-----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, QMoPDQ3rZggt4CY4mL+hN/IN58USZzkWuESt8kMUmgTJqTcVeWkGcwidG6ZMeqRq N2fShyTnsgmLWYYE4iN0/w== 0000700612-98-000007.txt : 19980401 0000700612-98-000007.hdr.sgml : 19980401 ACCESSION NUMBER: 0000700612-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARNOLD INDUSTRIES INC CENTRAL INDEX KEY: 0000700612 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 232200465 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10894 FILM NUMBER: 98582830 BUSINESS ADDRESS: STREET 1: 625 S FIFTH AVE CITY: LEBANON STATE: PA ZIP: 17042 BUSINESS PHONE: 7172742521 MAIL ADDRESS: STREET 1: P O BOX 11963 CITY: HARRISBURG STATE: PA ZIP: 17108 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-10894 ARNOLD INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2200465 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 625 South Fifth Avenue, Lebanon, Pennsylvania 17042 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 274-2521 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, 1.00 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 27, 1998, reference to the immediately preceding closing sale price of such stock (3/26/98), was $433,774,107. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 27, 1998 Common Stock 25,993,954 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1997, and Registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 6, 1998, are incorporated into Parts II and III, respectively, as set forth herein. The total number of pages included in this report, including the cover page, is 47. The exhibit index is located on sequentially numbered page 17. PART I Item 1. BUSINESS Arnold Industries, Inc. (hereinafter sometimes referred to as "Arnold Industries" or the "Company") was incorporated on February 1, 1982, under the laws of the Commonwealth of Pennsylvania at the direction of the Board of Directors of New Penn Motor Express, Inc. to become a holding company and to effect a reorganization pursuant to which, through requisite stockholder approval, New Penn Motor Express, Inc. became a wholly owned subsidiary of Arnold Industries as of March 31, 1982. The Company is engaged in the trucking and warehousing businesses. The Company's business activities are currently conducted by two (2) operating subsidiaries and a non-operating, investment management subsidiary. New Penn Motor Express, Inc. ("New Penn") is a less-than-truckload ("LTL") transportation company. Arnold Transportation Services, Inc. ("Arnold Transportation") provides truckload ("TL") service and, under the name Arnold Logistics, warehousing and warehouse-related trucking service. On December 31, 1997, two truckload carriers previously acquired by the Company, Silver- Eagle Transport, Inc. ("SilverEagle ") and D.W. Freight, Inc. ("DW"), were merged with and into Arnold Transportation. Prior to the merger, operational integration of the truckload carriers had already taken place. Maris, Inc. ("Maris") is a Delaware investment company active in the management of assets generated by the operating subsidiaries. In 1997, New Penn, the Company's LTL carrier, and Maris, contributed approximately fifty-three percent (53%) of the Company's Operating Revenue. The Company's combined TL carrier operations contributed forty percent (40%), and Arnold Logistics, its warehousing and related trucking operations, contributed approximately seven percent (7%). NEW PENN MOTOR EXPRESS, INC. New Penn maintains general offices in Lebanon, Pennsylvania, and transports commodities by motor vehicle on a less-than-truckload basis, operating primarily in interstate commerce in New England and the Middle Atlantic states. The southeastern United States, Indiana, Ohio and Quebec and Ontario, Canada, are serviced through correspondent agreements with certain other high-service carriers in each area. Certain areas in Canada, including Montreal, are now serviced directly by New Penn. Puerto Rico is serviced by New Penn land service in conjunction with correspondent ocean service. Commodities transported include paper products, food products, textiles, building products, metal products, pharmaceuticals, office equipment and supplies, and wearing apparel. New Penn operates from twenty-two (22) terminals at which it receives, consolidates and distributes freight. It also utilizes a correspondent's terminal in Puerto Rico. Rates and Regulations In common with other interstate motor carriers, New Penn is subject to limited Federal economic regulation of its operations, including the territories it serves and the commodities it carries. The ICC Termination Act of 1995, effective January 1, 1997, abolished the Interstate Commerce Commission ("ICC") and the traditional economic regulatory scheme administered by that agency, and replaced it with significantly lessened economic regulation administered by the Federal Highway Administration ("FHWA"). To the extent rates and charges assessed by New Penn for interstate transportation are published on behalf of New Penn by regional tariff bureaus, such collectively published rates and charges are exempt from the anti-trust laws. However, price competition is now widespread, and such bureau-published rates are of relatively little influence today. As a result of the changes to the Federal law, neither interstate rates nor intrastate rates are filed with any regulatory agencies of the Federal government. Changes in rates and charges may now be effected without regulatory approval. The FHWA has jurisdiction over the qualification and the maximum hours of service of drivers, insurance and the general safety of operations and motor carrier equipment. New Penn's operations are subject to limited regulation by the states through which it operates. Certificates The authorized routes, territories and commodities to be transported for all property carriers by motor vehicle (except carriers of exempt commodities) are determined by operating authorities issued, in the case of interstate operations, by FHWA (formerly by the ICC), and, in the case of intrastate operations, by regulatory agencies of the individual states. Operating authorities relating to the operations of New Penn have been issued to it by the respective regulatory agencies having jurisdiction. Recent legislation has greatly eased or in many cases eliminated the requirements for obtaining interstate and intrastate operating authority. Employees and Employee Relations New Penn has approximately fourteen hundred and fifty (1,450) full-time employees (including its officers). Most of the hourly paid employees are covered by contracts with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America (Teamsters) effective April 1, 1994, through March 31, 1998. New Penn has agreed to accept the terms of the recently negotiated Master Freight Agreement between the Teamsters and the membership of Trucking Management, Inc. when ratified. Most labor contracts in the unionized trucking industry are negotiated on an industry-wide basis for three to five year periods and contain uniform wage rates, fringe benefits and other working conditions applicable to all covered motor carriers, including competitors of New Penn, subject to local differences established in riders to the national contracts. New Penn anticipates stable labor relations with its unionized employees during the next five (5) years. New Penn employs a sales staff of approximately sixty-five (65) people, augmented by sales and related efforts of its four (4) regional managers and twenty-two (22) terminal managers, together with various other marketing and sales staff, to solicit new business and to handle service programs with existing customers. Competition The motor carrier industry is highly competitive, particularly as a result of deregulation of Interstate Commerce Commission operating authorities. New Penn competes primarily with other motor common carriers, motor contract carriers, private transportation and railroads. A very substantial number of motor carriers operate within the same areas served by New Penn. Some of the competing carriers are larger than New Penn in terms of revenues, tonnage handled and net worth. Furthermore, as a result of deregulation, even more carriers may begin to operate in interstate and intrastate commerce in the same geographical territory in which New Penn is currently operating. New Penn believes the competitive position of a transportation company depends upon rates as well as consistency and dependability of service. Price cutting in the trucking industry has become intense. Profitability depends upon New Penn's ability to maximize utilization of revenue equipment and to minimize handling costs. ARNOLD TRANSPORTATION SERVICES, INC. Arnold Transportation changed its name from Lebarnold, Inc. on May 31, 1997. Arnold Transportation has two primary operating divisions: the TL carrier division and the warehousing and related trucking division. The warehousing and related trucking division operates under the trade name of Arnold Logistics. On December 31, 1997, two other regional truckload companies operated by the Company were merged with and into Arnold Transportation, creating a "core carrier." Many manufacturers in the United States are reducing the number of regional carriers that they utilize and are concentrating their transportation business in a smaller number of "core carriers." Carriers must be able to transport goods across inter-regional boundaries if they are to compete for the business of these manufacturers. By combining the operations of the Company's three regional truckload carriers, the Company has created a core carrier able to compete for inter-regional business. Integration of the three carriers will have the added benefit of reducing duplicative expenses in the areas of dispatch, record-keeping, administration, etc., with anticipated cost reductions as a result. Arnold Transportation's trucking division has 48-state authority to serve the general public, although its basic business, that of truckload carriage, is conducted east of the Mississippi and in the southwest. The main operating location for this division is in Camp Hill, Pennsylvania, with other terminals located in North Carolina, Georgia, Florida, Texas and Oklahoma. Arnold Transportation also conducts operations from a customer's location in Ohio, and a leased facility in New York. Most services are being performed in company-owned equipment with company drivers, although in 1992 Arnold Transportation began utilizing owner-operators to complement its fleet. Arnold Logistics serves the assembly, distribution and warehousing needs of its customers primarily from twelve (12) separate warehouse buildings in four (4) operating locations with a total capacity of approximately two (2) million square feet. These facilities are located in Camp Hill, Mountville and Mechanicsburg, Pennsylvania, and Fort Worth, Texas. Arnold Logistics also maintains approximately 300,000 square feet of warehouse in Wilmington, North Carolina, presently leased to a third party. Arnold Transportation has approximately seven hundred sixty (760) employees (including its officers). General Truckload carriers no longer file tariff rates with the ICC. Arnold Transportation's trucking operations are, in general, subject to limited regulation and competitive factors similar to that experienced by New Penn. Arnold Transportation is not subject to collective bargaining with its labor force. Item 2. PROPERTIES Headquarters. Arnold Industries and New Penn maintain executive and general offices at 625 South Fifth Avenue, Lebanon, Pennsylvania 17042. Arnold Transportation maintains its principal office at 4410 Industrial Park Road, Camp Hill, Pennsylvania 17011. Arnold Transportation operates regional centers at 9523 Florida Mining Boulevard, Jacksonville, Florida 32257, and at 3375 High Prairie Avenue, Grand Prairie, Texas 75050. The companies own their principal offices and regional centers. Facilities. New Penn maintains general commodities terminal facilities in twenty-two (22) cities situated in seven (7) states and Quebec province of Canada. On December 31, 1997, eighteen (18) of the terminals were owned by the Company or its subsidiaries and four (4) were leased from unrelated parties. The terminals owned are located as follows: Southington, CT; Elkridge, MD; Billerica, MA; South Kearny, NJ; Trenton, NJ; Albany, NY; Newburgh, NY, Cheektowaga, NY; Maspeth (Long Island), NY; Rochester, NY; Camp Hill, PA; Lancaster, PA; Cinnaminson, NJ; Neville Island, PA; Reading, PA; Dunmore, PA; Milton, PA; and Cranston, RI. Leases for terminal sites in Springfield, MA; Syracuse, NY; Altoona, PA; and Stanhope, Quebec, expire from time to time over the next several years. Management believes the leases will be renewed or replaced by other leases in the normal course of business. New Penn also operates through a correspondent in Cantano, Puerto Rico. In the mid-Atlantic, Arnold Transportation owns and operates trucking terminals in Camp Hill, Pennsylvania, and Charlotte, North Carolina. It also leases facilities in Selkirk, New York (near Albany), and Dayton, Ohio, which it will renew or replace in the normal course of business. Arnold Transportation owns and, through Arnold Logistics, operates ten (10) warehouse buildings in three (3) locations, Camp Hill and Mechanicsburg, Pennsylvania, and Fort Worth, Texas, totaling approximately 1,700,000 square feet. Arnold Transportation also leases approximately 300,000 square feet of additional warehouse space for Arnold Logistics' use in Mountville, Pennsylvania, and 25,000 square feet of warehouse space in Fort Worth, Texas. Management believes that the leases will be renewed or replaced in the normal course of business. In 1982, Arnold Transportation acquired, from an unrelated third party, 90 acres near Wilmington, North Carolina, on which are located approximately 320,000 square feet of warehouse space. This facility is presently leased to an unrelated third party and is not operated by Arnold Logistics. In the southeast, Arnold Transportation maintains seven (7) terminals and/or drop lots to support its operations. These are located in Jacksonville and Jasper, Florida; Albany, Atlanta and Fairburn, Georgia; and Greensboro, North Carolina. The terminals in Jacksonville, Jasper, Albany and Atlanta are owned by Arnold Transportation; the drop lot in Fairburn, Georgia, is also owned by the Company. The remaining facilities are leased from unrelated third parties. These leases expire from time to time over the next several years. Management believes these leases will be renewed or replaced in the normal course of business. In the southwest, Arnold Transportation maintains six (6) terminal and/or drop-off locations in, respectively, Grand Prairie, Houston, Paris, Waco and Dallas, Texas, and Muskogee, Oklahoma. Arnold Transportation owns its facilities in Grand Prairie, Houston and Paris, Texas, and Muskogee, Oklahoma. The Dallas and Waco facilities are under lease with unrelated parties, which will expire or be renewed over the next several years. Management believes the leases will be renewed or replaced in the normal course of business. Arnold Transportation also owns two warehouses totaling approximately 150,000 square feet in the Ft. Worth, Texas area, which are managed by Arnold Logistics. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the the Company or its subsidiaries are party or to which any of their property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE PART II Item 5. MARKET INFORMATION There is incorporated herein by reference the information appearing under the captions "Quarterly Performance" and "Price Range Common Stock" on page 17 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997. It is anticipated that comparable cash dividends will continue to be paid in the future. The number of holders of record of the Company's common stock as of March 27, 1998, was approximately 1,392. However, the Company believes there are substantially more beneficial owners of Company stock than reflected by the number of record holders. The Registrant's common stock is traded in the over-the-counter market on the NASDAQ National Market System under the symbol "AIND." Prices shown are the actual high and low close for the periods given. The closing price of the Company's common stock on March 26, 1998, was $16.69. Item 6. SELECTED FINANCIAL DATA There is incorporated herein by reference the information appearing under the caption "Eleven-Year Financial Summary" on pages 20 and 21 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS There is incorporated herein by reference the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 and 19 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Arnold Industries, Inc. and its subsidiaries, included on pages 8 through 15 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997, are incorporated by reference herein: Consolidated Balance Sheets - December 31, 1997 and 1996. Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Also, there is incorporated herein by reference the "Report of Independent Accountants" and information appearing under the caption "Quarterly Performance" on pages 16 and 17, respectively, of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is incorporated herein by reference the information appearing under the captions "Directors" and "Executive Officers" in the Registrant's definitive proxy statement for the Annual Meeting of Stockholders on May 6, 1998. There have been no events under the bankruptcy act, no criminal proceedings and no judgments or injunctions during the past five (5) years which would be material to an evaluation of any Director or Executive Officer. Item 11. EXECUTIVE COMPENSATION There is incorporated herein by reference the information appearing under the captions "Executive Officers", "Executive Compensation and Other Benefits", "Performance Graph," "Report on Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the Registrant's definitive proxy statement for the Annual Meeting of Stockholders on May 6, 1998. No other remuneration payments are proposed to be made in the future, directly or indirectly, by or on behalf of Arnold Industries and its subsidiaries, pursuant to any plan or arrangement, to any Director or Executive Officer of the Company except as disclosed above. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is incorporated herein by reference the information appearing under the caption "Security Ownership of Directors, Officers and Certain Beneficial Owners" in the Registrant's definitive proxy statement for the Annual Meeting of Stockholders on May 6, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is incorporated herein by reference the information appearing under the caption "Certain Transactions" in the Registrant's definitive proxy statement for the Annual Meeting of Stockholders on May 6, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) The following consolidated financial statements of the registrant and its subsidiaries, included on pages 8 to 15 in the Registrant's Annual Report to Stockholders for the year ended December 31, 1997 and the report of independent accountants on page 16 of such report are incorporated herein by reference in Item 8: Financial statements: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Accountants' Report Selected Quarterly Financial Data - Years Ended December 31, 1997 and 1996: Quarterly performance data, included on page 17 in the Registrant's Annual Report to Stockholders for the year ended December 31, 1997, is incorporated herein by reference. (2) The following financial statement schedules for the years 1997, 1996 and 1995 are submitted herewith: Schedule II - Valuation and qualifying accounts and reserves Report of Independent Accountants All other schedules are omitted because they are not required, inapplicable or the information is otherwise shown in the financial statements or notes thereto. (3) Exhibits included herein: Exhibit 3 - Articles of Incorporation and Bylaws (Articles of Incorporation of the Company, as amended, and Bylaws of the Company (filed as Exhibits 3.1 and 3.2 to Registrant's Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference). Exhibit 13 - 1997 Annual Report to Stockholders Exhibit 21 - Subsidiaries of the Registrant Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K have been filed by the Registrant during the last quarter of the period covered by this report.
ARNOLD INDUSTRIES, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1997, 1996 and 1995 Additions Balance at Charged to Charged to beginning costs and other Balance at Description of period expenses accounts Deductions end of year Year ended December 31, 1997 Allowance for doubtful accounts $ 1,724,106 $ 821, 238 $194,215 $ 1,399,531 $ 1,340,028 Estimated liability for claims $20,140,931 $14,935,706 - $14,890,883 $20,185,754 Year ended December 31, 1996 Allowance for doubtful accounts $ 1,108,051 $ 1,232,565 $ 94,245 $ 710,755 $ 1,724,106 Estimated liability for claims $15,235,791 $17,666,656 - $12,878,516 $20,140,931 Year ended December 31, 1995 Allowance for doubtful accounts $ 895,563 $ 589,513 $ 88,797 $ 465,822 $ 1,108,051 Estimated liability for claims $15,045,879 $12,765,543 - $12,458,631 $15,352,791 1 Recoveries 2 Accounts deemed to be uncollectible and charged to allowance for doubtful accounts and payments made for estimated liability for claims.
[Letterhead of Coopers & Lybrand L.L.P.] Report of Independent Accountants The Board of Directors Arnold Industries, Inc. Lebanon, Pennsylvania Our report on the consolidated financial statements of Arnold Industries, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 16 of the 1997 Annual Report to Stockholders of Arnold Industries, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement Schedule II included in this Form 10-K. This supplementary financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this supplementary financial statement schedule based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statement taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. One South Market Square Harrisburg, Pennsylvania February 27, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 1998. ARNOLD INDUSTRIES, INC. By /s/ E. H. Arnold E. H. Arnold, President By /s/ Ronald E. Walborn Ronald E. Walborn Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons in their capacities as indicated below. Name Date /s/ E. H. Arnold March 30, 1998 E. H. Arnold President and Director /s/ Kenneth F. Leedy March 30, 1998 Kenneth F. Leedy Executive Vice President and Director /s/ Ronald E. Walborn March 30, 1998 Ronald E. Walborn Treasurer and Director /s/ Heath L. Allen March 30, 1998 Heath L. Allen Secretary and Director INDEX TO EXHIBITS Sequential Page No. Exhibit 13 - 1997 Annual Report to Stockholders 18 Exhibit 21 - Subsidiaries of Registrant 44 Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P. 45 Exhibit 27 - Financial Data Schedule 46 EX-13 2 APPENDIX TO ARNOLD INDUSTRIES, INC. 1997 ANNUAL REPORT DESCRIBING GRAPHIC AND IMAGE MATERIAL Front cover - Picture of New Penn tractor and trailer on a divided highway. Picture of Arnold Transportation Services tractor and trailer on an exit ramp with city buildings in background. Picture of employees at computer terminals. Pie chart depicting allocation of revenue as stated verbally in accompanying text. Page 1 - President's Letter to Stockholders includes a picture of E.H. Arnold, Company President. Bar graph representing Operating Revenue (in millions) for years 1988 ($148); 1989 ($168); 1990 ($189); 1991 ($196); 1992 ($234); 1993 ($273); 1994 ($302); 1995 ($330); 1996 ($356) and 1997 ($383). Pages 2 and 3 - Description of New Penn includes the following material: Picture of New Penn tractor and trailer in urban setting; Bar graph representing the number of full-time New Penn employees for year 1995 (1,315); 1996 (1,410) and 1997 (1,431); Bar graph representing the number of tractors and trucks owned by New Penn in 1995 (651); 1996 (660) and 1997 (727); Bar graph representing the number of trailers owned by New Penn in 1995 (1,315); 1996 (1,365) and 1997 (1,447); Bar graph representing the number of shipments (in thousands) transported by New Penn in 1995 (1,578); 1996 (1,757) and 1997 (1,932); Bar graph representing the weight of freight (in millions of pounds) transported by New Penn in 1995 (1,841); 1996 (2,017) and 1997 (2,163); Map of Eastern and Middle United States with portions of Quebec and Ontario Provinces and Puerto Rico shaded to indicate New Penn's Northeast regional service, Inter-regional service and International service areas; Bar graph representing New Penn revenue (in millions) for years 1993 ($157); 1994 ($159); 1995 ($167); 1996 ($182) and 1997 ($203); Bar graph representing New Penn operating income (in millions) for years 1993 ($35); 1994 ($33); 1995 ($34); 1996 ($33) and 1997 ($44); New Penn logo; Pages 4 and 5 - Description of Arnold Transportation Services includes the following material: Bar graph representing revenue of Arnold Transportation Services (in millions) for years 1993 ($116); 1994 ($143); 1995 ($163); 1996 ($174) and 1997 ($180); Bar graph representing operating income of Arnold Transportation Services (in millions) for years 1993 ($12); 1994 ($16); 1995 ($15); 1996 ($8) and 1997 ($7); Bar graph representing the number of employees of Arnold Transportation for years 1995 (1,760); 1996 (1,810) and 1997 (1,921); Bar graph representing the number of owner-operators of Arnold Transportation for years 1995 (262); 1996 (298) and 1997 (371); Bar graph representing the number of tractors owned by New Penn in 1995 (990); 1996 (1,075) and 1997 (1,012); Bar graph representing the number of trailers owned by Arnold Transportation in 1995 (3,732); 1996 (4,248) and 1997 (4,415); Picture of Arnold Transportation tractor and trailer on highway bridge; Map of Eastern and Middle United States with various states shaded to indicate Arnold Transportation's primary and secondary service areas; Arnold Transportation Services logo; Page 6 - Description of Arnold Logistics includes the following materials: Picture of warehouse employees on a forklift and packing material on pallets; Arnold Logistics logo; Page 7 - Consolidated Five-Year Statistical Summary: the information on this page of the Annual Report is presented in bar-graph format. Page 8 - Table of Contents for Financial Statements. (Front Cover) ARNOLD INDUSTRIES, INC. 1997 ANNUAL REPORT (Inside Front Cover) CONTENTS Letter to Stockholders New Penn Motor Express Arnold Transportation Services Arnold Logistics Consolidated Five-Year Statistical Summary Financial Statements Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants Quarterly Performance Price Range Common Stock Management's Discussion and Analysis of Financial Condition and Results of Operations Eleven-Year Financial Summary Board of Directors and Stockholder Information Company Executives FINANCIAL SUMMARY (dollars in thousands except per share data) 1997 1996 Change REVENUES $383,165 $356,335 7.5% NET INCOME $ 32,210 $ 25,409 26.8% NET INCOME PER SHARE-BASIC $ 1.23 $ .95 29.5% STOCKHOLDERS' EQUITY $217,253 $209,147 3.9% TOTAL ASSETS $317,040 $303,112 4.6% RETURN ON AVERAGE STOCKHOLDERS' EQUITY 15.1% 12.6% 2.5% ARNOLD INDUSTRIES, INC. Arnold Industries is a transportation and logistics holding company. Through its operating units, New Penn Motor Express, Inc., Arnold Transportation Services, Inc. and Arnold Logistics, the Company provides regional less-than-truckload (LTL), truckload and value-added warehousing services. 1997 operating revenues totaled $383 million. OPERATING REVENUE: REGIONAL LTL - $203 million TRUCKLOAD - $154 million VALUE-ADDED WAREHOUSING - $ 26 million NEW PENN New Penn provides next-day LTL service in the Northeast region of the United States. The company is widely regarded as a superior service provider and one of the most efficiently operated carriers in the industry. ARNOLD TRANSPORTATION SERVICES Arnold Transportation Services was created through the merger of three regional truckload subsidiaries and provides irregular route and dedicated truckload services throughout the Eastern half of the United States. ARNOLD LOGISTICS Arnold Logistics is a division of Arnold Transportation Services and specializes in integrated distribution services, order fulfillment and contract packaging services. Arnold Logistics operates 2.3 million square feet of warehousing space located primarily in Central Pennsylvania. LETTER TO STOCKHOLDERS Arnold Industries achieved record revenues and earnings in 1997 on the strength of outstanding performances at our less-than-truckload (LTL) and logistics operating units. Basic earnings per share increased 29% in 1997 compared to the prior year. Operating revenues increased 8% to $383 million. New Penn had an outstanding year with revenues up 12% and operating income up 34%. Operating revenues exceeded $200 million for the first time. Ken Leedy, president of New Penn and Steve O'Kane, executive vice president, have assembled the best team in the industry capable of continuing New Penn's history of profitable growth. We were pleased to announce an early settlement of the New Penn labor agreement. We believe the combination of market growth and the low market share of New Penn will allow us to continue the growth of New Penn without sacrificing margins. We continue to expand our infrastructure and look for ways to serve a larger area from the Northeast. The merger of our three regional truckload subsidiaries was completed at the end of 1997 to create Arnold Transportation Services. The combination of the three companies required major changes in personnel and computer systems. These changes resulted in one-time charges that had a negative impact on earnings. There will be additional charges in 1998 which management does not expect to be material. At the same time, the integration repositioned the company to take on new business in new markets that will be more profitable long-term. Short-term, the new business resulted in an increase in empty miles. An important area that showed improvement in 1997 was the recruitment and retention of drivers. There has been an industry-wide shortage of qualified drivers. Through improvements in compensation, recruiting and retention we reduced our rate of driver turnover. Lower turnover and improved recruiting of owner-operators throughout the service area will strongly support future growth. Overall, the operating income at Arnold Transportation Services declined by 8% in 1997. There was no easy way to get from where we were, to where we needed to be in the truckload arena. While there has been some short-term pain in the form of reduced operating margins, the rationale for our strategy is sound. Our three medium-sized truckload carriers were not well positioned to grow. The market is consolidating and very small niche players and large carriers will survive. Those in the middle will not. Our Fortune 500 clients are reducing the number of carriers with whom they do business to a limited number of "core carriers." Arnold Transportation Services is now positioned to be a "core carrier" for our larger customers. While there is no quick-fix to improve our truckload operating margins, revenues are increasing, a new organizational structure is in place and management control systems are improving. Incremental margin improvements have the potential to make a significant contribution to earnings. Arnold Industries now has a top 25 position in both the LTL and truckload markets. Based on 1996 industry revenues, New Penn is the 22nd largest LTL carrier and Arnold Transportation Services is the 23rd largest truckload carrier. While our goal remains to be the best, not the biggest, we are now positioned as a major player in the regional LTL and truckload markets allowing us to meet the needs of our target market customers. Arnold Logistics is a growing player in the value-added warehousing market. By focusing on order fulfillment and contract packaging services, Doug Enck, vice president and general manager of Arnold Logistics and his team have done an excellent job increasing revenues and improving margins. To support future growth, your Board of Directors has approved construction of 560,000 square feet of new warehouse space to be built in Central Pennsylvania. Construction is expected to be complete in late 1998. New services are now being offered in Texas and we are investigating further geographic expansion to the Southeast. Operating revenues at Arnold Logistics have grown 21% and 16% the past two years. We anticipate growth will accelerate as the new facilities come on-line in 1999. On behalf of the Board of Directors, we say thank you to the 3,800 dedicated employees of Arnold Industries, New Penn, Arnold Transportation and Arnold Logistics. We also want to thank our valued customers without whom our company has no purpose, and our shareholders whose confidence we do not take for granted. The focus of our business has broadened over the years to include LTL, truckload and logistic services. We have had to adapt our strategies to a rapidly changing marketplace. However, our principles have not changed. We remain committed to executing our strategies with discipline and consistency to provide the best available service to our customers, and build value for our shareholders. E.H. Arnold Chairman, President & CEO March 3, 1998 NEW PENN SCOPE OF OPERATIONS New Penn Motor Express is a next-day regional less-than-truckload (LTL) carrier of general commodities. The Company operates 23 terminal facilities serving the twelve northeastern states, the Province of Quebec and the Commonwealth of Puerto Rico. New Penn also provides services to Indiana and Ohio, plus the southeastern United States and Ontario, Canada through partnerships with other high-service regional carriers. COMPETITIVE POSITION New Penn is a superior service carrier in the Northeast market providing all points coverage in the region. New Penn delivers high levels of speed and reliability. Over 92% of New Penn's Northeast regional shipments are delivered next-day. Service standards were improved from two-days to next-day on eight additional traffic lanes during 1997. New Penn provides excellent on-time service with 97% of shipments being delivered within the Company's published service standards. Outstanding freight handling procedures result in one of the lowest freight loss and damage ratios in the industry. New Penn's cargo claim ratio was .38% in 1997 which indicates that less than 4/10ths of one percent of revenues were paid to customers to settle cargo loss and damage claims. During 1997, New Penn was rated among the "Best of the Best" in the Distribution magazine "Quest for Quality Awards." RECORD REVENUE AND OPERATING INCOME New Penn had an outstanding year in 1997 recording record revenues and operating income. Revenues totaled $203 million, an increase of 12% compared to 1996. Operating income grew faster than revenues in 1997 and totaled $44 million, an increase of 34% over the 1996 level. In August 1997, New Penn was recognized in Transport Topics for having the lowest operating ratio (total expenses as a percentage of revenues) and the best net profit margin for 1996 among the 100 largest trucking companies in the U.S. For the year 1997, the operating ratio of New Penn improved by over three points to 78.4%. The excellent performance of New Penn in 1997 is attributable to several factors including a strong economy, an improved pricing environment, superior service quality, improved asset utilization, excellent cost identification and control and the continued effort and dedication of New Penn employees. Above average growth was achieved in the Canadian, Puerto Rico and Import/Export markets. Pool distribution services also contributed to the growth experienced in 1997 as shippers take advantage of the efficiencies and service improvements available by combining the services of truckload carriers with New Penn's next-day LTL service. CAPITAL INVESTMENT New Penn invested in the areas of information technology, equipment and facilities to increase its capacity to serve and maintain efficiencies. As noted in the November 1997 issue of Logistics Management magazine, "New Penn Motor Express has invested heavily in technology to maintain its edge in a competitive Northeast LTL market." Information technology investments allow New Penn to monitor and manage company activities and respond quickly and accurately to customer inquiries. What is known as the "year 2000 problem" received considerable attention during 1997. Modifications have been completed in billing and operational systems that allow the computer programs to properly recognize the year 2000. All systems are scheduled to be "year 2000 compatible" by the end of 1998. A new system for managing accounting, human resources and payroll functions is being installed. The new system enhances information retrieval, reporting and expense analysis. The Company's AS/400 computer system was upgraded. The upgrade doubled data processing capacity. The tractor and trailer fleets were expanded as indicated in the graphs below. Investments were made in Scranton, PA and Rochester, NY to renovate and expand terminal facilities. The Puerto Rico freight handling facility and the sales office in S. Kearny, NJ were also renovated. OUTLOOK New Penn continues to be the envy of the industry in terms of both service levels provided and financial performance. The market remains intensely competitive as low-cost carriers increase the scope of their services. However, New Penn will continue to prosper based upon a service-oriented, cost-conscious culture of continuous improvement, excellent operational fundamentals, intelligent use of technology, strong management controls and highly productive employees. The Company changed its approach to labor negotiations in the fall of 1997 when it announced its intention to negotiate independently for the renewal of the labor agreement. This change is believed to be in the long-term best interests of New Penn employees and customers, as well as Arnold Industries shareholders. Continued growth is anticipated as the regional LTL market continues to outpace the national market and, while New Penn is a major player in the Northeast, its relative market share remains low. New Penn's next-day focus positions the Company to meet the needs of shippers requiring outstanding performance in an era of low inventories and just-in-time manufacturing. ARNOLD TRANSPORTATION SERVICES SCOPE OF OPERATIONS Arnold Transportation Services is a truckload and logistic services company. The Company provides irregular route, multi-stop and dedicated truckload services in the northeast, southeast, mid-west and southwest sections of the United States. The Company operates from ten service centers and provides regional and interregional service. Arnold Logistics operates as a division of Arnold Transportation Services and is further discussed on page 6 of this report. COMPETITIVE POSITION The truckload operations of Arnold Transportation Services were formed through the combination of three independently operated regional subsidiaries of Arnold Industries. The merger officially took place at the end of 1997. The resulting company ranks among the 25 largest truckload carriers in the United States. Arnold Transportation Services has a significant presence in the beverage, consumer products and retail industries. The merger took place to position the Company to serve the regional and interregional needs of its Fortune 500 clients. Many large companies today are reducing the number of carriers with whom they do business by focusing their shipping with a limited number of "core carriers." The integration of the three regional subsidiaries positions Arnold Transportation Services to compete for large contracts involving business within and between several regions of the United States. While the interregional business is growing, the current business mix continues to reflect the regional roots of the Company. The average length-of-haul is approximately 350 miles. High service levels are the norm with shipments generally being delivered same-day, next-day or second-day, depending on the distance traveled and customer requirements. A YEAR OF TRANSITION During 1997 the truckload operations made the transition from operating as three small companies to one large company. As expected, the process of integration necessitated significant changes in people, operations and information systems. The operations planning and customer service functions were consolidated in Jacksonville, FL. Truckload revenues totaled $154 million in 1997 which was an increase of 1% compared to 1996. Combined truckload and logistics revenues at Arnold Transportation Services totaled $180 million in 1997, a 3% increase over 1996. The costs associated with combining the truckload operations had a negative impact on operating income in 1997. The operating income for truckload and logistics operations totaled $7 million in 1997, approximately an 8% decline compared to the 1996 figure. A YEAR OF PROGRESS Progress was made on several fronts to ensure the Company benefits from the merger. The Company was restructured to reflect the regional and interregional nature of the new organization. The Company is no longer structured along geographic regions. The new structure will allow the Company to manage the regional dedicated and irregular route activity while also servicing the interregional market and creating a consistent corporate culture. The sales force is now positioned to improve effectiveness by pursuing opportunities within and between all regions. Significant improvements were made in controlling workers compensation and auto insurance claims with the total incurred claim cost being reduced by 47%. Improvements were also made in the Company's safety performance with the number of preventable accidents per million miles being reduced by 13%. Driver recruiting and retention efforts were enhanced by centrally managing the effort. CAPITAL INVESTMENTS Providing good service in the truckload arena is primarily a function of having high quality equipment and drivers in position to provide service when the customer calls. By the end of 1997, Arnold Transportation Services had increased equipment capacity through additions to the fleet and additional owner-operators. The 48' trailer fleet is being replaced with 53' trailers which are preferred by customers. A key area of focus during 1997 was management information systems. The merger requires that existing systems be merged or new systems be developed that would improve effectiveness and efficiency. Information systems were enhanced to facilitate the central dispatch function. The sales automation system was fully implemented to improve communication within the sales organization. A new billing system is in development, and the Company will benefit from the new accounting, human resources and payroll system. The installation of Qualcomm satellite tracking units was completed on the national fleet used in interregional operations. Satellite tracking capability is being added to selected regional operations where the system enhances productivity or customer service. OUTLOOK Many new customer opportunities have developed as a result of positioning the Company to serve the regional and interregional markets. The average length-of-haul and the revenue per truck are expected to increase. The interregional business is less transaction-oriented in two ways: 1) there are fewer billing transactions required to support the same amount of revenue, and 2) a higher percentage of the business is under contract rather than bid on a day-to-day transactional basis. An increase in the percentage of interregional business is expected to improve earnings. Overall, the market for truckload services remains strong and the pricing environment suggests revenue enhancements will be feasible in 1998. While some costs were incurred in 1997, additional costs are anticipated in 1998 to fully integrate the information and operational systems. Arnold Transportation Services is well positioned to grow in the years ahead. ARNOLD LOGISTICS SCOPE OF OPERATIONS Arnold Logistics is a provider of value- added warehousing and logistic services. This division of Arnold Transportation Services operates over 2.3 million square feet of warehousing space. Facilities are located in Pennsylvania, Texas and North Carolina. Services provided include: Distribution Services integrated warehousing, shipping and transportation services, including climate-controlled facilities Fulfillment Services seamless integration of telemarketing, credit card approval, online order entry, warehousing, shipping and custom reports of order entry and inventory analysis Contract Packaging automated high-speed shrink-wrapping and banding, collating, carton assembly, UPC and date coding COMPETITIVE POSITION Arnold Logistics is positioned to capitalize on several broad business trends. There is a trend toward outsourcing ancillary functions, including logistics and transportation since it is not considered a core business function for many companies. The growth of mail-order business is being addressed by Arnold Logistics through the development of order fulfillment services. Lastly, the growth of the warehouse club retail format has propelled the need for custom packaging. Arnold Logistics' customers benefit by reducing capital investment in the logistics function, reducing order-cycle times and increasing flexibility to address special projects. Arnold Logistics has distinguished itself from competitors by offering unique value-added services and customizing solutions to meet the unique needs of its clients. Arnold Logistics has developed a culture that supports long-term customer partnerships. Employees strive to develop innovative solutions that create value for customers. Arnold Logistics serves customers in a variety of industries including food, publications, software and consumer non-durables. Again in 1997, Arnold Logistics received a perfect score in the American Institute of Baking (AIB) audit for cleanliness of its food-grade facilities. RECORD REVENUE Arnold Logistics achieved record revenue in 1997 of $26.2 million, a 16% increase compared to 1996. The growth was primarily in the areas of order fulfillment and contract packaging. The Company continued to expand its customer base. Contract packaging services were expanded to the Texas facility during 1997. Focus on value-added services and modest investments in automation, forklift trucks and the refurbishing of offices allowed Arnold Logistics to improve its return on assets. OUTLOOK Arnold Logistics will continue to emphasize value-added contract packaging and order fulfillment services. These services will be further expanded in the Dallas/Ft. Worth market and may be expanded in the southeastern United States during 1998. Geographic expansion will allow the company to provide services to its existing customer base in new markets. New warehousing space of 560,000 square feet is currently under construction in Central Pennsylvania. Additional information systems resources are also being allocated to meet the customized data interchange and information reporting requirements of its customers. These investments will allow Arnold Logistics to grow as a premier provider of value-added warehousing services. Consolidated Five-Year Statistical Summary (dollars in thousands except per share data) 1993 1994 1995 1996 1997 Operating Revenues 272,697 302,390 330,136 356,335 383,165 Net Income 29,902 30,355 30,501 25,409 32,210 Net Income Per Share 1.13 1.14 1.15 .95 1.23 Operating Revenues by Service Warehousing/ Logistics 15,481 16,457 18,545 22,538 26,154 Truckload 100,694 126,300 144,534 151,926 153,712 Less-than-Truckload 156,522 159,633 167,057 181,871 203,299 FINANCIAL STATEMENTS CONTENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants Quarterly Performance Price Range Common Stock Management's Discussion and Analysis of Financial Condition and Results of Operations Eleven-Year Financial Summary Board of Directors and Stockholder Information Company Executives CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (dollars in thousands) ASSETS 1997 1996 Current assets: Cash and cash equivalents $ 26,505 $ 19,704 Marketable securities 9,786 21,917 Accounts receivable: Trade (less allowance for doubtful accounts of $1,340 and $1,724) 40,063 30,554 Officers and employees 363 95 Deferred income taxes 10,498 7,649 Prepaid expenses and supplies 4,462 3,765 Refundable income taxes 577 - Total current assets 92,254 83,684 Property and equipment, at cost: Land 16,970 16,435 Buildings 84,095 79,846 Revenue and service equipment 210,396 196,325 Other equipment and fixtures 31,170 27,538 Construction in progress 3,372 2,668 346,003 322,812 Accumulated depreciation 140,441 123,198 Total property and equipment 205,562 199,614 Other assets: Goodwill, net of accumulated amortization of $2,401 and $2,049 8,494 8,863 Investments in limited partnerships 9,616 10,145 Cash value of life insurance, net 804 530 Other 310 276 Total other assets 19,224 19,814 $317,040 $303,112 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 16,280 $ 16,222 Accounts payable, trade 10,155 9,332 Federal and state income taxes - 456 Estimated liability for claims 6,453 6,452 Salaries and wages 3,768 4,126 Accrued vacation 5,523 4,635 Accrued expenses - other 4,154 2,552 Total current liabilities 46,333 43,775 Other long-term liabilities: Estimated liability for claims 13,733 13,689 Deferred income taxes 35,684 31,095 Notes payable 2,383 3,874 Other 1,654 1,532 Total other long-term liabilities 53,454 50,190 Commitments and contingencies (Note 10) Stockholders' equity: Common stock, par value $1.00; authorized 100,000,000 shares; 29,942,628 issued in 1997 and 1996 29,942 29,942 Paid-in capital 483 209 Retained earnings 208,617 187,923 239,042 218,074 Less treasury stock, at cost - 4,020,442 and 3,279,108 shares in 1997 and 1996, respectively (21,789) (8,927) Total stockholders' equity 217,253 209,147 $317,040 $303,112 The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (dollars in thousands, except per share data) 1997 1996 1995 Operating revenues $383,165 $356,335 $330,136 Operating expenses: Salaries, wages and related expenses 187,439 174,666 160,130 Supplies and expenses 59,387 57,552 50,542 Operating taxes and licenses 9,342 9,381 9,297 Insurance 7,471 9,837 6,816 Communication and utilities 5,247 4,680 4,297 Purchased transportation 29,650 28,066 22,755 Rental of buildings, revenue equipment, etc., net 1,715 1,328 1,296 Depreciation and amortization 29,133 27,756 25,348 Miscellaneous 2,865 2,727 1,018 Total operating expenses 332,249 315,993 281,499 Operating income 50,916 40,342 48,637 Other expenses - net, including interest income of $1,605, $1,090 and $996 (27) (890) (736) Income before income taxes 50,889 39,452 47,901 Income taxes 18,679 14,043 17,400 Net income $ 32,210 $ 25,409 $ 30,501 Per share amounts Basic $ 1.23 $ 0.95 $ 1.15 Diluted $ 1.22 $ 0.94 $ 1.13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (dollars in thousands, except per share data) Common Paid-in Retained Treasury Stock Capital Earnings Stock Balance - December 31, 1994 $29,942 $ 75 $155,460 $ (9,019) Net income - - 30,501 - Distribution of treasury stock due to exercise of stock options - 78 - 49 Cash dividends paid ($.44 per share) - - (11,719) - Balance - December 31, 1995 29,942 153 174,242 (8,970) Net income - - 25,409 - Distribution of treasury stock due to exercise of stock options - 56 - 43 Cash dividends paid ($.44 per share) - - (11,728) - Balance - December 31, 1996 29,942 209 187,923 (8,927) Net income - - 32,210 - Distribution of treasury stock due to exercise of stock options - 274 - 203 Purchase of treasury stock - - - (13,065) Cash dividends paid ($.44 per share) - - (11,516) - Balance - December 31, 1997 $29,942 $483 $208,617 $(21,789) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (dollars in thousands) 1997 1996 1995 Cash flows from operating activities: Net income $32,210 $25,409 $30,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,636 28,269 25,546 Gain on disposal of property and equipment (588) (726) (1,452) Equity in (earnings) losses of limited partnerships (33) (5) 30 Provision for deferred taxes 1,740 1,860 6,750 Net (gain) loss on investments 24 176 (374) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (9,777) 695 (1,199) (Increase) decrease in prepaid expenses and supplies (698) 903 (196) Increase (decrease) in accounts payable, trade 823 2,016 (2,440) Increase (decrease) in income taxes payable (1,034) 1,874 (2,959) Increase in estimated liability for claims 45 4,692 322 Increase in accrued expenses 2,132 1,709 418 Other, net 122 128 128 Net cash provided by operating activities 54,602 67,000 55,075 Cash flows from investing activities: Proceeds from sale of investment securities 19,075 3,103 11,546 Purchase of investment securities (6,967) (16,693) (1,587) Proceeds from disposition of property and equipment 5,649 4,830 7,602 Purchase of property and equipment (39,760) (31,279) (52,606) Capital contributions in limited partnerships (1,587) (1,646) (1,866) Distributions from limited partnerships 46 22 32 Acquisitions of primary assets of T.W. Owens & Sons, Inc. - - (11,121) Increase in cash value of life insurance (274) - - Other, net (34) 226 (69) Net cash used in investing activities (23,852) (41,437) (48,069) Cash flows from financing activities: Proceeds from employee stock options exercised 476 99 127 Cash dividends paid (11,516) (11,728) (11,719) Principal payments on long-term debt 156 - (13,199) Purchase of treasury stock (13,065) - - Net cash used in financing activities (23,949) (11,629) (24,791) Increase (decrease) in cash and cash equivalents 6,801 13,934 (17,785) Cash and cash equivalents at beginning of year 19,704 5,770 23,555 Cash and cash equivalents at end of year $26,505 $19,704 $ 5,770 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,373 $ 1,300 $ 1,741 Income taxes $17,971 $10,388 $13,618 Noncash investing activities in 1995 related to the recognition of the fair value of future capital contributions in limited partnerships of $6,951. The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Business: The Company operates in the motor carrier industry, principally in the Eastern United States. Revenues are mainly generated proportionately from less-than-truckload and truckload hauling. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Arnold Industries, Inc. and all of its subsidiaries. All material intercompany transactions and balances have been eliminated. Revenue Recognition: In accordance with industry practice, revenues from less-than- truckload hauling are allocated between reporting periods based on relative transit time in each reporting period with expenses recognized as incurred, and revenues from truckload hauling are recognized when the shipment is completed with expenses recognized as incurred. Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Marketable Securities: At December 31, 1997 and 1996, marketable equity and debt securities have been categorized as available for sale and as a result are recorded at fair value. Realized gains and losses on the sale of securities are recognized using the specific identification method and are included in other income in the consolidated statements of income. Quoted market prices are used to determine market value. Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and trade accounts receivable. The Company places its cash and cash equivalents with high credit financial institutions, and limits the amount of credit exposure to any one financial institution. The Company's marketable securities consist principally of U.S. Government securities and municipal bonds. These securities are subject to minimal risk. Concentrations with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographies. Property and Equipment: The Company depreciates the cost, less estimated residual value, of revenue equipment and other depreciable assets principally on the straight-line basis over their estimated useful lives. The estimated useful lives used in computing depreciation on the principal classifications of property and equipment are as follows: Buildings 15 - 31 years Revenue equipment 3 - 7 years Service equipment 3 - 6 years Other equipment and fixtures 4 - 7 years When buildings and equipment are retired or otherwise disposed of, the property and accumulated depreciation accounts are relieved of the applicable amounts and any resulting profit or loss is reflected in miscellaneous operating expenses. Goodwill: The excess of the cost of investments in subsidiaries over the fair market value of net assets acquired is shown as goodwill, which is being amortized on a straight-line basis over a maximum period of 40 years. The Company's policy is to record an impairment loss against the net unamortized cost in excess of net assets of businesses acquired in the period when it is determined that the carrying amount of the asset may not be recoverable. An evaluation is made at each balance sheet date (quarterly) and it is based on such factors as the occurrence of a significant event, a significant change in the environment in which the business operates or if the expected future net cash flows (undiscounted and without interest) would become less than the carrying amount of the asset. Investments in Limited Partnerships: The Company's investments in low-income housing limited partnerships reflect their cash investment plus the present value of required future contributions net of amortization of any excess of cost over the estimated residual value. Use of Estimates: The preparation of the Company's financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The consolidated financial statements include estimates for claims outstanding, the future recoverability of deferred tax assets, the allowance for uncollectible accounts receivable and residual value of several limited partnerships accounted for on a cost basis. Actual results could differ from those estimates. Income Taxes: In accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS 109), deferred income taxes are accounted for by the liability method, wherein deferred tax assets or liabilities are calculated on the differences between the bases of assets and liabilities for financial statement purposes versus tax purposes (temporary differences) using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax expense in the consolidated statements of income is equal to the sum of taxes currently payable plus an amount necessary to adjust deferred tax assets and liabilities to an amount equal to period-end temporary differences at prevailing tax rates. Treasury Stock: Treasury stock is carried at cost, determined by the first-in, first-out method. Effective March 22, 1997, the Board of Directors authorized management to repurchase up to 1,000,000 shares of common stock through open market purchases. During 1997, the Company purchased 817,600 shares of its common stock at an aggregate cost of approximately $13,100. Effective February 27, 1998, the Board authorized the repurchase of an additional 1,000,000 shares. Per Share Amounts: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. SFAS 128 simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share," by replacing the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Restatement of all prior-period earnings per share data is required upon adoption. The basic earnings per share and diluted earnings per share are as follows: 1997 1996 1995 Basic and diluted earnings per share: Earnings $32,210 $25,409 $30,501 Basic earnings per share, number of share 26,172,232 26,655,125 26,635,327 Diluted earnings per share, number of shares 26,506,495 26,900,743 26,986,575 Basic earnings per share $1.23 $0.95 $1.15 Diluted earnings per share $1.22 $0.94 $1.13 Comprehensive Income: In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company will adopt SFAS 130 and begin reporting comprehensive income in the first quarter of 1998. Segment Information: In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the disclosure of segment results. It requires that segments be determined using the "management approach," which means the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company will adopt SFAS 131 in the fourth quarter of 1998, and is still evaluating its impact on the Company's financial statement disclosures. 2. MARKETABLE SECURITIES: The cost and market value of investment securities at December 31, 1997 and 1996 follows: 1997 1996 Market Market Cost Value Cost Value U.S. treasury securities $ 99 $ 99 $ 95 $ 95 Municipal bonds 8,627 8,627 20,484 20,505 Equity securities 1,000 1,004 1,000 1,000 Accrued interest receivable 56 56 317 317 Total $9,782 $9,786 $21,896 $21,917 The net gain (loss) on marketable securities recorded during the years ended 1997, 1996 and 1995 amounted to $(24), $24 and $374, respectively. The contractual maturities of debt securities available for sale at December 31, 1997 are as follows: Market Value Due within one year $8,270 Due after one year through five years 357 $8,627 3. NOTES PAYABLE: The Company has unsecured working capital lines of credit with maximum borrowings of $31,500 of which $14,790 was outstanding at December 31, 1997 and 1996. Borrowings under these agreements bear interest at fixed rates quoted by the bank at the time of borrowing. The current interest rate on the outstanding balance was 6.4%. In connection with its investments in low income housing limited partnerships, the Company is required as of December 31, 1997 to make additional contributions over the next four years as follows: 1998, $1,712; 1999, $1,209; 2000, $1,189; and 2001, $200. The additional contributions of $4,310 were discounted to $3,874 using the Company's incremental borrowing rate of 6%. Management anticipates that the cash flow from the tax credits generated by these investments will approximate the additional contributions during this period. 4. STOCK OPTION AND STOCK PURCHASE PLANS: Stock Option Plan: The Company has a 1987 and a 1997 stock option plan which provide for the granting of options to purchase shares of the Company's stock to certain executives, employees, consultants and directors. The 1987 stock option plan expired on March 31, 1997 and was replaced by the 1997 stock option plan effective April 1, 1997. No new options can be granted under the 1987 stock option plan. Under the 1997 stock option plan, options to acquire up to 2,000,000 shares of the stock may be granted to executives, employees, consultants and directors of the Company. Options under both plans carry various restrictions. Under the plans, certain options granted to employees will be qualified incentive stock options within the meaning of Section 422A of the Internal Revenue Code and other options will be considered nonqualified stock options. The incentive stock options may be granted for no less than market value at the date of grant. A proposed amendment to the 1997 stock option plan requires that nonqualified stock options be issued at a price not less than market value at the date of grant. Options are exercisable starting three months from the date of grant and expire no later than ten years after the date of grant. Also, no employee may participate in the incentive stock option plans if immediately after the grant he or she would own directly or indirectly more than 10% of the stock of the Company. Transactions and other information relating to the 1987 and 1997 stock option plans for the three years ended December 31, 1997 are summarized as follows: Stock Option Plans Weighted Average Fair Value of Options Granted During Shares Price Per Share the Year Balance, outstanding - December 31, 1994 1,104,110 $4.46 to $15.62 Options granted Options exercised (18,730) $4.46 to $ 7.25 Options expired (28,700) $7.25 to $14.75 Balance, outstanding - December 31, 1995 1,056,680 $ 4.46 to $15.62 Options granted 38,800 $13.63 $3.81 Options exercised (15,746) $ 4.46 to $ 7.25 Options expired (26,000) $13.63 to $14.75 Balance, outstanding - December 31, 1996 1,053,734 $ 4.46 to $15.62 Options granted 526,500 $15.00 to $21.75 $5.09 Options exercised (76,268) $ 4.46 to $15.62 Options expired (72,600) $13.63 to $14.75 Balance, outstanding - December 31, 1997 1,431,366 $ 4.46 to $21.75 Options exercisable - December 31, 1997 905,631 $ 4.46 to $18.56 On June 26, 1996, stock options granted in 1994 for $18.25 per share to $18.50 per share have been repriced to $13.63 per share. All other provisions of the 1994 options granted have remained unchanged. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for options granted under the plans. Had compensation costs for the Company's plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS 123, the impact on the Company's net income and earnings per share would be as follows: 1997 1996 1995 As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma Net income $32,210 $30,917 $25,409 $25,281 $30,501 $30,501 Basic earnings per share $ 1.23 $ 1.18 $ 0.95 $ 0.95 $ 1.15 $ 1.15 Diluted earnings per share $ 1.22 $ 1.17 $ 0.94 $ 0.94 $ 1.13 $ 1.13 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996: dividend yield of 3.00%; expected volatility of 27.00% and 26.00%, respectively; risk-free interest rate of 6.22% and 6.72%, respectively; and expected life of 6 years. Stock Purchase Plan: Effective November 15, 1992 the Company adopted a stock purchase plan which replaced a similar plan adopted in 1975. The 1992 stock purchase plan is available to all eligible employees. Under the plan, subscriptions of each subscribing employee are remitted to a custodian for investment in the common stock of the Company. Minimum and maximum contributions under the 1992 plan are five hundred twenty dollars and five thousand two hundred dollars for each employee in any one year. The minimum and maximum contributions under the 1975 plan were three hundred dollars and three thousand dollars for each employee in any one year. At least monthly the custodian purchases the stock in the over-the- counter market and the Company allocates all purchased shares based on average price for all purchases and individual payroll deduction amounts. Under the 1992 plan the Company is responsible for all costs of stock purchases and stock sales within the plan and any administrative costs related to issuance of stock certificates. Employees are responsible for the expense of sale or transfer on issued stock certificates. The 1975 plan required that employees pay all of the custodian and brokerage fees. 5. INCOME TAXES: Consolidated income tax expense consists of the following: 1997 1996 1995 Currently payable: Federal $13,803 $10,334 $ 8,960 State 3,136 1,849 1,690 16,939 12,183 10,650 Deferred: Federal 1,272 1,517 5,626 State 468 343 1,124 1,740 1,860 6,750 Total income tax expense $18,679 $14,043 $17,400 The effective income tax rates of 36.7% in 1997, 35.6% in 1996 and 36.3% in 1995 differ from the federal statutory rates for the following reasons: 1997 1996 1995 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 4.6 3.6 3.8 Tax-free investment income and other (2.9) (3.0) (2.5) 36.7% 35.6% 36.3% Deferred tax liabilities (assets) are comprised of the following at December 31: 1997 1996 Property and equipment, principally due to differences in depreciation $35,183 $33,293 Limited partnership investments, principally due to differences in tax basis 1,465 1,350 Other 329 294 Gross deferred tax liabilities 36,977 34,937 Estimated liability for claims, principally due to differences in timing of recognition of expense (7,424) (7,828) Vacation liability, principally due to differences in timing of recognition of expense (1,925) (1,519) Allowance for bad debts, principally due to differences in timing of recognition of expense (531) (673) Deferred compensation, principally due to differences in timing of recognition of expense (794) (672) Other (1,117) (799) Gross deferred tax assets (11,791) (11,491) $25,186 $23,446 6. PROFIT SHARING PLANS: The Company has trusteed profit sharing plans for all employees meeting certain eligibility tests. The plans may be amended at any time at the discretion of the Board of Directors. Approximate charges to income for contributions to the plans amounted to $2,031, $1,721 and $1,662 for 1997, 1996 and 1995, respectively. 7. PENSION PLANS: Charges to income for pension expense for 1997, 1996, and 1995 approximate $9,449, $7,919 and $6,599, respectively, representing payments to multiemployer pension plans under the provisions of various labor contracts. Under the Multiemployer Pension Plan Amendments Act of 1980 (the Act), an employer withdrawing from a multiemployer pension plan is liable for a portion of the unfunded vested benefit obligations of such plan. The Act treats an employer as having withdrawn when the employer either permanently ceases to have an obligation to contribute to the plan or permanently ceases all covered operations under the plan. The Company presently has no plans to withdraw from a multiemployer pension plan. The Company also offers a supplemental defined benefit pension plan for certain key officers and employees with payments to begin five years following retirement. Death and disability benefits are also provided. The amount of annual pension benefit is determined by the Board of Directors. The charge to income for this plan was $146, $149 and $140 for 1997, 1996, and 1995, respectively. The following table sets forth the supplemental plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996: 1997 1996 Actuarial present value of benefit obligations: Vested benefit obligation $ 872 $ 601 Accumulated benefit obligation $1,637 $1,480 Projected benefit obligation for service rendered to date 1,637 1,480 Plan assets at fair value - - Plan liability under projected benefit obligation 1,637 1,480 Unrecognized net loss (29) - Unrecognized net asset at transition 46 52 Accrued pension cost $1,654 $1,532 The following table sets forth components of net pension cost for the supplemental plan recognized in the Company's consolidated income statements for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 Service cost - benefits earned during the period $ 50 $ 61 $ 61 Interest cost on projected benefit obligation 102 94 85 Net amortization and deferral (6) (6) (6) Net pension cost $146 $149 $140 A discount rate of 7% is used in accounting for the pension plan as of December 31, 1997 and 1996. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments include cash and cash equivalents, marketable securities, investments in limited partnerships and notes payable. At December 31, 1997 and 1996 the carrying amount of cash equivalents approximates fair value because of the short-term maturity of those instruments, and the carrying value of marketable securities is fair market value. With respect to investments in limited partnerships, management has determined that the resulting carrying value approximates estimated fair market value. The fair value of the Company's obligations for contributions to limited partnerships approximates its carrying value. The fair market value of the Company's notes payable approximates its carrying value and was based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. 9. TRANSACTIONS WITH AFFILIATES: Accounting and legal fees totaling approximately $903, $746 and $733 in 1997, 1996 and 1995, respectively, were paid or accrued to firms in which certain directors have financial interests. 10. COMMITMENTS AND CONTINGENCIES: By agreement with its insurance carriers, the Company has assumed liability in any single occurrence for Workmen's Compensation and Property Damage up to $1,000 and for Public Liability up to $1,000 for the first occurrence and up to $500 for each subsequent occurrence with excess liability assumed by the insurance carriers up to $52,000. In conjunction with these agreements, the Company has issued irrevocable letters of credit to guarantee future payments of claims to the insurance carriers. At December 31, 1997, the outstanding balance of the letters of credit was $7,553 on a total commitment of $12,000. REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors Arnold Industries, Inc. Lebanon, Pennsylvania: We have audited the accompanying consolidated balance sheets of Arnold Industries, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arnold Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. One South Market Square Harrisburg, Pennsylvania February 27, 1998 QUARTERLY PERFORMANCE (dollars in thousands, except per share data) Operating Operating Net Revenues Income Income QUARTER 1997 1996 1997 1996 1997 1996 First $ 90,539 $ 82,392 $ 11,548 $ 8,233 $ 7,321 $ 5,043 Second 97,341 90,111 15,051 11,467 9,510 7,154 Third 99,175 91,442 14,287 10,938 9,048 7,128 Fourth 96,110 92,390 10,030 9,704 6,331 6,084 $383,165 $356,335 $ 50,916 $ 40,342 $ 32,210 $ 25,409 Net Income Net Income Dividends Per Share-Basic Per Share-Diluted Per Share QUARTER 1997 1996 1997 1996 1997 1996 First $ .27 $ .19 $ .27 $ .19 $ .11 $ .11 Second .37 .27 .36 .27 .11 .11 Third .35 .27 .35 .26 .11 .11 Fourth .24 .22 .24 .22 .11 .11 $1.23 $ .95 $1.22 $ .94 $ .44 $ .44 PRICE RANGE COMMON STOCK HIGH LOW HIGH LOW QUARTER 1997 1996 First $16 $13 $17 7/8 $13 Second 18 3/8 13 7/8 16 1/2 13 1/2 Third 24 1/2 17 16 1/2 13 5/8 Fourth 25 5/8 16 3/4 16 1/2 15 1/4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Arnold Industries' 1997 operating revenue resulted from the activities of four operating subsidiaries: New Penn Motor Express, Inc. ("New Penn"), Arnold Transportation Services, Inc. (formerly known as Lebarnold, Inc.), SilverEagle Transport, Inc. ("SilverEagle"), and D.W. Freight, Inc. and its wholly owned subsidiary Dalworth Trucking Co. (collectively "Dalworth"). Arnold Transportation Services, Inc. changed its name from Lebarnold, Inc. on May 31, 1997. New Penn is a less-than-truckload (LTL) transportation company. Arnold Transportation Services is a truckload (TL) carrier. At the end of calendar year 1997, SilverEagle and Dalworth merged with and into Arnold Transportation Services to provide regional and interregional truckload transportation services. Throughout 1997, SilverEagle and Dalworth operated as separate corporate entities, although the integration of services provided by all three truckload carriers under the Arnold Transportation Services umbrella had begun well before year-end. In addition, during the year certain operations were shifted between the operating companies. The results of operations set forth below combine the results reported by Arnold Transportation Services, SilverEagle and Dalworth. In addition to LTL and TL transportation services, Arnold Industries provides specialty warehousing operations and related transportation services under the name Arnold Logistics, a division of Arnold Transportation Services. Operating Revenues (dollars in millions) Total LTL Amount % Increase Amount % Increase 1997 $383.2 8 $203.3 12 1996 356.3 8 181.9 9 1995 330.0 9 167.1 5 Warehousing/ Truckload Related Trucking Amount % Increase Amount % Increase 1997 $153.7 1 $26.2 16 1996 151.9 5 22.5 21 1995 144.4 14 18.6 13 The revenue growth at New Penn increased primarily due to a tonnage increase of 7% for 1997 over 1996 and 10% for 1996 over 1995. The tonnage hauled increased from 1,008,566 for 1996 to 1,081,334 for 1997. The revenue growth for both New Penn and Arnold Transportation Services for the last three years was affected substantially by discounted pricing. Nevertheless, New Penn's revenues increased by 12% in 1997, 9% in 1996 and 5% in 1995, and Arnold Transportation Services' revenues increased by 1% in 1997, 5% in 1996 and 14% in 1995. The revenues for both companies were negatively impacted by the extreme winter weather in early 1996 and by flooding in various parts of the country which primarily affected the truckload divisions. The 1997 revenue for Arnold Transportation Services was substantially affected by a number of major customers who re-bid their contracts in 1997. New business was secured on interregional lanes which substantially increased empty miles. Empty miles will be reduced as backhaul revenue is secured. Also for 1996, the revenue of Dalworth was negatively impacted due to deregulation in the State of Texas. The warehousing division under the name of Arnold Logistics increased its revenue 16% and 21% for 1997 and 1996 respectively due to increased business. As a result of combining the three truckload divisions, the results of operations for 1997 and thereafter will be reported to the shareholders as one truckload carrier (Arnold Transportation Services). Set forth below is a schedule showing revenues for New Penn, Arnold Transportation Services (ATS), and the warehousing division Arnold Logistics. 1997 1996 1995 Amount % Amount % Amount % New Penn $203.3 53 $181.9 51 $167.1 50 ATS 153.7 40 151.9 43 144.4 44 Arnold Logistics 26.2 7 22.5 6 18.6 6 TOTAL $383.2 100% $356.3 100% $330.1 100% The following tables set forth the percentages of operating expenses and operating income to operating revenues for the years indicated. New Penn Motor Express Arnold Transp. & Related Companies Services 1997 1996 1995 1997 1996 1995 Operating Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating Expenses Salaries, wages and related expenses 57.3 60.0 58.4 39.5 37.6 38.3 Supplies and expenses 9.2 10.3 9.8 22.6 22.2 20.9 Operating taxes and licenses 2.9 3.2 3.5 1.9 2.0 2.2 Insurance 1.5 1.8 1.5 2.4 3.8 2.7 Communication and utilities 1.1 1.2 1.1 1.7 1.5 1.5 Purchased transportation 1.1 1.0 1.0 15.3 15.0 12.9 Rental of buildings, revenue equipment, etc., net (0.2) (0.3) (0.4) 1.1 1.1 1.2 Depreciation and amortization 4.7 4.8 4.9 10.9 10.9 10.5 (Gain) on sale of equipment (0.1) (0.2) (0.4) (0.1) (0.1) (0.4) Miscellaneous 0.9 0.2 0.4 0.8 1.7 1.1 Total Operating Expenses 78.4 82.0 79.8 96.1 95.7 90.9 Operating Income 21.6% 18.0% 20.2% 3.9% 4.3% 9.1% The operating expenses of New Penn and its related companies decreased to 78.4% of operating revenues in 1997 from 82.0% in 1996 and 79.8% in 1995. Salaries, wages and related expenses decreased to 57.3% in 1997 from 60.0% in 1996 as a result of improved revenue yield and increased operating efficiencies. These expenses had increased to 60.0% in 1996 from 58.4% in 1995 primarily as a result of discounting of revenues and increased drivers' wages and benefits, including workers' compensation expense. Supplies and expenses decreased in 1997 to 9.2% from 10.3% in 1996 and 9.8% in 1995. A fuel surcharge was implemented in September 1996, which partially offset higher operating costs in 1997. Insurance expense decreased to 1.5% in 1997 compared to 1.8% in 1996. It had been 1.5% in 1995. The Company's insurance carrier increased New Penn's insurance reserve during the year 1996 due to a prior year's loss. The salaries, wages and related expenses of the Arnold Transportation Services companies increased to 39.5% in 1997 from 37.6% in 1996 and 38.3% in 1995. The expense increased in 1997 due to lower revenues per mile as a result of fewer operating efficiencies due to an increase in empty miles. Also, Arnold Transportation Services has experienced higher health benefit costs in both 1997 and 1996. Supplies and expense have increased to 22.6% in 1997 from 22.2% in 1996 and 20.9% in 1995. This was partially due to higher fuel costs in both 1997 and 1996, which were only partially offset by a fuel surcharge in September and October of 1996. In addition, lower revenue per mile and higher empty miles contributed to the increased percentages in both 1997 and 1996. Insurance decreased to 2.4% in 1997 from 3.8% in 1996 and 2.7% in 1995. The insurance expense was impacted favorably in 1997 by decreased claims. The increase in 1996 was due to the Company's insurance carrier increasing Arnold Transportation Services reserves for 1996 due to changes in prior year loss reserve estimates. Since July 1, 1995, the company has made major changes to its insurance and risk management program, which has substantially improved the Company's loss and reserve experience. Purchased transportation costs increased to 15.3% in 1997 compared to 15.0% in 1996 and 12.9% in 1995. The Company has increased substantially the number of owner-operators in both 1997 and 1996. Miscellaneous operating expenses decreased to .8% in 1997 from 1.7% in 1996 and 1.1% in 1995. A number of shippers had declared bankruptcy in 1996 and 1995 which resulted in the writing off of accounts receivable balances. The formation of Arnold Transportation Services resulted in certain one-time charges for converting to commonly used management information systems, standardizing certain employee benefit programs and applying Arnold Transportation Services decals to revenue equipment. These charges reduced operating income by approximately $750,000 for 1997. There will be additional charges in 1998 which management does not expect to be material. Total operating expenses increased to 96.1% for 1997 compared to 95.7% in 1996 and 90.9% in 1995. Arnold Industries' operating income for 1997 increased $10.6 million or 26% over 1996 compared to a decrease of $8.3 million for 1996 or 17% from 1995. New Penn's operating income increased substantially for 1997, which improved the overall operating results of Arnold Industries; however, Arnold Transportation Services' reduced operating income adversely impacted the overall operating results. Other net non-operating expenses consist primarily of interest income, other investment income and interest expense. Interest income increased $.5 million for 1997 over 1996 and 1995 due to additional investment securities. Interest expense for 1997 was $1.4 million compared to $1.3 million for 1996. The 1996 interest expense decreased $.4 million from 1995, primarily due to a reduction in debt. The effective income tax rates for 1997, 1996 and 1995 were 36.7%, 35.6% and 36.3% respectively. Net income for 1997 increased to $32.2 million compared to $25.4 million for 1996 and $30.5 million for 1995. Basic net income per share in 1997 was $1.23 compared to $.95 in 1996 and $1.15 in 1995. Diluted net income per share was $1.22 for 1997 compared to $.94 in 1996 and $1.13 in 1995. Capital Expenditures In 1997, the Company authorized the purchase of up to one million shares of its common stock. During the year, the Company purchased 817,600 shares for a total cost of $13.1 million. The total property and equipment purchases (net of dispositions) amounted to $34.1 million for 1997, compared to $26.4 million for 1996 and $45.0 million for 1995. The Company is projecting capital expenditures of approximately $50.0 million for 1998, excluding any acquisitions. Liquidity and Capital Resources Cash, cash equivalents, and marketable securities totaled $36 million at the end of 1997, compared to $42 million at the end of 1996 and $14 million at the end of 1995. The decrease for 1997 was attributable to increased capital expenditures and the purchase of the treasury stock. The increase in 1996 over 1995 was due to substantially lower capital expenditures. Working capital amounted to $46 million, $40 million and $16 million at the end of 1997, 1996 and 1995, respectively. Net cash provided by operating activities was $55 million in 1997, $67 million in 1996 and $55 million in 1995. The Company's current cash position, together with funds invested in marketable securities and cash flow generated from future operations, are expected to be sufficient to finance anticipated capital expenditures. These funds may be supplemented when necessary or desirable by short or long-term borrowing. Inflation During 1997, the Company believes that inflation had a minimal effect on operating results. However, most of the Company's expenses are subject to inflation, which results in increased costs. Seasonality In the trucking industry, results of operations show a seasonal pattern because of customers' reduced shipments in the winter months. In addition, operating expenses are usually higher during the winter months. Current Trends On January 2, 1998, New Penn announced a general rate increase of 5.4%. However, most customer rates are subject to negotiated contracts and agreements. Additionally, discounting in both the LTL and TL segments of the industry has continued into 1998. New Penn's revenue was up 4% for the fourth quarter of 1997. The beginning of 1998 is showing some additional slowing of growth. Revenues at Arnold Transportation Services are up slightly for 1998. The truckload company merger of the three divisions was completed at the end of 1997, and management believes that the restructuring will have a positive effect on operating results during the latter part of the year 1998 through improved marketing, quality of revenue, reduced empty miles and improved equipment utilization. The Company is continuing to improve efficiency by continued refinement of information technology, which will reduce costs and provide better service to its customers. New Penn has agreed to accept the terms of the tentative new National Master Freight Agreement with the Teamsters when ratified to replace the current contract which expires March 31, 1998. This agreement is for a five-year period expiring March 31, 2003. Arnold Logistics is beginning construction in 1998 of approximately 560,000 square feet of warehouse space in Central Pennsylvania. In February 1998, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's common stock in open market transactions. This newly authorized repurchase is in addition to the 182,400 shares remaining to be repurchased under the program announced in 1997. Management believes the Company's shares reflect good value and that their repurchase is an appropriate use of Company funds. The Company is devoting considerable resources to the modification of its computer software to deal with the "year 2000 problem." In addition to its internal costs, independent consulting costs to date total approximately $640,000, and a new software program for managing accounting, human resources and payroll functions was purchased at a cost of $500,000 in 1997. Although significant progress has been made, it is anticipated that additional consulting costs of approximately $500,000 will be incurred before all software modifications are completed. All systems are scheduled to be "year 2000 compatible" by the end of 1998. Management believes that tremendous growth opportunities remain for the operating companies. The Company is continuing to evaluate possible expansion of the LTL, TL and warehousing divisions.
ELEVEN-YEAR FINANCIAL SUMMARY (dollars in thousands, except per share data) Fiscal Year 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 Income Operating revenues 383,165 356,335 330,136 302,390 272,697 233,620 196,202 188,830 167,589 148,196 124,176 Operating expenses Depreciation and amortization 29,133 27,756 25,348 21,120 17,811 14,222 11,500 10,527 11,021 9,906 8,973 Operating taxes and licenses 9,342 9,381 9,297 8,924 7,908 6,780 5,887 4,836 4,537 4,147 3,593 Other 293,774 278,856 246,854 222,824 200,106 172,304 142,080 137,027 123,121 109,397 92,886 Operating income 50,916 40,342 48,637 49,522 46,872 40,314 36,735 36,440 28,910 24,746 18,724 Non-operating income (expense) Interest income (expense), net 225 (200) (711) 35 355 246 195 (1,123) (1,180) (923) (691) Other (252) (690) (25) (429) 1,326 (71) 10 (449) 884 4,142 (287) Income before income taxes, extraordinary loss, and cumulative effect of change in accounting principle 50,889 39,452 47,901 49,128 48,553 40,489 36,940 34,868 28,614 27,965 17,746 Income taxes 18,679 14,043 17,400 18,384 18,651 14,660 13,512 12,452 10,939 10,543 8,171 Income before extraordinary loss and cumulative effect of change in accounting principle 32,210 25,409 30,501 30,744 29,902 25,829 23,428 22,416 17,675 17,422 9,575 Extraordinary loss, net of tax benefit - - - 389 - - - - - - - Cumulative effect of change in accounting for income taxes - - - - - - - - 1,322 - - Net income 32,210 25,409 30,501 30,355 29,902 25,829 23,428 22,416 18,997 17,422 9,575 Per Share Data Income before extraordinary loss and cumulative effect of change in accounting principle - Basic 1.23 .95 1.15 1.16 1.13 .97 .88 .84 .67 .67 .37 Diluted 1.22 .94 1.13 1.14 1.11 .96 .88 .84 .67 .67 .37 Net income - Basic 1.23 .95 1.15 1.14 1.13 .97 .88 .84 .71 .67 .37 Diluted 1.22 .94 1.13 1.12 1.11 .96 .88 .84 .72 .67 .37 Cash dividends declared .44 .44 .44 .41 .35 .32 .29 .25 .22 .11 .06 Book value 8.38 7.84 7.33 6.63 5.90 5.12 4.46 3.86 3.31 2.76 2.16 Financial Position - Year End Cash, temporary investments and marketable securities 36,291 41,621 14,273 41,643 38,285 45,186 57,558 37,184 26,826 25,318 15,029 Working capital 45,921 39,909 16,219 24,839 24,093 29,856 55,664 30,877 24,049 23,575 11,558 Property and equipment-net 205,562 199,614 199,822 169,603 144,148 110,674 88,250 91,393 83,540 67,346 58,291 Total assets 317,040 303,112 276,877 260,279 228,361 197,203 170,668 159,973 136,313 116,197 94,081 Long-term debt 2,383 3,874 5,049 - - 476 17,603 19,479 19,749 14,812 12,840 Stockholders' equity 217,253 209,147 195,367 176,458 156,867 136,015 118,502 102,362 87,681 72,589 55,520 Other Data Percentage return on average stockholders' equity 15.1 12.6 16.4 18.2 20.4 20.3 21.2 23.6 23.7 27.2 19.0 Net cash provided by operating activities 54,602 67,000 55,075 60,524 51,299 34,518 35,898 36,639 29,471 25,195 23,136 1 D.W. Freight, Inc. was acquired in April 1992 and is accounted for under the purchase method - asset acquisitions from H.R. Hill and T.W. Owens occurred in March 1994 and January 1995, respectively 2 Adjusted to give retroactive effect to the two-for-one stock split in 1993, the two-for-one stock split in 1991, the three-for-two stock split in 1988, the five-for-four stock split in 1987 3 Excludes restricted cash prior to 1992 4 Certain liabilities with respect to claims were reclassified as long-term beginning in 1991 5 Write-off of the unamortized balance of intrastate operating rights 6 The Company adopted SFAS No. 96, "Accounting for Income Taxes," in 1989
BOARD OF DIRECTORS E. H. Arnold Heath L. Allen, Esq. Arthur L. Peterson Chairman, President, CEO Secretary and Director Director and Director Partner - Keefer Wood President - Center Wood Allen & Rahal, LLP for the Study of Harrisburg, PA of the Presidency New York, NY Kenneth F. Leedy Ronald E. Walborn, CPA Carlton E. Hughes Director CFO, Treasurer and Director Director President - New Penn Motor President - Walborn Shambach Chairman- Stewart- Express, Inc. Associates Amos Steel, Inc. Harrisburg, PA Harrisburg, PA STOCKHOLDER INFORMATION Counsel Messrs. Keefer Wood Allen and Rahal, LLP 210 Walnut Street Harrisburg, PA 17101 Auditors Coopers & Lybrand L.L.P. One South Market Square Harrisburg, PA 17101 Registrar and Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 Stock Listing Arnold Industries common stock is traded on the NASDAQ National Market System. The stock symbol is AIND. In newspapers, the stock is listed as "ArnoldInd", "Arnold Inds" or similar variations. There were 1,392 record-holders of the Company's common stock as of March 16, 1998. The number of beneficial owners is considerably greater. Annual Meeting of Stockholders The Arnold Industries 1998 Annual Meeting of Stockholders will be held 4:00 PM, May 6, 1998 at the Lebanon Country Club, 3375 West Oak Street, Lebanon, Pennsylvania. Investor Information Stockholders, securities analysts, portfolio managers, representatives of financial institutions and individuals seeking financial and operating information, including copies of Form 10-K, may contact: Corporate Secretary Arnold Industries, Inc. P.O. Box 210 Lebanon, PA 17042 (717) 273-9058 Copies of the Company's Form 10-K will be supplied to stockholders upon request without charge. Dividend Reinvestment/Cash Purchase Plan This plan enables you, as a stockholder, to apply your dividends on the Company's stock towards the purchase of additional shares of Arnold Industries, Inc. common stock on an automatic basis. Also, at your option, you may make quarterly cash payments from $25 to $3,000 to purchase additional stock. The Company pays the brokerage commissions and administrative fees connected with your participation in this Plan. Participation in the Plan is entirely voluntary and you may enroll or withdraw at any time. The Plan is administered by Registrar and Transfer Company, Arnold Industries' stock transfer agent. For information call 800-368-5948. Quarterly Reports The Company presently sends to its stockholders of record a quarterly report from its President, Edward H. Arnold, summarizing results of operations for the most recent quarter. If you are not a stockholder of record, but instead hold your stock in the name of a broker or other nominee, you may also receive these quarterly reports by requesting this report and supplying your mailing address to the Company. Requests should be mailed to the Company to the attention of the Corporate Secretary. The nature of Arnold Industries operations subject it to changing economic, competitive, regulatory and technological conditions, risks, and uncertainties. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Arnold Industries provides the following cautionary remarks regarding important factors which, among others, could cause future results to differ materially from the forward-looking statements about our management confidence and strategies for performance; expectations for new and existing technologies and opportunities; and expectations for market segment and industry growth. These factors include, but are not limited to: (1) changes in the business environment in which Arnold Industries operates, including licensing restrictions, interest rates and capital costs; (2) changes in governmental laws and regulations, including taxes; (3) market and competitive changes, including market demand and acceptance for new services and technologies; and (5) other risk factors listed from time to time in Arnold Industries SEC reports. Arnold Industries does not intend to update this information and disclaims any legal liability to the contrary. COMPANY EXECUTIVES ARNOLD INDUSTRIES, INC. Heath L. Allen, Esq., Secretary E.H. Arnold, Chairman, President & CEO Timothy D. Hoffman, VP, Properties Donald G. Johnson, Senior Vice President Andrew J. Kerlik, VP, Personnel & Safety Ronald E. Walborn, CPA, CFO & Treasurer NEW PENN MOTOR EXPRESS, INC. Steven D. Gast, VP, Corporate Planning Steven J. Ginter, VP, Marketing Charles J. Kachel, VP, National Accounts Robert C. Kemp, VP, National Accounts Kenneth F. Leedy, President John G. McCloy, VP, Central Division Thomas P. McDonald, VP, Sales, Central Division Anthony S. Nicosia, VP, Sales, Eastern Division Shawn P. Nolan, VP, Western Division Stephen M. O'Kane, Executive Vice President Terrence P. Ryan, VP, Sales, Western Division Frank Santanella, VP, Eastern Division Daniel W. Schmidt, VP, Labor Relations Charles A. Zaccaria, VP, Northern Division ARNOLD TRANSPORTATION SERVICES Kurt E. Antkiewicz, VP, Sales & Marketing J. Michael Driggers, VP, Operations Michael J. Gregerson, VP, Safety/Fleets Kurt E. Morgan, VP, Terminals Robert J. Petruzzi, COO ARNOLD LOGISTICS Douglas B. Enck, Vice President/General Manager EX-21 3 Exhibit 21 - Subsidiaries of the Registrant On December 31, 1997, at 11:59 p.m., the Registrant had three wholly-owned subsidiaries, all of which are included in the consolidated financial statements, as follows: Organized Under the Name Laws of New Penn Motor Express, Inc. Pennsylvania Arnold Transportation Services, Inc. Pennsylvania MARIS, Inc. Delaware EX-23 4 Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P. LETTERHEAD OF COOPERS & LYBRAND L.L.P. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to incorporation by reference in the Registration Statement (No. 33-41454) on Form S-8, the Registration Statement (No. 33-61005) on Form S-8 and the Registration Statement (No. 33-64923) on Form S-4 of our reports dated February 27, 1998, on our audits of the consolidated financial statements and financial statement schedules of Arnold Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, which reports appear on page 16 of the 1997 Annual Report to Stockholders and on page 15 of the Annual Report on Form 10-K, respectively, of Arnold Industries, Inc. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. One South Market Square Harrisburg, PA 17101 March 30, 1997 EX-27 5
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN ARNOLD INDUSTRIES, INC.'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 26,504,782 9,786,175 41,403,379 1,340,028 0 92,254,963 346,003,319 140,441,244 317,040,416 46,333,605 0 0 0 29,942,628 187,310,328 317,040,416 0 383,164,535 0 332,249,045 0 851,230 1,379,932 50,889,105 18,678,890 32,210,215 0 0 0 32,210,215 1.23 1.22
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