from which it provides regional and dedicated service in the Mid-West and on the East Coast. Knight expects that its three regional operating bases will provide a platform for future growth, and intends to expand its regional operations from those bases. -1- o 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. o OPERATING EFFICIENCIES. The Company employs a number of strategies that it believes are instrumental to its efforts to achieve and maintain operating efficiencies. Knight seeks to maintain a simplified operation that focuses on operating dry vans in particular geographical and shipping markets. This approach allows the Company to concentrate its marketing efforts to achieve higher penetration of its targeted service areas. The Company seeks operating economies by maintaining a generally compatible fleet of tractors and trailers that facilitates Knight's ability to serve a broad range of customer needs and thereby maximizes equipment utilization and efficiencies in equipment maintenance and positioning. 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, 1998, the Company's 25 largest customers represented 51.4% of operating revenue; its ten largest customers represented 34.5% of operating revenue; and its five largest customers represented 22.0% 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's primary arrangements for dedicated services in the Houston area obligate the Company to provide a portion of its customer's transportation needs from one of the customer's distribution centers. The Company furnishes these services through Company provided revenue equipment and drivers. -2- Each of the Company's two 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 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 provides electronic data interchange ("EDI") services to shippers requiring such service. The Company has made an investment in a communications company that provides two-way digital wireless communication services which enables customers such as the Company to communicate with manned and unmanned transportation assets via the Internet and through ground based wide-area networks. The Company's investment is intended to assure access to low cost communication services for the future which are capable of meeting the needs of the Company and its customers. DRIVERS, OTHER EMPLOYEES, AND INDEPENDENT CONTRACTORS As of December 31, 1998, Knight employed 1,145 persons, including 933 drivers and 31 maintenance personnel. 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 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 a stock option plan and a cash employee incentive program. The Company also maintains an independent contractor program. Because independent contractors provide their own tractors, the independent contractor program provides the Company an alternate method of obtaining additional revenue equipment. The Company intends to continue its use of independent contractors. As of December 31, 1998, the Company had 231 tractors 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 independent contractors to assist them in acquiring revenue equipment. -3- Company loans are secured by a lien on the independent contractor's revenue equipment. As of December 31, 1998, the Company had outstanding loans of approximately $3.4 million to independent contractors. REVENUE EQUIPMENT The Company operates a fleet of 53-foot long, high cube trailers, including 50 refrigerated trailers and 24 flatbed trailers in its fleet as of March 4, 1999. The efficiency and flexibility provided by its fleet configurations permit the Company to handle both high volume and high weight shipments. Knight's fleet configuration also allows the Company to move freight on a "drop-and-hook" basis, increasing asset utilization and providing better service to customers. 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. As of December 31, 1998, the Company operated 702 company tractors with an average age of 1.5 years and 2,809 trailers with an average age of 2.2 years. The Company also had under contract, as of December 31, 1998, 231 tractors, operated by independent contractors. 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 42 months after the date of purchase and to replace its trailers over a five to seven year period. Actual replacement depends upon the condition of particular equipment, its resale value and other factors. The Company employs a continuous preventive maintenance program designed to minimize equipment down time, facilitate customer service, and enhance trade value when equipment is replaced. 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, 1998, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price of approximately $41 million for delivery throughout 1999. 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 Safety Director 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. The Company's Chief Financial Officer and Vice President of Human Resources and Administration are responsible for securing appropriate insurance coverages at cost effective rates. The primary claims arising in the Company's -4- 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, for collision, comprehensive, and cargo liability up to a combined limit of $12,500 per occurrence, and for workers' compensation up to $250,000 per occurrence. The Company maintains insurance to cover liabilities in excess of these amounts. The Company's insurance policies provide for general liability coverage up to $1,000,000 per occurrence and $2,000,000 in the aggregate; automobile liability coverage up to $1,000,000 per occurrence; cargo insurance up to $2,500,000 per occurrence; and additional umbrella liability coverage up to $25,000,000. 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, and efficiency. 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 -5- review so that the Company can achieve environmental compliance and avoid environmental risk. The Company's Phoenix and Indianapolis facility was designed, after consultation with environmental advisors, to contain and properly dispose of hazardous substances and petroleum products used in connection with the Company's business. The Company 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 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" for additional information regarding certain regulatory matters. 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, an officer and director of the Company and one of its principal shareholders. See "Certain Relationships and Related Transactions," below, for additional information. In October 1997, the Company completed construction of a bulk fuel storage facility and fueling islands at its Phoenix headquarters to obtain greater operating efficiencies. In June of 1998, the Company completed 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, and 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 -6- operations in the Texas and Louisiana region. The Company has acquired property in Katy, Texas for its regional headquarters and construction of the Company's new facility is expected to be completed by January, 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. The Company leases office facilities in California, Oklahoma and Utah, 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, 1998, the Company's aggregate monthly rent for all leased properties was approximately $35,000. 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 new favorable locations. The Company has not encountered any significant impediments to the location or addition of new facilities. 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." 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 1998. -7- 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 tier 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 ---- --- 1997 First Quarter $ 16.83 $ 12.50 Second Quarter $ 19.00 $ 13.67 Third Quarter $ 19.17 $ 14.33 Fourth Quarter $ 21.33 $ 15.17 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 As of March 4, 1999, the Company had 70 shareholders of record and approximately 1,550 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 five-year period ended December 31, 1998, are derived from the Company's Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report. 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, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) STATEMENTS OF INCOME DATA: Operating revenue $125,030 $99,428 $77,504 $56,170 $37,543 Operating expenses 102,049 81,948 64,347 45,569 29,431 Income from operations 22,981 17,480 13,157 10,601 8,112 Net interest expense and other (259) (18) (346) (196) (734) Income before income taxes 22,722 17,462 12,810 10,406 7,378 Net income 13,346 10,252 7,510 5,806 4,094 Diluted net income per share (1) .87 .68 .52 .43 .33 BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit) $ 3,242 $ 2,044 $ 4,141 $ (293) $ 1,761 Total assets 116,958 82,690 64,118 43,099 32,588 Long-term obligations, net of current 7,920 -- 53 981 2,117 Shareholders' equity 70,646 56,798 45,963 24,732 18,903 OPERATING DATA (UNAUDITED): Operating ratio(2) 81.6% 82.4% 83.0% 81.1% 78.4% Average revenue per mile $ 1.24 $ 1.22 $ 1.24 $ 1.26 $ 1.29 Average length of haul (miles) 489 500 489 494 482 Empty mile factor 10.0% 9.6% 9.6% 10.3% 10.1% Tractors operated at end of period(3) 933 772 575 425 291 Trailers operated at end of period 2,809 2,112 1,529 1,044 639
- ---------- (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". (2) Operating expenses as a percentage of operating revenue. (3) Includes 231 independent contractor operated vehicles at December 31, 1998; includes 192 independent contractor operated vehicles at December 31, 1997; 158 independent contractor operated vehicles at December 31, 1996; 115 independent contractor operated vehicles at December 31, 1995; and 29 independent contractor operated vehicles at December 31, 1994. -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" AND 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, 1998, 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, 1998, the Company's operating revenue grew at a 36.5% compounded annual rate, while net income increased at a 40.4% compounded annual rate. The Company has established regional operations in Phoenix, Arizona; Indianapolis, Indiana; and Katy, Texas. The Company's headquarters facilities in Phoenix, Arizona, serve the Western United States. The Company's operations in Indianapolis 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. Use of independent contractors also resulted in a lower turnover rate. Due to the use of independent contractors, the Company originally experienced a decrease in salaries, wages and benefits, fuel and maintenance, and other expenses, as a percentage of operating revenue, and a corresponding increase in purchased transportation as a percentage of operating revenue. As of December 31, 1998, the Company had 231 tractors owned and operated by independent contractors. The Company expanded its Company-owed fleet during 1998. As the Company-owed fleet has expanded, purchased transportation has decreased slightly as a percentage of operating revenue. Purchased transportation represents the amount an independent contractor is paid to haul freight for the Company on a mutually agreed per-mile basis. -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, ------------------------ 1998 1997 1996 ---- ---- ---- Operating revenue 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses: Salaries, wages and benefits 28.7 28.2 28.7 Fuel 9.7 10.2 10.2 Operations and maintenance 5.9 5.6 5.2 Insurance and claims 2.5 2.5 3.6 Operating taxes and licenses 4.2 4.1 3.9 Communications .8 .6 .6 Depreciation and amortization 10.0 9.6 9.7 Purchased transportation 17.4 19.2 18.6 Miscellaneous operating expenses 2.4 2.4 2.5 ----- ----- ----- Total operating expenses 81.6 82.4 83.0 ----- ----- ----- Income from operations 18.4 17.6 17.0 Net interest expense .2 -- .5 ----- ----- ----- Income before income taxes 18.2 17.6 16.5 Income taxes 7.5 7.3 6.8 ----- ----- ----- Net Income 10.7% 10.3% 9.7% ===== ===== ===== 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 (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. The Company cannot predict whether higher prices will return -11- or the extent to which fuel surcharges could be collected from customers to offset such increases if they occur. 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. 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. FISCAL 1997 COMPARED TO FISCAL 1996 Operating revenue increased by 28.3% to $99.4 million in 1997 from $77.5 million in 1996. 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 -12- an increase in the Company's independent contractor fleet, during 1997 compared to 1996. The Company's fleet increased by 34.3% to 772 tractors (including 192 owned by independent contractors) as of December 31, 1997 from 575 tractors (including 158 owned by independent contractors) as of December 31, 1996. Average revenue per mile declined to $1.22 per mile for the year ended December 31, 1997 from $1.24 per mile for the same period in 1996, reflecting continued pressure on rates and increased competition in all of the Company's operating regions. Equipment utilization averaged 121,459 miles per tractor in 1997, down slightly when compared to an average of 121,960 miles per tractor in 1996. This change reflects increased competition in the short-to-medium truckload carrier business. Salaries, wages and benefits expense decreased as a percentage of operating revenue to 28.2% for 1997 from 28.7% for 1996, primarily the result of the increase in the ratio of tractors to non-driving employees. This ratio measures productivity and efficiency of non-driving personnel. The Company records accruals for workers' compensation 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 remained constant as a percentage of operating revenue at 10.2% for both 1997 and 1996. Operations and maintenance expense increased as a percentage of operating revenue to 5.6% for 1997 from 5.2% in 1996. This increase was the result of lower revenue per mile and the decrease in the number of independent contractors as a percentage of the Company's entire fleet to 24.8% in 1997, compared to 27.5% in 1996. Insurance and claims expense decreased as a percentage of operating revenue to 2.5% for 1997 compared to 3.6% for 1996. This decrease resulted from lower insurance premiums and a decrease in the Company's accident rate. Operating taxes and license expense increased as a percentage of operating revenue to 4.1% for 1997 from 3.9% for 1996. The increase resulted primarily from the increased cost associated with the licensing of trailers for use in states with higher licensing fees. Communications expenses remained constant, with no significant change taking place in 1997 compared to 1996. Depreciation and amortization expense decreased to 9.6% for 1997 from 9.7% in 1996. The small decrease resulted from an increase in revenue being generated at each of the Company's facilities and the absence of large expenditures for any additional facilities. Purchased transportation expense increased to 19.2% in 1997 from 18.6% in 1996 due to the decrease in the Company's revenue per mile. Independent contractors are compensated at a fixed rate per mile. Miscellaneous operating expenses remained steady, with no significant change taking place in 1997. As a result of the above factors, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 82.4% for 1997, compared to 83.0% for 1996. Net interest expense decreased as a percentage of operating revenue to less than 0.1% for 1997 from 0.5% in 1996 as a result of the application of the proceeds from the Company's secondary stock offering in July 1996, which were used to reduce debt and to purchase revenue equipment. -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 7.3% for the year ended December 31, 1997 from 6.8% for the year ended December 31, 1996 primarily due to the lower revenue per mile. As a result of the preceding changes, the Company's net income as a percentage of operating revenue was 10.3% in 1997, compared to 9.7% in 1996. 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, term borrowings to finance equipment purchases, the Company's line of credit, and the Company's initial and secondary public offerings in 1994 and 1996, respectively. Net cash provided by operating activities totaled approximately $29.3 million, $23.6 million and $14.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Capital expenditures for the purchase of revenue equipment, office equipment and leasehold improvements totaled approximately $31.5 million, $26.3 million and $24.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The Company anticipates that capital expenditures, net of trade-ins, will be approximately $41 million for 1999, to be used primarily to acquire new revenue equipment to expand the Company's fleet, to upgrade existing facilities, and to acquire additional facilities. Net cash provided by financing activities and net direct equipment financing was approximately $8.9 million for the year ended December 31, 1998. Net cash used in financing activities and net direct equipment financing was $0.8 million for the year ended December 31, 1997. Net cash provided by financing activities and net direct equipment financing was approximately $8.3 million for the year ended December 31, 1996. The change between 1998 and 1997 was due to the Company borrowing approximately $11.5 million during 1998. The change between 1997 and 1996 was due to the Company's ability to offset the cost of purchasing revenue equipment with the proceeds of the Company's secondary stock offering during 1996. The Company maintains a $10 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 .625%), or the prime rate. At December 31, 1998, and March 4, 1999, the Company had $3,500,000 in borrowings under its revolving line of credit. The line of credit expires in May 1999. 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. The Company borrowed $10 million during 1998 under a long-term Promissory Note with its lender. The Note is unsecured and bears interest at a fixed rate of 5.75% per annum. As of December 31, 1998, $9,711,628 was currently owed under the Note, with monthly payments of $193,558 payable through October 2003. Management believes that the cash flow from operating activities 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 -14- 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. 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. 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 effects of inflation on the Company's business during 1998, 1997 and 1996 generally was not significant. During 1998, the Company experienced historically low fuel prices, as a result of conditions in the petroleum industry. The conditions that created these historic low price conditions may not persist. YEAR 2000 CAPABILITIES. 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 has implemented or is in the process of reviewing, testing, and implementing various modifications to ensure that its computer equipment and software will function properly in the Year 2000 and beyond. For this purpose, the term "computer equipment and software" includes systems commonly referred to as information technology systems ("IT systems"), such as data processing, dispatch, accounting, telephone, and other miscellaneous systems as well as systems that are not commonly referred to as IT systems, such as fax machines, heating and air conditioning systems, and other miscellaneous systems. The Company has been and will be in contact with 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. The Company currently anticipates that all necessary Year 2000 modifications will be completed in the next six months, and that such efforts will be completed prior to any anticipated impact on its computer equipment and software. All internal and external costs associated with the Company's Year 2000 compliance activities are expensed as incurred. The Company believes that the costs of addressing the Year 2000 issue will not have a material impact on its financial position. Since all major computerized systems and applications will have been reviewed and tested as part of the Year 2000 project, the Company feels that it has reasonably addressed all material risks that may effect its operations. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all year 2000 issues are not properly identified and corrected, there can be no assurance that the Year 2000 issue will not materially effect the Company's relationships with vendors, -15- customers, and others. Also, there can be no assurance that the Year 2000 issues of other entities with whom the Company deals will not have a material adverse impact on the Company's operations. The Company is in the process of evaluating and developing a contingency plan to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. The contingency plan is expected to be completed in 1999. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, gains and losses) in a full set for general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures About Segments of an Enterprise and Related Information, which supersedes Statement of Financial Accounting Standards No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. 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, interest rates or increases in insurance costs or liability claims, to the extent not offset by increases in freight rates, would reduce the Company's profitability. Although the Company's independent contractors are responsible for paying for their own equipment, fuel and other operating costs, significant increases in these costs could cause them to seek higher compensation from the Company or other contractual opportunities. 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 adjust its driver compensation package, which could adversely affect the Company's profitability if not offset by a corresponding increase in rates. 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. -16- 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. 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 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." 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 initiated operations in Indianapolis, Indiana, in order to access markets in the Midwest and on the East Coast. These operations will require the commitment of additional revenue equipment and personnel, as well as management resources, for future development. These initiatives represent the first established operations of the Company in markets outside of its primary regional operations in the Western United States. Should the growth in the Company's operations near Houston, Texas or in Indianapolis, Indiana 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 or that it will not take longer than expected or require a more substantial financial commitment than anticipated in order for the Company to generate positive operating results in these new markets. 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. In the opinion of management, an increase in short-term interest rates would not have a material adverse effect on the Company's financial condition, based on the level of debt carried by the Company as of December 31, 1998. Management does not foresee or expect any significant changes in exposure to -17- interest rate fluctuations or in how that exposure is managed by the Company in the near future. The Company has not issued corporate debt instruments. The Company is subject to commodity price risk with respect to purchases of fuel and tires. The Company has not used derivative financial instruments to manage these risks. The Company has installed fuel islands at its Phoenix, Arizona and Indianapolis facilities which enable it to purchase fuel at "rack" prices, saving pumping charges. 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 results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of Knight Transportation, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the related Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 1998, together with the related notes and report of Arthur Andersen LLP, independent public accountants, are set forth at pages 23 through 36, 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 Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999. ITEM 11. EXECUTIVE COMPENSATION The Company incorporates by reference the information contained under the heading "Executive Compensation" from its definitive Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999. 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 Information Statement to be delivered to shareholders of the Company in connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999. 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 Information Statement to be delivered to shareholders of the Company in -18- connection with the 1999 Annual Meeting of Shareholders to be held May 12, 1999. 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 23 through 36, 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, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules 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 38. (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: -19- 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). -20- 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* Loan Agreement and Revolving Line of Credit Note each dated July 14, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facilities) 10.4.3* Term Note dated October 1, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. 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.) 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. -21- 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 30, 1999. 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 30, 1999 - -------------------------------------------- Randy Knight Chairman of the Board, Director /s/ Kevin P. Knight March 30, 1999 - -------------------------------------------- Kevin P. Knight Chief Executive Officer, Director /s/ Gary J. Knight March 30, 1999 - -------------------------------------------- Gary J. Knight President, Director /s/ Keith T. Knight March 30, 1999 - -------------------------------------------- Keith T. Knight Executive Vice President, Director /s/ Clark A. Jenkins March 30, 1999 - -------------------------------------------- Clark A. Jenkins Chief Financial Officer, Secretary, Director Executive Vice President, Finance /s/ Keith L. Turley March 30, 1999 - -------------------------------------------- Keith L. Turley Director /s/ Donald A. Bliss March 30, 1999 - -------------------------------------------- Donald A. Bliss Director /s/ G.D. Madden March 30, 1999 - -------------------------------------------- G.D. Madden Director -22- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS -23- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Knight Transportation, Inc.: We have audited the accompanying consolidated balance sheets of KNIGHT TRANSPORTATION, INC. (an Arizona corporation) and subsidiaries (collectively, the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Phoenix, Arizona, January 19, 1999. -24- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 124,188 $ 512,339 Trade receivables, net of allowance for doubtful accounts of approximately $662,700 and $457,600, respectively 18,248,984 11,934,364 Notes receivable 561,608 -- Inventories and supplies 1,329,329 402,076 Prepaid expenses 1,617,900 694,434 Deferred tax assets (Note 2) 2,740,200 1,907,800 ------------ ----------- Total current assets 24,622,209 15,451,013 ------------ ----------- PROPERTY AND EQUIPMENT: Land and improvements 6,037,741 4,322,837 Buildings and improvements 5,970,919 1,855,092 Furniture and fixtures 3,169,514 2,146,637 Shop and service equipment 1,217,370 1,018,636 Revenue equipment 93,672,070 75,695,123 Leasehold improvements 469,037 432,467 ------------ ----------- 110,536,651 85,470,792 Less: accumulated depreciation (25,964,744) 20,025,293) ------------ ----------- PROPERTY AND EQUIPMENT, net 84,571,907 65,445,499 ------------ ----------- NOTES RECEIVABLE 2,846,008 -- OTHER ASSETS (Note 6) 4,918,096 1,793,284 ------------ ----------- $116,958,220 $82,689,796 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,143,476 $ 4,847,070 Accrued liabilities 5,220,372 3,082,413 Current portion of long-term debt (Note 3) 1,791,981 14,171 Line of credit (Note 3) 3,500,000 2,000,000 Claims accrual (Note 5) 3,724,385 3,463,322 ------------ ----------- Total current liabilities 21,380,214 13,406,976 LONG-TERM DEBT, less current portion (Note 3) 7,919,647 -- DEFERRED INCOME TAXES (Note 2) 17,012,285 12,485,085 ------------ ----------- 46,312,146 25,892,061 ------------ ----------- COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 6 and 8) SHAREHOLDERS' EQUITY (Notes 7 and 8): Preferred stock -- -- Common stock 149,814 149,243 Additional paid-in capital 24,509,012 24,007,386 Retained earnings 45,987,248 32,641,106 ------------ ----------- Total shareholders' equity 70,646,074 56,797,735 ------------ ----------- $116,958,220 $82,689,796 ============ =========== The accompanying notes are an integral part of these consolidated balance sheets. -25- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1998 1997 1996 ------------ ------------ ------------ OPERATING REVENUE $125,030,245 $ 99,428,693 $ 77,503,786 ------------ ------------ ------------ OPERATING EXPENSES: Salaries, wages and benefits 35,890,806 27,990,073 22,217,900 Fuel 12,156,740 10,182,487 7,890,607 Operations and maintenance 7,438,511 5,584,178 4,017,698 Insurance and claims 3,092,169 2,524,823 2,820,086 Operating taxes and licenses 5,236,401 4,114,145 3,018,999 Communications 965,019 597,728 509,411 Depreciation and amortization 12,446,438 9,560,569 7,520,905 Purchased transportation 21,771,073 19,038,834 14,378,518 Miscellaneous operating expenses 3,051,911 2,355,504 1,973,131 ------------ ------------ ------------ 102,049,068 81,948,341 64,347,255 ------------ ------------ ------------ Income from operations 22,981,177 17,480,352 13,156,531 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income 160,228 49,747 51,730 Interest expense (419,263) (67,576) (398,204) ------------ ------------ ------------ (259,035) (17,829) (346,474) ------------ ------------ ------------ Income before income taxes 22,722,142 17,462,523 12,810,057 INCOME TAXES (9,376,000) (7,211,000) (5,300,000) ------------ ------------ ------------ Net income $ 13,346,142 $ 10,251,523 $ 7,510,057 ============ ============ ============ BASIC EARNINGS PER SHARE $ .89 $ .69 $ .53 ============ ============ ============ DILUTED EARNINGS PER SHARE $ .87 $ .68 $ .52 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 14,968,967 14,875,746 14,197,968 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 15,262,865 15,150,510 14,377,747 ============ ============ ============ The accompanying notes are an integral part of these consolidated balance sheets. -26- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Additional ---------------------- Paid-in Retained Shares Amount Capital Earnings Total ----------- -------- ----------- ----------- ----------- BALANCE, December 31, 1995 13,653,000 $136,530 $ 9,716,237 $14,879,526 $24,732,293 Exercise of stock options 3,750 37 29,963 -- 30,000 Issuance of 1,200,000 shares of common stock, net of offering costs of $1,109,191 (Note 7) 1,200,000 12,000 13,678,809 -- 13,690,809 Net income -- -- -- 7,510,057 7,510,057 ----------- -------- ----------- ----------- ----------- 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 7) 594 6 10,044 -- 10,050 Net income -- -- -- 10,251,523 10,251,523 ----------- -------- ----------- ----------- ----------- BALANCE, December 31, 1997 14,924,422 149,243 24,007,386 32,641,106 56,797,735 Exercise of stock options 56,100 561 484,137 -- 484,698 Issuance of 960 shares of common stock (Note 7) 960 10 17,489 -- 17,499 Net income -- -- -- 13,346,142 13,346,142 ----------- -------- ----------- ----------- ----------- BALANCE, December 31, 1998 14,981,482 $149,814 $24,509,012 $45,987,248 $70,646,074 =========== ======== =========== =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. -27- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,346,142 $ 10,251,523 $ 7,510,057 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 12,446,438 9,560,569 7,520,905 Non-cash compensation expense for issuance of common stock to certain members of board of directors 17,499 10,050 -- Provision for doubtful accounts 205,100 139,600 23,000 Deferred income taxes, net 3,694,800 3,470,127 2,211,958 Changes in assets and liabilities- Increase in trade receivables (6,519,721) (1,659,831) (3,062,094) Increase in notes receivable (3,407,616) -- -- (Increase) decrease in inventories and supplies (927,253) (73,251) 93,764 (Increase) decrease in prepaid expenses (923,466) (185,349) 428,219 Increase in other assets (3,150,654) (195,811) (652,693) Increase (decrease) in accounts payable 2,828,741 1,069,469 (250,046) Increase in accrued liabilities and claims accrual 2,399,022 1,218,964 459,965 ------------ ------------ ------------ Net cash provided by operating activities 20,009,032 23,606,060 14,283,035 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (29,326,223) (23,548,158) (21,919,774) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing (payments) on line of credit, net 1,500,000 2,000,000 (2,000,000) Borrowing of debt 10,000,000 -- 759,200 Payments of debt (302,543) (433,511) (2,294,455) Payments of accounts payable - equipment (2,753,115) (2,929,800) (1,927,726) Proceeds from sale of common stock -- -- 13,690,809 Proceeds from exercise of stock options 484,698 573,003 30,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities 8,929,040 (790,308) 8,257,828 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (388,151) (732,406) 621,089 CASH AND CASH EQUIVALENTS, beginning of year 512,339 1,244,745 623,656 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 124,188 $ 512,339 $ 1,244,745 ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Noncash investing and financing transactions: Equipment acquired by accounts payable $ 2,220,780 $ 2,753,115 $ 2,929,800 Issuance of common stock to certain members of board of directors 17,499 10,050 -- Cash Flow Information: Income taxes paid $ 4,898,131 $ 3,945,579 $ 2,459,144 Interest paid 372,009 69,161 408,138
The accompanying notes are an integral part of these consolidated balance sheets. -28- KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (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. During 1996, the Company expanded its operations by opening new facilities in Katy, Texas and Indianapolis, Indiana. 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 231 and 192 owner-operators at December 31, 1998 and 1997, respectively. This represents approximately 25% of the Company's tractor fleet at December 31, 1998 and 1997. 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. CASH EQUIVALENTS - The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. INVENTORIES AND SUPPLIES - Inventories and supplies consist of tires and spare parts which are stated at the lower of cost, using the first-in, first-out (FIFO) method, or net realizable value. -29- 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, 1998, 1997 and 1996, repairs and maintenance expense totaled approximately $3,446,000, $2,442,000 and $1,883,000, respectively and is included in operations and maintenance expense in the accompanying consolidated statements of income. Revenue equipment is depreciated to a salvage value of 15% for all tractors. Trailers are depreciated to salvage values of 10% to 40%. The Company periodically reviews its estimates related to useful lives and salvage values for revenue equipment. TIRES - Tires on revenue equipment purchased are capitalized as a part of the equipment cost and depreciated over the life of the vehicle. Replacement tires and recapping costs are expensed when placed in service. OTHER ASSETS - Included in other assets for 1998 is an investment in a company with advanced communications technology which the Company anticipates utilizing in 1999. This investment has been recorded at a cost of $4,000,000 and represents approximately a 4.6% ownership interest at December 31, 1998. There were no material intercompany transactions between this communications company and Knight during 1998. 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. 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 No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company's three largest customers for each of the years 1998, 1997 and 1996, represent 15%, 17% and 17% of operating revenues, respectively. The single largest customer's revenues represent 6%, 8% and 9% of operating revenues for the years 1998, 1997 and 1996, respectively. Notes receivable represent 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 -30- equipment and are due in monthly installments, including principal and interest, over periods generally ranging from three to five years. 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 have been retroactively adjusted to reflect the stock split. EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE, which supersedes Accounting Principles Board (APB) Opinion No. 15, 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. SFAS No. 128 is effective for financial statements for both interim and annual periods presented after December 15, 1997, and as a result, 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 1998, 1997 and 1996, is as follows:
1998 1997 1996 ----------------------------------- ----------------------------------- ----------------------------------- 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 $13,346,142 14,968,967 $ .89 $10,251,523 14,875,746 $ .69 $ 7,510,057 14,197,968 $ .53 ====== ====== ====== Effect of stock options -- 293,898 -- 274,764 -- 179,779 ----------- ---------- ----------- ---------- ----------- ---------- Diluted EPS $13,346,142 15,262,865 $ .87 $10,251,523 15,150,510 $ .68 $ 7,510,057 14,377,747 $ .52 =========== ========== ====== =========== ========== ====== =========== ========== ======
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT - Effective January 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS No. 131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which 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 the Company has three 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. In addition, each segment exhibits similar financial performance, including average revenue per mile and operating ratio. As a result of the foregoing, the Company has determined that it is appropriate to aggregate its operating 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. -31- (2) INCOME TAXES: Income tax expense consists of the following: 1998 1997 1996 ---------- ---------- ---------- Current income taxes: Federal $4,464,200 $2,904,400 $2,429,100 State 1,217,000 836,473 658,900 ---------- ---------- ---------- 5,681,200 3,740,873 3,088,000 ---------- ---------- ---------- Deferred income taxes: Federal 3,040,700 2,840,200 1,805,300 State 654,100 629,927 406,700 ---------- ---------- ---------- 3,694,800 3,470,127 2,212,000 ---------- ---------- ---------- Total income tax expense $9,376,000 $7,211,000 $5,300,000 ========== ========== ========== 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: 1998 1997 1996 ---------- ---------- ---------- Tax at the statutory rate (34%) $7,725,500 $5,937,300 $4,355,400 State income taxes, net of federal benefit 1,234,900 967,800 703,300 Other 415,600 305,900 241,300 ---------- ---------- ---------- $9,376,000 $7,211,000 $5,300,000 ========== ========== ========== The net effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997, are as follows: 1998 1997 ----------- ----------- Short-term deferred tax assets: Claims accrual $ 1,549,800 $ 1,383,400 Other 1,190,400 524,400 ----------- ----------- Total short-term deferred tax assets $ 2,740,200 $ 1,907,800 =========== =========== Long-term deferred tax liabilities: Property and equipment depreciation $16,314,885 $11,904,300 Prepaid expenses deducted for tax purposes 697,400 580,785 ----------- ----------- Total long-term deferred tax liabilities $17,012,285 $12,485,085 =========== =========== -32- (3) LINE OF CREDIT AND LONG-TERM DEBT: Long-term debt consists of the following at December 31: 1998 1997 ----------- ----------- 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% $ 9,711,628 $ -- Notes payable, paid in full in 1998 -- 14,171 ----------- ----------- 9,711,628 14,171 Less - current portion (1,791,981) (14,171) ----------- ----------- $ 7,919,647 $ -- =========== =========== Long-term debt maturities are as follows: 1999 $ 1,791,981 2000 1,898,018 2001 2,012,945 2002 2,133,484 2003 1,875,200 ----------- $ 9,711,628 =========== The Company has a $10,000,000 revolving line of credit (see Note 5) with principal due at maturity, July 2000, 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. Borrowings under the line of credit are limited to 80% of eligible accounts receivable, as defined, and 50% of net fixed assets, as defined and amounted to $3,500,000 at December 31, 1998. Under the terms of the line of credit, the Company is required to maintain certain financial ratios. These ratios include; total liabilities to net worth ratio, current ratio, and certain debt service ratios. The Company is also required to maintain certain other covenants relating to corporate structure, ownership and management. (4) COMMITMENTS AND CONTINGENCIES: PURCHASE COMMITMENTS As of December 31, 1998, the Company had purchase commitments for additional tractors and trailers with an estimated purchase price, net of estimated trade-in values, of approximately $41 million for delivery throughout 1999. 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. 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. -33- 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. (5) 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 $992,000. These letters of credit reduce the available borrowings under the Company's line of credit (see Note 3). (6) RELATED PARTY TRANSACTIONS: The Company leases approximately eight acres and facilities from a shareholder and officer, (the Shareholder) under a five year lease, with an option to extend for two additional five-year terms. The lease terms include base rent of $4,828 per month for the initial three years of the lease, and increases of 3% on the third anniversary of the commencement date, the first day of each option term, and the third anniversary of the commencement date of each option term. In 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 will be 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 $75,000, $60,200 and $59,000 during 1998, 1997 and 1996, respectively. The Company paid approximately $90,000, $80,000 and $80,000 for certain of its key employees' life insurance premiums during 1998, 1997 and 1996, 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. The Company provided maintenance and shipping for Total Warehousing, Inc. (Total), a company owned by a shareholder of the Company, of approximately $16,000 for the year ended December 31, 1996. No services were provided during 1998 or 1997. Total provided general warehousing services to the Company in the amount of approximately $9,000, $11,000 and $14,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (7) SHAREHOLDERS' EQUITY: The Company's authorized capital stock consists of 100,000,000 shares of $.01 par value common stock; 14,981,482 and 14,924,422 shares of common stock were issued and outstanding at December 31, 1998 and 1997, respectively. In addition, the Company has authorized 50,000,000 shares of $.01 par value preferred stock, none of which was outstanding at December 31, 1998 or 1997. -34- In July 1996, the Company issued 1,200,000 shares of common stock at $12.33 per share (the Offering). The Offering consisted of 2,400,000 shares of common stock comprised of 1,200,000 newly-issued Company shares and 1,200,000 shares from existing shareholders. During 1997, all Board of Director members received their director fees of $2,500 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, all Board of Director members received their director fees of $5,000 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. (8) 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 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 Statement of Financial Accounting Standards No. 123 (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: 1998 1997 1996 ----------- ----------- ---------- Net income: As reported $13,346,142 $10,251,523 $7,510,057 Pro forma 13,060,131 10,052,945 7,338,132 Earnings per share: As reported - Diluted EPS $ .87 $ .68 $ .52 Pro forma - Diluted EPS .86 .66 .51 -35- 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 1996; risk free interest rate of 6.73%, expected life of six years, expected volatility of 36%, expected dividend rate of zero, and expected forfeitures of 0%. The following weighted average assumptions were 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%. 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.
1998 1997 1996 ----------------- ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- Outstanding at beginning of year 791,396 $11.25 540,000 $ 8.51 393,375 $ 8.04 Granted 39,750 18.58 380,325 14.38 208,875 9.32 Exercised (56,100) 8.47 (67,078) 8.53 (3,750) 8.00 Forfeited (70,896) 13.49 (61,851) 9.43 (58,500) 8.32 ------- ------ ------- ------ ------- ------ Outstanding at end of year 704,150 $11.69 791,396 $11.25 540,000 $ 8.51 ======= ====== ======= ====== ======= ====== Exercisable at end of year 129,129 $ 8.20 71,834 $ 8.06 11,250 $ 8.38 ======= ====== ======= ====== ======= ====== Weighted average fair value of options granted during the period $ 9.65 $ 7.08 $ 4.43 ======= ======= =======
Options outstanding at December 31, 1998, have exercise prices between $8.00 and $21.33. There are 345,050 options outstanding with exercise prices ranging from $8.00 to $9.25 with weighted average exercise prices of $8.43 and weighted average remaining contractual lives of 6.39 years. There are 359,100 options outstanding with exercise prices ranging from $9.26 to $21.33 with weighted average exercise prices of $14.80 and weighted average contractual lives of 8.92 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 1998, 1997 and 1996, there were no discretionary contributions. Employees' rights to employer contributions vest after five years from their date of employment. The Company's matching contribution, included in accrued liabilities in the accompanying consolidated balance sheets, was approximately $125,000, $93,000 and $69,000 for 1998, 1997 and 1996, respectively. -36- EXHIBITS TO KNIGHT TRANSPORTATION, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 -37- 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). -38- 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* Loan Agreement and Revolving Line of Credit Note each dated July 14, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. (superseding prior credit facilities) 10.4.3* Term Note dated October 1, 1998, between Wells Fargo Bank, N.A. and Knight Transportation, Inc. 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.) 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. -39- EX-10.4.2 2 LOAN AGREEMENT AND REVOLVING LINE OF CREDIT NOTE WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE $10,000,000.00 PHOENIX, ARIZONA JULY 14,1998 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 86003, 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 $10,000,000.00, 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 not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" 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-Bank 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 Bank 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 D 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 are 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 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. 1 (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 be 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 a.m., California time, of) the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Batik will quote the applicable fixed rate to Borrower at approximately 10:00 a.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 a.m., 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 (8) 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 conclusive 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 JULY 15, 1998. (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. 2 (f) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to .06200% per annum (computed on the basis of a 360-day year, actual days elapsed) on the average unused amount of this Note, which fee shall be calculated on a monthly basis by Bank and shall be due and payable by borrower in arrears on the 15th day of each month. (g) COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest and fees due hereunder by charging Borrower's demand deposit account number 4159-518950 with Bank, or any other demand deposit account maintained by any 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. STANDBY LETTER OF CREDIT SUBFEATURE: (a) LETTER OF CREDIT SUBFEATURE. As a subfeature under this Note, Bank agrees from time to time during the term hereof to issue standby letters of credit for the account of Borrower to finance 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 $1,250,000.00. Each Letter of Credit shall be issued for a term not to exceed 360 days, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to the maturity date of this Note. The undrawn amount of all Letters of Credit shall be reserved tinder this Note and shall not be available for borrowings hereunder. 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 draft paid by Bank under a Letter of Credit shall be deemed an advance under this Note and shall be repaid by Borrower in accordance with the terms and conditions of this Note; provided however, that if advances hereunder 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 hereunder. 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. (b) LETTER OF CREDIT FEES. Borrower shall pay to Bank (i) fees upon the issuance of each Letter of Credit equal to 0.900% 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 by Bank of each draft under any Letter of Credit and 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. BORROWING AND REPAYMENT: (a) USE OF PROCEEDS. Advances under this Note shall be available solely to finance WORKING CAPITAL REQUIREMENTS. (b) 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 any document executed in connection with, or at any time as a supplement to, this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. 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. 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 any 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, 2000. (c) 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 Borrower. 3 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 Tern) 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: Any default in the payment or performance of any obligation under this Note, or any defined event of default under any loan agreement now or at any time hereafter in effect between Borrower and Bank (whether executed prior to, concurrently with or at any time after this Note), shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal, interest, fees and charges 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, it 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 - --------------------------------- CLARK JENKINS CHIEF FINANCIAL OFFICER/SECRETARY 4 WELLS FARGO BANK LOAN AGREEMENT This Loan Agreement (this "Agreement") is entered into by and between KNIGHT TRANSPORTATION, INC. ("Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and sets forth the terms and conditions which govern all Borrower's commercial credit accommodations from Bank, whether now existing or hereafter granted (each, a "Credit" and collectively, "Credits"), which terms and conditions are in addition to those set forth in any other contract, instrument or document (collectively with this Agreement, the "Loan Documents") required by this Agreement or heretofore or at any time hereafter delivered to Bank in connection with any Credit. I. REPRESENTATIONS AND WARRANTIES. Borrower makes the following representations and warranties to Bank, which representations and warranties shall be true as of the date hereof and on the date of each extension of credit under each Credit with the same effect as though made on each such date: (a) 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 in all jurisdictions in which such qualification or licensing is required or in which the failure to be qualified or licensed could have a material adverse effect on Borrower. (b) AUTHORIZATION AND VALIDITY. Each of the Loan Documents has been duly authorized, and upon its execution and delivery to Bank will constitute a legal, valid and binding obligation of Borrower or the party which executes the same, enforceable in accordance with its respective terms. (c) NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of law or regulation, or contravene any provision of Borrower's Articles of Incorporation or By-Laws, or result in any breach of or default under any agreement, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. (d) NO 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 except as disclosed by Borrower to Bank in writing prior to the date hereof. (e) FINANCIAL STATEMENTS. The most recent annual financial statement of Borrower, and all interim financial statements delivered to Bank since the date of said annual financial statement, true copies of which have been delivered by Borrower to Bank prior to the date hereof, are complete and correct, present fairly the financial condition of Borrower and disclose all liabilities of Borrower, and have been prepared in accordance with generally accepted accounting principles. Since the dates of such financial statements 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. (f) TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year except as disclosed by Borrower to Bank in writing prior to the date hereof. II. ADDITIONAL TERMS. (a) CONDITIONS PRECEDENT. The obligation of Bank to grant any Credit is subject to the condition that Bank shall have received all contracts, instruments and documents, duly executed where applicable, deemed necessary by Bank to evidence such Credit and all terms and conditions applicable thereto, all of which shall be in form and substance satisfactory to Bank. (b) APPLICATION OF PAYMENTS. Each payment made on each Credit shall be applied first, to any interest then due, second, to any fees and charges then due, and third, to the outstanding principal balance thereof. III. COVENANTS. So long as any Credit remains available or any amounts under any Credit remain outstanding, Borrower shall, unless Bank otherwise consents in writing: (a) INSURANCE. Maintain and keep in force, for each business in which Borrower is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation, 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. 5 (b) COMPLIANCE: LAWS AND REGULATIONS; YEAR 2000. (i) Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of Borrower's business; and comply with the provisions of all documents pursuant to which Borrower is organized arid/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations arid orders of any governmental authority applicable to Borrower and/or its business, and all state or federal environmental, hazardous waste, health arid safety statutes, arid any rules or regulations adopted pursuant thereto, which govern or affect any operations and/or properties of Borrower. (ii) 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. (c) OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness or other liabilities, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, direct or contingent (including any contingent liability under any guaranty of the obligations of any person or entity), except (i) the liabilities of Borrower to Bank, Iii) trade debt incurred by Borrower in the normal course of its business, and (iii) any other liabilities of Borrower existing as of, and disclosed to Bank in writing prior to, the date hereof. (d) MERGER; CONSOLIDATION; TRANSFER OF ASSETS. Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof; nor acquire all or substantially all of the assets of any other person or 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. (e) PLEDGE OF ASSETS. Not 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 in favor of Bank and except any of the foregoing existing as of, and disclosed to Bank in writing prior to, the date hereof. (f) FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank, together with such current financial and other information as Bank from time to time may reasonably request: (i) As soon as available, but in no event later than 120 days after and as of the end of each FISCAL year, AN AUDITED financial statement of Borrower, prepared by an independent certified public accountant acceptable to Bank, to include a balance sheet, income statement and statement of cash flow, together with all supporting schedules and footnotes. (ii) As soon as available, but in no event later than 60 days after and as of the end of EACH FISCAL QUARTER, a financial statement of Borrower, prepared by Borrower and certified as correct by an officer of Borrower authorized to borrow under the Most current Corporate Borrowing Resolution delivered by Borrower to Bank, to include a balance sheet and income statement, together with all supporting schedules and footnotes. (g) 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 following definitions: (i) Current Ratio not at any time less than 1.00 to 1 .0, with "Current Ratio" defined as total current assets divided by total current liabilities. (ii) Tangible Net Worth not at any time less than $50,000,000.00, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (iii) Total Liabilities divided by Tangible Net Worth not at any time greater than 1.00 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. 6 IV. DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (i) The failure to pay any principal, interest, fees or other charges when due under any of the Loan Documents. (ii) Any representation or warranty hereunder or under any other Loan Document shall prove to be incorrect, false or misleading in any material respect when made. (iii) Any violation or breach of any term or condition of this Agreement or any other of the Loan ocuments. (iv) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which Borrower or any guarantor hereunder has incurred debt or any other liability of any kind to any person or entity, including Bank. (v) The filing of a petition by or against Borrower or any guarantor hereunder under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of Borrower or any such guarantor; Borrower or any such guarantor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of Borrower or any such guarantor. (vi) Any material adverse change, as determined solely by Bank, in the financial condition of Borrower. (vii) The death or incapacity of any individual guarantor hereunder; or the dissolution or liquidation of Borrower or of any guarantor hereunder which is a corporation, partnership or other type of entity. (viii) Any change in ownership during the term hereof of an aggregate of 25% or more of the common stock of Borrower. (b) REMEDIES. Upon the occurrence of any Event of Default: (i) the entire balance of principal, interest, fees and charges on each Credit shall, at Bank's option, become immediately due and payable in full without presentment; "demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (ii) the obligation, if any, of Bank to extend any further credit to Borrower under any Credit shall immediately cease and terminate; and (iii) 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 security for any Credit, All rights, powers and remedies of Bank shall be cumulative. V. MISCELLANEOUS. (a) 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 kind by Bank of any breach of or default under this Agreement, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. (b) NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to the applicable party at its address specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (i) if personally delivered, upon delivery; (ii) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (iii) if sent by telecopy, upon receipt. (c) 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 (i) the negotiation and preparation of this Agreement and the other Loan Documents, and Bank's continued administration of each Credit, Iii) 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 (iii) 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 of 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. (d) 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 interests or rights. hereunder without Bank's prior 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 Credit, Borrower or its business, any guarantor of any Credit or the business of any such guarantor, or any collateral for any Credit. (e) CONTROLLING AGREEMENT; Amendment. In the event of any direct conflict between any provision of this Agreement and any provision of any other Loan Document, the terms of this Agreement shall control. This Agreement may be amended or modified only in writing signed by Bank and Borrower. 7 (f) 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 Loan Document to which it is riot a party. (g) SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition of invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. (h) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Arizona. (i) CANCELLATION OF PRIOR LOAN AGREEMENTS. This Agreement cancels and supersedes all prior loan agreements between Borrower and Bank relating to any Credit. VI. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (a) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, 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. All 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 QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Arizona State Bar or retired judges of the state or 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 in 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. 8 (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 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, Borrower and Bank have executed this Agreement as of JULY 14, 1998. KNIGHT TRANSPORTATION, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Clark Jenkins ------------------------------------ By: /s/ CLARK JENKINS ------------------------------ CHIEF FINANCIAL OFFICER/SECRETARY Title: -------------------------- Address: 5601 W. BUCKEYE ROAD Address: 100 West Washington PHOENIX AZ 85043 Phoenix, AZ 85003 9 WELLS FARGO BANK CERTIFICATE OF INCUMBENCY TO: WELLS FARGO BANK, NATIONAL ASSOCIATION The undersigned, CLARK JENKINS, Secretary of KNIGHT TRANSPORTATION, INC., a corporation created and existing under the laws of the state of ARIZONA, hereby certifies to Wells Fargo Bank, National Association ("Bank") that (a) the following named persons are duly elected officers of this corporation and presently hold the titles specified below, (b) said officers are authorized to act on behalf of this Corporation in transactions with Bank, and (c) the signature opposite each officer's name is his or her true signature: Title Name Signature - ----- ---- --------- Chairman Randy Knight /s/ Randy Knight Chief Executive Officer Kevin P. Knight /s/ Kevin P. Knight President Gary Knight /s/ Gary Knight Chief Financial Officer Clark Jenkins /s/ Clark Jenkins The undersigned further certifies that if any of the above-named officers change, or this corporation shall immediately provide to Bank a new Certificate of Incumbency. Bank is hereby authorized to rely on this Certificate of Incumbency until a new Certificate of Incumbency certified by the Secretary of this corporation is received by Bank. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate seal of said corporation as of Knight Transportation, Inc. /s/ Clark Jenkins ----------------------------------- CLARK JENKINS, Secretary (SEAL) 10 To: Wells Fargo Bank, National Association 100 West Washington Phoenix, AZ 85003 Re: KNIGHT TRANSPORTATION, INC. ("Borrower") Attn:____________________________________________ The undersigned is the Chief Financial Officer* of Borrower. In said capacity, the undersigned hereby certifies to Wells Fargo Bank, National Association ("Bank") that (a) the financial statement of Borrower dated as of 3/31/98, heretofore or concurrently herewith delivered by Borrower to Bank, and all schedules and footnotes thereto, are true and correct, and have been prepared in accordance with generally accepted accounting principles, and (b) as of the date hereof, there exists no default or defined Event of Default under any loan agreement, promissory note or any other document in effect with respect to any credit accommodation granted by Bank to Borrower. Dated: 7/14/98 KNIGHT TRANSPORTATION, INC. By: /s/ Clark Jenkins ------------------------------------- Title: Chief Financial Officer * Insert the title of the signer who must be an officer of Borrower authorized to borrow under the most current Corporate Borrowing Resolution delivered by Borrower to Bank. 11 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 CHIEF FINANCIAL OFFICER/SECRETARY OR PRESIDENT 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 its 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 of 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 corporation's 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 $10,100,000.00 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 12 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 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 May 13, 1998, 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 7/14/98. By: /s/ Clark Jenkins ------------------------------------- CLARK JENKINS, Secretary (SEAL) 13 WELLS FARGO BANK LOAN AGREEMENT This Loan Agreement (this "Agreement" is entered into by and between KNIGHT TRANSPORTATION, INC. ("Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and sets forth the terms and conditions which govern all Borrower's commercial credit accommodations from Bank, whether now existing or hereafter granted (each, a "Credit" and collectively, 'Credits"), which terms and conditions are in addition to those set forth in any other contract, instrument or document (collectively with this Agreement, the "Loan Documents") required by this Agreement or heretofore or at any time hereafter delivered to Bank in connection with any Credit. I. REPRESENTATIONS AND WARRANTIES. Borrower makes the following representations and warranties to Bank, which representations and warranties shall be true as of the date hereof and on the date of each extension of credit under each Credit with the same effect as though made on each such date: (a) 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 in all jurisdictions in which such qualification or licensing is required or in which the failure to be qualified or licensed could have a material adverse effect on Borrower. (b) AUTHORIZATION AND VALIDITY. Each of the Loan Documents has been duly authorized, and upon its execution and delivery to Bank will constitute a legal, valid and binding obligation of Borrower or the party which executes the same, enforceable in accordance with its respective terms. (c) NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of law or regulation, or contravene any provision of Borrower's Articles of Incorporation or By-Laws, or result in any breach of or default under any agreement, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. (d) NO 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 except as disclosed by Borrower to Bank in writing prior to the date hereof. (e) FINANCIAL STATEMENTS. The most recent annual financial statement of Borrower, and all interim financial statements delivered to Bank since the date of said annual financial statement, true copies of which have been delivered by Borrower to Bank prior to the date hereof, are complete and correct, present fairly the financial condition of Borrower and disclose all liabilities of Borrower, and have been prepared in accordance with generally accepted accounting principles. Since the dates of such financial statements 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. (f) TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year except as disclosed by Borrower to Bank in writing prior to the date hereof. II. ADDITIONAL TERMS. (a) CONDITIONS PRECEDENT. The obligation of Bank to grant any Credit is subject to the condition that Bank shall have received all contracts, instruments and documents, duly executed where applicable, deemed necessary by Bank to evidence such Credit and all terms and conditions applicable thereto, all of which shall be in form and substance satisfactory to Bank. (b) APPLICATION OF PAYMENTS. Each payment made on each Credit shall be applied first, to any interest then due, second, to any fees and charges then. due, and third, to the outstanding principal balance thereof. III. COVENANTS. So long as any Credit remains available or any amounts under any Credit remain outstanding, Borrower shall, unless Bank otherwise consents in writing: (a) INSURANCE. Maintain and keep in force, for each business in which Borrower is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation, 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. 14 (b) COMPLIANCE: LAWS AND REGULATIONS; YEAR 2000. (i) Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of Borrower's 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, and all state or federal environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any operations and/or properties of Borrower. (ii) 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. (c) OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any indebtedness or other liabilities, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, direct or contingent (including any contingent liability under any guaranty of the obligations of any person or entity), except (i) the liabilities of Borrower to Bank, (ii) trade debt incurred by Borrower in the normal course of its business, and (iii) any other liabilities of Borrower existing as of, and disclosed to Bank in writing prior to, the date hereof. (d) MERGER; CONSOLIDATION; TRANSFER OF ASSETS. Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof; nor acquire all or substantially all of the assets of any other person or 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. (e) PLEDGE OF ASSETS. Not 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 in favor of Bank and except any of the foregoing existing as of, and disclosed to Bank in writing prior to, the date hereof. (f) FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank, together with such current financial and other information as Bank from time to time may reasonably request: (i) As soon as available, but in no event later than 120 days after and as of the end of each FISCAL year, AN AUDITED financial statement of Borrower, prepared by an independent certified public accountant acceptable to Bank, to include a balance sheet, income statement and statement of cash flow, together with all supporting schedules and footnotes. (ii) As soon as available, but in no event later than 60 days after and as of the end of EACH FISCAL QUARTER, a financial statement of Borrower, prepared by Borrower and certified as correct by an officer of Borrower authorized to borrow under the most current Corporate Borrowing Resolution delivered by Borrower to Bank, to include a balance sheet and income statement, together with all supporting schedules and footnotes. *(g) 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 following definitions: (i) Current Ratio not at any time less than 1.00 to 1 .0, with "Current Ratio" defined as total current assets divided by total current liabilities. (ii) Tangible Net Worth not at any time less than $50,000,000.00, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (iii) Total Liabilities divided by Tangible Net Worth not at any time greater than 1.00 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (iv) EBITDA Coverage Ratio not less than 3.00 to 1.0 as of each FISCAL quarter end, 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 interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt.* *To be measured on a rolling four quarter basis. 15 IV. DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (i) The failure to pay any principal, interest, fees or other charges when due under any of the Loan Documents. (ii) Any representation or warranty hereunder or under any other Loan Document shall prove to be incorrect, false or misleading in any material respect when made. (iii) Any violation or breach of any term or condition of this Agreement or any other of the Loan Documents. (iv) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which Borrower or any guarantor hereunder has incurred debt or any other liability of any kind to any person or entity, including Bank. (v) The filing of a petition by or against Borrower or any guarantor hereunder under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of Borrower or any such guarantor; Borrower or any such guarantor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of Borrower or any such guarantor. (vi) Any material adverse change, as determined solely by Bank, in the financial condition of Borrower. (vii) The death or incapacity of any individual guarantor hereunder; or the dissolution or liquidation of Borrower or of any guarantor hereunder which is a corporation, partnership or other type of entity. (viii) Any change in ownership during the term hereof of an aggregate of 25% or more of the common stock of Borrower. (b) REMEDIES. Upon the occurrence of any Event of Default: (i) the entire balance of principal, interest, fees and charges on each Credit shall, at Bank's option, become immediately due and payable in full without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (ii) the obligation, if any, of Bank to extend any further credit to Borrower under any Credit shall immediately cease and terminate; and (iii) 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 security for any Credit. All rights, powers and remedies of Bank shall be cumulative. V. MISCELLANEOUS. (a) 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 kind by Bank of any breach of or default under this Agreement, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. (b) NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to the applicable party at its address specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (i) if personally delivered, upon delivery; (ii) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (iii) if sent by telecopy, upon receipt. (c) COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount 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 (i) the negotiation and preparation of this Agreement and the other Loan Documents, and Bank's continued administration of each Credit, (ii) 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 (iii) 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. (d) 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 interests or rights hereunder without Bank's prior 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 Credit, Borrower or its business, any guarantor of any Credit or the business of any such guarantor, or any collateral for any Credit. 16 (e) CONTROLLING AGREEMENT; AMENDMENT. In the event of any direct conflict between any provision of this Agreement and any provision of any other Loan Document the terms of this Agreement shall control. This Agreement may be amended or modified only in writing signed by Bank and Borrower. (f) 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 Loan Document to which it is not a party. (g) SEVERABILITY OF PROVISIONS. If any provision of this Agreement snail be held to 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. (h) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Arizona. (i) CANCELLATION OF PRIOR LOAN AGREEMENTS. This Agreement cancels and supersedes all prior loan agreements between Borrower and Bank relating to any Credit. VI. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (a) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, 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. All 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 QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the Arizona State Bar or retired judges of the state or 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 in 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 17 Arizona, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, reducing 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 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 then 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, Borrower and Bank have executed this Agreement as of OCTOBER 1, 1998. KNIGHT TRANSPORTATION, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Clark Jenkins By: /s/ --------------------------------- ------------------------------- CLARK JENKINS Title: Vice President CHIEF FINANCIAL OFFICER/SECRETARY Address: 5601 W. BUCKEYE ROAD Address: 100 West Washington PHOENIX, AZ 85043 Phoenix, AZ 85003 18 EX-10.4.3 3 TERM NOTE DATED OCTOBER 1, 1998 WELLS FARGO BANK TERM NOTE $10,000,000.00 Phoenix, Arizona October 1, 1993 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 n immediately available funds, the principal sum of $10,000,000,00, with interest thereon as set forth herein. INTEREST/FEES: (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. (c) COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal and interest due hereunder by charging Borrower's demand deposit account number 4159-518950 with Bank, or any other demand deposit account maintained by any 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. REPAYMENT AND PREPAYMENT: (a) REPAYMENT. Principal and interest shall be payable on the 1ST day of each MONTH in installments or $192,558.23 each, commencing NOVEMBER 1, 1998, 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) 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 or the discounted monthly differences for each month 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 (i) 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) If 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. 1 The "Money Market Funds Rate" means 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 that 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: Any default in the payment or performance of any obligation under this Note, or any defined event of default under any loan agreement now or at any time hereafter in effect between Borrower and Bank (whether executed prior to, concurrently with or at any time after this Note), shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal, interest, fees and charges 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 --------------------------------- CLARK JENKINS CHIEF FINANCIAL OFFICER/SECRETARY 2 WELLS FARGO BANK DISBURSEMENT ORDER DATE: OCTOBER 1, 1998 OFFICE: ARIZONA RCBO #03839, 100 WEST WASHINGTON, PHOENIX, AZ 85003 Wells Fargo Bank, National Association, is hereby authorized to pay the proceeds of the credit accommodation to the undersigned granted in the principal amount of $10,000,000.00 to the order of: NAME AMOUNT ---- ------ $ - ------------------------------------------------------- ------------------- $ - ------------------------------------------------------- ------------------- $ - ------------------------------------------------------- ------------------- $ - ------------------------------------------------------- ------------------- $ - ------------------------------------------------------- ------------------- $ - ------------------------------------------------------- ------------------- KNIGHT TRANSPORTATION, INC. By: /s/ Clark Jenkins --------------------------------- CLARK JENKINS CHIEF FINANCIAL OFFICER/SECRETARY 3 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, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER, SECRETARY, PRESIDENT 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 its 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 corporation's 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 $20,100,000.00 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. 4 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 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 ---------------------------------- CLARK JENKINS, Secretary (SEAL) 5 To: Wells Fargo Bank, National Association 100 West Washington Phoenix, AZ 85003 Re: KNIGHT TRANSPORTATION, INC. ("Borrower") Attn: ------------------------------------- The undersigned is the Chief Financial Officer* of Borrower. In said capacity, the undersigned hereby certifies to Wells Fargo Bank, National Association ("Bank") that (a) the financial statement of Borrower dated as of June 30, 1998, heretofore or concurrently herewith delivered by Borrower to Bank, and all schedules and footnotes thereto, are true and correct, and have been prepared in accordance with generally accepted accounting principles, and (b) as of the date hereof, there exists no default or defined Event of Default under any loan agreement, promissory note or any other document in effect with respect to any credit accommodation granted by Bank to Borrower. Dated: Oct. 1, 1998 KNIGHT TRANSPORTATION, INC. By: /s/ Clark Jenkins -------------------------------- Title: Chief Financial Officer * Insert the title of the signer who must be an officer of Borrower authorized to borrow under the most current Corporate Borrowing Resolution delivered by Borrower to Bank. 6 EX-23 4 CONSENT OF ARTHUR ANDERSON LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-72377. ARTHUR ANDERSEN LLP Phoenix, Arizona March 15, 1999. EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 124,188 0 18,810,592 662,700 1,329,329 24,622,209 110,536,651 (25,964,744) 116,958,220 21,380,214 0 0 0 149,814 70,496,260 116,958,220 0 125,030,245 0 102,049,068 0 0 (259,035) 22,722,142 9,376,000 13,346,142 0 0 0 13,346,142 .89 .87 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. Prior Financial Data Schedules have not been restated for this recapitalization and stock split.
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