-----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, GLtsgywNuT4+OiHXlbnb2NZtCvWVdvqfmwCGiUuaJjCkKZGLfGfHKD9QYKjAkn9L i6mLbuDEJzR71pBsi+nLzA== 0000700612-99-000005.txt : 19990402 0000700612-99-000005.hdr.sgml : 19990402 ACCESSION NUMBER: 0000700612-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 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: 99582305 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 FORM 10-K 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, 1998 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 26, 1999, computed by reference to the immediately preceding closing sale price of such stock (3/25/99), was $372,451,890. 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 26, 1999 Common Stock 24,830,126 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1998, and Registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 5, 1999, 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 53. The exhibit index is located on sequentially numbered page 21. 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. Maris, Inc. ("Maris") is a non-operating, investment management subsidiary incorporated in the State of Delaware. In 1998, New Penn, the Company's LTL carrier, contributed approximately fifty percent (50%) of the Company's Operating Revenue. The Company's TL carrier operations contributed approximately forty-three percent (43%), 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 correspondent 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-three (23) terminals at which it receives, consolidates and distributes freight. It utilizes a correspondent's terminal facility 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 signifi- cantly 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 sixty (1,460) 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, 1998, through March 31, 2003. 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 four (4) 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 authori- ties. 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. Arnold Transportation operates as a "core carrier" within the TL industry. Many manufacturers in the United States continue to reduce 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. The Company created Arnold Transportation as a core carrier at the end of 1997 by integrating the operations of three regional TL carriers previously operated as independent units. Integration has had the added benefit of reducing duplicative expenses in the areas of dispatch, record-keeping, administration, etc. 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 has been relocated from Camp Hill, Pennsylvania, to Jacksonville, Florida, with other terminals located in Pennsylvania, North Carolina, Georgia, 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 sixteen (16) separate warehouse buildings in six (6) operating locations with a total capacity of approximately 3,100,000 square feet. These facilities are located in Camp Hill, Mountville, Mechanicsburg, and Lancaster, Pennsylvania, and Fort Worth and Arlington, Texas. Arnold Logistics also maintains approximately 320,000 square feet of warehouse in Wilmington, North Carolina, presently leased to a third party. Arnold Transportation has approximately thirteen hundred eight (1,380) 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 9523 Florida Mining Boulevard, Jacksonville, Florida 32257. Arnold Transportation operates regional centers at 4410 Industrial Park Road, Camp Hill, Pennsylvania 17011, 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-three (23) cities situated in seven (7) states and Quebec province of Canada. On December 31, 1998, eighteen (18) of the terminals were owned by the Company or its subsidiaries and five (5) 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 facilities in Springfield, MA; Syracuse, NY; Altoona, PA; Portland, ME; 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 located in Cantano, Puerto Rico. In the mid-Atlantic region, 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), Dayton, Ohio, and St. Louis, Missouri, which it will renew or replace in the normal course of business. In the mid-Atlantic region, Arnold Transportation also owns and, through Arnold Logistics, operates twelve (12) warehouse buildings in three (3) locations, Camp Hill, Mechanicsburg, and Lancaster, Pennsylvania, totaling approximately 2,300,000 square feet. Arnold Transportation also leases approximately 300,000 square feet of additional warehouse space for Arnold Logistics' use in Mountville, Pennsylvania. Management believes that the lease 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 five (5) terminals and/or drop lots to support its operations. These are located in Jacksonville and Jasper, Florida; Albany, Atlanta and Austelle, Georgia. The terminals in Jacksonville, Jasper, Albany and Austelle are owned by Arnold Transportation. The Atlanta facility is leased from an unrelated third party. Management believes the lease will be renewed or replaced in the normal course of business. In the southwest, Arnold Transportation maintains five (5) terminal and/or drop-off locations in, respectively, Grand Prairie, Houston, Paris and Waco, Texas, and Muskogee, Oklahoma. Arnold Transportation owns its facilities in Grand Prairie, Houston and Paris, Texas, and Muskogee, Oklahoma. The Waco facility is under lease with an unrelated party, which will expire or be renewed over the next several years. Management believes the lease 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 Fort Worth, Texas area, which are managed by Arnold Logistics. Additional warehouse space consisting of 25,000 and 248,000 square feet is under lease in Fort Worth and Arlington, Texas, respectively, which leases will be renewed or replaced in the normal course of business. 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 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 18 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. 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 26, 1999, was approximately 1,535. 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 25, 1999, was $15.00. Item 6. SELECTED FINANCIAL DATA There is incorporated herein by reference the information appearing under the caption "Eleven-Year Financial Summary" on pages 22 and 23 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. 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 19 through 21 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INHERENT IN DERIVATIVE FINANCIAL INSTRUMENTS Neither the Company nor any of its subsidiaries, including Maris, Inc., own derivative financial instruments. Accordingly, the Company has no exposure to sudden changes in the financial and commodities markets and the impact that those changes may have on the value of market risk sensitive derivative securities. Maris, Inc., however, does own certain market risk sensitive instruments, including money market funds, time deposits, tax-free bonds and other like instruments. The Company believes that the risk inherent in owning these types of investments is no greater than the market risk of owning any security traded on various exchanges in the United States and elsewhere. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Arnold Industries, Inc. and its subsidiaries, included on pages 9 through 16 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998, are incorporated by reference herein: Consolidated Balance Sheets - December 31, 1998 and 1997. Consolidated Statements of Income - Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Also, there is incorporated herein by reference the "Report of Indepen- dent Accountants" and information appearing under the caption "Quarterly Performance" on pages 17 and 18, respectively, of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. 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 5, 1999. There have been no events under the bankruptcy act, no criminal proceed- ings 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 Regis- trant's definitive proxy statement for the Annual Meeting of Stockholders on May 5, 1999. No other remuneration payments are proposed to be made in the future, directly or indirectly, by or on behalf of Arnold Industries and its subsid- iaries, 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 5, 1999. 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 5, 1999. Item 14. YEAR 2000 COMPLIANCE The Company continues its on-going project to assure Year 2000 ("Y2K") readiness. Y2K readiness involves assuring that all essential functions of the Company, including activities that are not directly computer dependant, will remain operative upon arrival of the Year 2000. Assuring Y2K readiness involves: (i) assessing which activities are impacted by date-dependent software programs and chips, (ii) making any necessary corrections and/or replacements to affected software and chips, and (iii) testing the corrections and/or replacements to evidence that software and chips recognize the Year 2000 date and function properly. Each of the three phases outlined above must be successfully completed before a particular system will be deemed Y2K ready. The Company's project to correct and/or replace internal information technology ("IT") software is now 100% complete. Internal IT software is software that the Company produces internally, using its own technicians and programmers, to perform such carrier and warehousing functions as billing, accounts receivable aging, payables, payroll, inventory control, dispatch, etc. The Company's internal IT software operates on an IBM AS 400 mainframe computer, and all such software, including software servicing the Company's three principal business units, New Penn Motor Express, Arnold Transportation Services and Arnold Logistics, has been assessed, corrected and/or replaced and tested successfully for Y2K compliance. The cost of the Company's program to correct and/or replace non- compliant internal IT software was $1,650,000. Those costs have already been incurred and paid from operating revenues of the Company's three principal business units. No other projects or capital expenditures were deferred or canceled due to the diversion of resources to Y2K compliance. Approximately 70% of the cost of the Company's internal program was incurred for services of third-party consultants and replacement of software. The remaining 30% of the cost was incurred for services of employees of the Company or its subsidiaries who devoted time to assuring Y2K readiness. The Company continues to monitor and assess the progress of third parties upon whom the Company relies for externally produced, date-dependant software, including, but not limited to, non-IT software, communications software, fueling cards, satellite-based on-board computers, diagnostic repair programs used at Company repair facilities, microfilm indexing, etc. Many such externally produced software programs are non-IT systems and impact the actual carriage of freight or storage of goods by the Company's operating units. The Company is also monitoring the progress of suppliers of basic materials such as fuel, parts, tires, etc., as well as that of significant customers upon whose continued business the Company relies for revenues. These monitoring efforts have revealed areas of concern with respect to Y2K readiness of the Company's vendors, suppliers and customers. To the extent reasonably practicable, the Company is taking steps to assure timely compliance or the availability of alternate software, services and supplies. The cost of maintaining and completing the external Y2K project, including correction and/or replacement costs and testing, is anticipated to be $150,000. The additional cost will be funded entirely from operating revenues of the Company. The Company faces the risk of disruptions to service if significant vendors, suppliers and/or customers do not become Y2K compliant in a timely manner. Failure by vendors and suppliers to become compliant would result in the loss of systems controlling dispatch, billing and payroll, among other essential functions of the Company. The Company does not believe that these risks will come to fruition because of the efforts to date to become Y2K compliant. The Company is developing contingency plans to acquire electricity, fuel and essential parts from other vendors in the event of a Y2K malfunction by a prime supplier. Plans include purchase and retention of higher levels of inventory for items such as tires and spare parts. As necessary, electricity will be available at most Company facilities, at least temporarily, though the use of generators that the Company routinely maintains for power outages. The Company has no contingency plans for loss of revenues from shippers who do not become Y2K compliant. 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 9 to 16 in the Registrant's Annual Report to Stockholders for the year ended December 31, 1998 and the report of independent accountants on page 17 of such report are incorporated herein by reference in Item 8: Financial statements: Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Income - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Independent Accountants' Report Selected Quarterly Financial Data - Years Ended December 31, 1998 and 1997: Quarterly performance data, included on page 18 in the Registrant's Annual Report to Stockholders for the year ended December 31, 1998, is incorporated herein by reference. (2) The following financial statement schedules for the years 1998, 1997 and 1996 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, inappli- cable 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 - 1998 Annual Report to Stockholders Exhibit 21 - Subsidiaries of the Registrant Exhibit 23.1 - Consent of PricewaterhouseCoopers LLP 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, 1998, 1997 and 1996
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, 1998 Allowance for doubtful accounts $ 1,340,028 $ 536,367 $221,223 $ 913,471 $ 1,184,147 Estimated liability for claims $20,185,754 $13,494,337 - $17,887,178 $15,792,913 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 Recoveries Accounts deemed to be uncollectible and charged to allowance for doubtful accounts and payments made for estimated liability for claims.
Report of Independent Accountants on Financial Statement Schedules To the Board of Directors of Arnold Industries, Inc. Our audits of the consolidated financial statements referred to in our report dated March 5, 1999 appearing on page 17 of the 1998 Annual Report to Shareholders of Arnold Industries, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP One South Market Square Harrisburg, Pennsylvania March 5, 1999 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 31, 1999. 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 31, 1999 E. H. Arnold President and Director /s/ Kenneth F. Leedy March 31, 1999 Kenneth F. Leedy Executive Vice President and Director /s/ Ronald E. Walborn March 31, 1999 Ronald E. Walborn Treasurer and Director /s/ Heath L. Allen March 31, 1999 Heath L. Allen Secretary and Director INDEX TO EXHIBITS Sequential Page No. Exhibit 13 - 1998 Annual Report to Stockholders 21 Exhibit 21 - Subsidiaries of Registrant 49 Exhibit 23.1 - Consent of PricewaterhouseCoopers LLP 50 Exhibit 27 - Financial Data Schedule 51 EX-13 2 (Front Cover) 1998 ANNUAL REPORT ARNOLD INDUSTRIES, INC. (Inside Front Cover) contents 1 Letter to Shareholders 2 New Penn Motor Express 4 Arnold Transportation Services 6 Arnold Logistics 7 Consolidated Five-Year Summary 8 Financial Statements 9 Consolidated Balance Sheets 10 Consolidated Statements of Income 10 Consolidated Statements of Shareholders' Equity 11 Consolidated Statements of Cash Flows 12 Notes to Consolidated Financial Statements 17 Report of Independent Accountants 18 Quarterly Performance 18 Price Range Common Stock 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Eleven-Year Financial Summary 24 Board of Directors and Shareholder Information 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. 1998 operating revenues totaled $404 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 provides irregular route and dedicated truckload services in the Northeast, Southeast, Midwest and Southwest regions 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 has 3.1 million square feet of warehousing space located in Pennsylvania, North Carolina and Texas. financial summary (dollars in thousands except per share data)
1998 1997 Change Revenues $403,721 $383,165 5.4% Net Income $35,116 $32,210 9.0% Net Income Per Share (Basic) $1.37 $1.23 11.4% Shareholders' Equity $226,400 $217,253 4.2% Total Assets $320,111 $317,040 1.0% Return on Average Shareholders' Equity 15.8% 15.1% 0.7% To Our Shareholders: We are pleased to report that in 1998 Arnold Industries achieved record revenues of over $400 million with an increase of 5.4%, and record basic earnings per share of $1.37, up 11.4% from the prior year. Our diversification in several segments of the transportation and logistics market has supported our growth in earnings these past two years. It was growth of earnings in our less-than-truckload (LTL) operations that supported the record performance in 1997 while significant improvement in earnings at our truckload and logistics operating units fueled the growth in 1998. New Penn continues to astound industry observers with its ability to operate very profitably in the competitive Northeast regional LTL market. Operating margins exceeded 20% again in 1998 in an industry where single digit margins are the norm. The performance of New Penn is testimony to the abilities and hard work of President Ken Leedy, Executive Vice President Steve O'Kane and the entire team. No other company has demonstrated their level of skill at identifying and driving costs out of the LTL process. One of the biggest challenges at New Penn in 1998 was to outperform their own incredible performance of the prior year when revenues were up 12% and operating income was up 35%. We are proud to report New Penn nearly matched 1997's record revenue and operating income. We are very pleased to report improved financial results in our truckload operations at Arnold Transportation Services under the leadership of Mike Walters. Mike assumed the presidency at Arnold Transportation Services in July of 1998. He has been pulling the team together as the executive offices were relocated to Jacksonville, FL, and he has established a culture of direct and open communication. Our efforts of the past two years to merge and turnaround the truckload operations began to pay off in the second half of the year as operating income was up 238% for 1998. Arnold Logistics had another good year with operating income up 12%. Doug Enck, Vice President and General Manager is to be commended for the job his team has done over the past three years as revenues have grown 59% and income has grown by 67% without a significant increase in warehouse space being utilized. We have improved the depth of management and restructured the operations at Arnold Logistics to position the company for future growth with the appointments of Larry Pechart as Director, Fulfillment Operations and Jeff Reuscher as Director, Food Group Operations. Exciting new developments are underway at Arnold Logistics to capitalize on current business trends. Arnold Logistics now provides comprehensive order fulfillment services for companies that market their products through the Internet and mail-order catalogs. During the past 24 months, we have purchased 2 million shares of Arnold Industries common stock in open-market transactions. We are currently executing a plan to repurchase an additional 1 million shares as we continue to believe our stock represents an excellent value. New Penn will continue to be the foundation that supports the outstanding earnings of Arnold Industries. However, we anticipate a substantial portion of our future growth in earnings will come from the truckload and logistics segments as well as the potential for growth in the LTL market outside the Northeast. We anticipate continued double-digit growth in revenues and improving margins in the truckload segment. With the opening of the new facilities in Lancaster County, PA, and additional space in Texas, Arnold Logistics will have added over 800,000 square feet of warehouse space, an increase of 35%. A five-year agreement was recently signed that will completely utilize the new Pennsylvania facilities by mid-year 1999. We want to take this opportunity not only to thank the thousands of customers that utilize our services, but also to thank our dedicated employees and our shareholders for their continued support. Please visit the Arnold Industries web site at www.aind.com for access to information about our company. We assure you that we are looking at new transportation and logistic opportunities to meet the needs of our customers, to provide continued employment and to improve the returns for our shareholders. /s/ E. H. Arnold Chairman, President & CEO March 1, 1999 NEW PENN OVERVIEW 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 service to portions of the Midwest, the Southeast and Ontario, Canada through partnerships with other high-service regional carriers. RECORD SERVICE LEVELS New Penn achieved new records in two key areas of importance to customers during 1998. The company delivered over 97% of shipments on-time as measured against its published service standards. Making this accomplishment even more noteworthy is the fact that service standards on several lanes were recently reduced from two-day to next-day service. In fact, 93% of all shipments are now delivered next-day. Another important service attribute is damage-free freight handling. During 1998, 99.8% of New Penn shipments were delivered damage-free. The Company achieved a record low cargo claims ratio of .34% in 1998. This measure indicates that one-third of one percent of revenues were paid to customers to settle loss and damage claims. The industry average is four times greater. During 1998, New Penn was again recognized by customers for outstanding service in the annual "Quest for Quality" survey conducted by Logistics Management and Distribution Report magazine. 1998 marks the fifth consecutive year that New Penn has received this recognition. The Company also received recognition from individual customers including the Outstanding LTL Service award from the Northeast Division of The Home Depot, a leader in the home improvement retail industry. A component of the outstanding service provided by New Penn is the safe operation of our trucks. During 1998 New Penn drivers were involved in less than one DOT chargeable accident for every 4 million miles driven. New Penn now has 48 drivers who have each driven more than 1 million accident-free miles. FINANCIAL RESULTS New Penn continues to lead the industry in operating profit margins based on the carrier financial data reported by Transport Topics in August 1998. It would appear that leadership will continue as New Penn achieved an operating ratio of 78.8% in 1998. Operating ratio is a common industry measure of profitability and reflects operating expenses as a percentage of revenues. New Penn revenues totaled $202.9 million and operating income totaled $43.1 million in 1998. New Penn nearly matched the record levels of the prior year through revenue yield strategies and tight cost controls. Several factors contributed to the difficulty of surpassing the outstanding performance of 1997 including a revenue windfall in 1997 resulting from a strike at UPS and the negative impact early in 1998 of a potential work stoppage at New Penn while the labor agreement was being negotiated. Although a new five-year agreement was reached six weeks prior to the deadline eliminating the potential of a work stoppage, competitors had successfully used the threat of a strike to secure additional business. INVESTING FOR THE FUTURE INFORMATION TECHNOLOGY New Penn continues to be a leader in the use of information technology to improve operating efficiency and customer service. Substantial progress was made in 1998 on the development of New Penn's on-board computer technology. After more than two years of leading edge development and testing, an on-board system has been designed to improve operational efficiencies and customer service. Customized mobile application software and a mobile data network are used to interface hand-held computers in each truck with New Penn's proprietary pick-up and delivery dispatch system. The system has now been installed in 30% of the tractor fleet and plans are in place to double the use of on-boards by mid-year 1999. If the rollout continues smoothly, the on-boards may be installed throughout the New Penn network by the end of 2000. The Company has made a concerted effort to address the so-called Year 2000, or Y2K, computer problem. As a result of these efforts, all internal New Penn systems are Y2K compatible and we anticipate no problems with internal systems. SALES SYSTEMS During 1998 New Penn made a significant commitment to upgrade the sales force automation system. The laptop computers used by all sales representatives improve their productivity, professionalism and effectiveness. New Penn also implemented a new sales force incentive plan whereby sales people who achieve their objectives are rewarded with points redeemable for merchandise and travel awards. FACILITIES AND EQUIPMENT The Company continues to reinvest in terminal facilities to ensure we have the capacity to efficiently grow in the future. A new facility serving the Philadelphia market will open during the first quarter of 1999, as will an expanded Boston facility. Additional terminal capacity is actively being pursued at six other locations. To maintain one of the most modern fleets in the industry, the Company also invested in 60 new tractors and 245 new trailers during 1998. The average age of the tractor fleet used in terminal to terminal operations is only 3.1 years. PEOPLE The quality of New Penn's service is based on the quality of the people providing that service. Each year the company works hard to hire and retain the best people for available operations, sales and administrative positions. New Penn's drivers and dockworkers may be among the best compensated in the industry, but their expertise, professionalism and tenure, an average of nearly 10 years, make a significant contribution to the superior level of service provided by New Penn. New Penn continues to be positioned as the premier Northeast regional carrier in terms of both operating efficiency and service to its customers. ARNOLD TRANSPORTATION SERVICES OVERVIEW Arnold Transportation Services provides irregular route, multi-stop and dedicated truckload services in the Northeast, Southeast, Midwest and Southwest regions of the United States. The Company is headquartered in Jacksonville, FL and operates 12 facilities. Arnold Transportation Services has a significant presence in the beverage, consumer products and retail industries, and was recognized by customers such as Appleton Paper and The Home Depot for outstanding service during 1998. The Arnold Transportation Services network provides dependable regional and interregional truckload service by linking facilities and drivers with a proprietary dispatch system and on-board satellite tracking computers. The Company purchased 160 new tractors equipped with sleeper cabs in 1998, and increased its use of owner-operators. The tractor fleet averages only 3.2 years of age. Over 98% of the linehaul tractor fleet is equipped with on-board satellite tracking units. The trailer fleet is predominately 53' high-capacity trailers. The Company purchased 535 new 53' trailers in 1998. 1998 was the first full year of operations for Arnold Transportation Services since the Company was created through the merger of three truckload subsidiaries of Arnold Industries. 1998 INITIATIVES Safety is a high priority at Arnold Transportation Services. The Company achieved a 10% reduction in the number of chargeable accidents per million miles driven in 1998. There are now 24 drivers that have driven over one million miles without a chargeable accident. The Company also experienced a 43% reduction in lost-time injuries during 1998. Ongoing training initiatives are being conducted in the areas of driver fatigue, rollover avoidance and how to deal with "road rage". As a result of these initiatives, the drivers and fellow motorists are safer. Driver recruitment and retention continues to be a truckload industry-wide challenge. Several initiatives resulted in better recruiting and lower driver turnover during 1998 including programs to improve driver referrals, driver compensation, the "driver friendliness" of the equipment, incentives for supervisors to retain drivers and arrangements for owner- operators to purchase and finance a truck from Arnold Transportation Services. The Company successfully recruited an additional 228 owner-operators in 1998, a 61% increase in the total number of owner-operators being utilized. Ninety of these new owner-operators were previously company drivers who purchased their truck from the Company. Significant progress was made in 1998 to improve the business information systems of Arnold Transportation Services. Integrating and consolidating the information systems of three smaller firms to effectively manage the financial, service quality and operational functions of the Company was among the biggest challenges of the merger. During 1998 the consolidation of the systems was completed. In addition, the satellite vehicle tracking and fuel management software was integrated with the proprietary dispatch system, a vehicle maintenance management system was implemented as was a human resources and financial accounting package. In addition, all of these efforts helped to ensure that systems are Y2K compliant. IMPROVING FINANCIAL RESULTS Revenues totaled $171.4 million in 1998, an increase of 12% compared to the prior year. Operating income increased by 238% to $7.1 million. All of the improvement in earnings occurred during the second half of 1998. A negative trend in operating margins during 1997 that resulted from efforts to merge the companies continued during the first half of 1998. Margins declined through the first two quarters. However, the turnaround began in the second half as operating profit margins improved during the third and fourth quarters compared to the prior year. BENEFITS OF MERGER While there were additional costs incurred during 1998 as a result of the merger, such as relocation of staff, the Company also started to reap benefits in the form of revenue growth and lower costs. REVENUE GROWTH For the past several years, large customers have been reducing the number of carriers serving their facilities. Arnold Transportation Services is now one of the 25 largest truckload carriers in the United States. As a major player in the industry with regional and interregional coverage, the Company is better positioned to meet the needs of Fortune 500 customers. This strategy began to pay dividends during 1998 by achieving growth with major national accounts. Contributing to the revenue growth was the expansion of interregional services. The average length of haul increased by over 13%. The Company also took a significant step in entering the Midwest market by opening a new facility in St. Louis, MO. The Midwest represents a large and virtually untapped market for future growth. COST REDUCTION The merger began to pay dividends during the second half of the year in terms of cost reduction. Several areas of improvement included: * A 6% reduction in non-driver employees as support functions were consolidated * A 15% reduction in empty miles * Improved asset utilization including an 8% increase in the revenue per tractor and a 6% reduction in the ratio of trailers to tractors * Elimination of redundant facilities as one service center and one maintenance facility were closed during 1998. STRATEGIES FOR FUTURE GROWTH Arnold Transportation Services is now positioned to increase revenues and improve profit margins. The new operations in St. Louis will permit greater penetration of the Midwest market. Greater emphasis of inter-regional lanes will continue to improve revenue and asset utilization. Indications are that the pricing environment will remain strong. Strategies to increase the use of owner-operators and to convert company drivers to owner-operators will continue. This is a win-win situation for the owner-operator and the Company. This process makes growth of truckload business less asset intensive and improves the ratio of variable to fixed costs. The Company has plans to increase its use of the Internet for driver recruiting in 1999 through introduction of a new web site. The Internet will also be used as a source of additional business. Continuation of the initiatives outlined above as well as others, such as strategies to further reduce equipment maintenance costs, will allow Arnold Transportation Services to enhance its position as a leader in the truckload industry. ARNOLD LOGISTICS OVERVIEW Arnold Logistics is a provider of value-added warehousing and logistic services. The company has over 3.1 million square feet of warehousing space. Facilities are located in Pennsylvania, Texas and North Carolina. Services provided include: FULFILLMENT SERVICES - call center management, credit card approval, online order entry, invoicing, warehousing, small package and freight shipping plus customized order and inventory reports CONTRACT PACKAGING - custom sortation, automated high-speed shrink-wrapping and banding, collating, carton assembly, UPC and date coding DISTRIBUTION SERVICES - integrated warehousing, shipping and transportation services, including climate-controlled facilities Arnold Logistics has developed a unique ability to customize solutions for efficiently assuming the labor intensive back- office order processing, packaging and shipping functions of its clients. Arnold Logistics has developed a culture that supports long-term customer partnerships in a variety of industries including food, publications, software and consumer non-durables. Arnold Logistics has distinguished itself for superior quality. The Distribution Services operations have achieved an annual accuracy rate of 99.998%. RECORD REVENUE AND OPERATING INCOME Arnold Logistics achieved record revenue in 1998 of $29.4 million, a 12% increase compared to 1997. The growth was primarily in the areas of order fulfillment and contract packaging. Operating income rose by 12% to a record $5.5 million. These results were achieved by focusing on labor-intensive value- added services. The major development at Arnold Logistics in 1998 was the completion of 562,000 square feet of new warehouse space in Central Pennsylvania. Business development efforts throughout 1998 have ensured that the new warehouse will be completely utilized by mid-year 1999. The Company continued to expand its customer base. Contract packaging services were expanded at the Texas facility during 1998 with nearly 250,000 square feet of additional warehouse space. OUTLOOK A key trend that Arnold Logistics is positioned to address is the growth of consumer direct retail sales through the Internet and mail-order catalog companies. General retail sales via the Internet are projected to grow by 600% in 1999. Order fulfillment services provided by Arnold Logistics allow Internet and catalog marketers to completely outsource their order processing, inventory management and small package shipping. Other trends on which Arnold Logistics is positioned to capitalize include the outsourcing of inventory and transportation management functions. The growth of the warehouse club retail format has propelled the need for custom packaging. Arnold Logistics' customers benefit by being able to reduce capital investment in the logistics function, lower costs, decrease order-cycle times and increase flexibility to address special projects. Recent investments made in additional warehouse space and automated material handling equipment will allow Arnold Logistics to capitalize on these trends and continue its outstanding record of growth. We anticipate Arnold Logistics will have a greater impact on the earnings of the parent company in the years ahead.
Arnold Industries consolidated five-year summary (dollars in thousands except per share data)
1998 1997 1996 1995 1994 Operating Revenues 403,721 383,165 356,335 330,136 302,390 Net Income 35,116 32,210 25,409 30,501 30,355 Net Income Per Share 1.37 1.23 .95 1.15 1.14 Operating Revenues by Service Warehousing/ Logistics 29,445 26,154 22,538 18,545 16,457 Truckload 171,366 153,712 151,926 144,534 126,300 Less-than-Truckload 202,910 203,299 181,871 167,057 159,633
financial statements contents 9 Consolidated Balance Sheets 10 Consolidated Statements of Income 10 Consolidated Statements of Shareholders' Equity 11 Consolidated Statements of Cash Flows 12 Notes to Consolidated Financial Statements 17 Report of Independent Accountants 18 Quarterly Performance 18 Price Range Common Stock 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Eleven-Year Financial Summary 24 Board of Directors and Shareholder Information Inside Back Cover Company Executives consolidated balance sheets as of December 31, 1998 and 1997 (dollars in thousands)
ASSETS 1998 1997 Current assets: Cash and cash equivalents $ 19,433 $26,505 Marketable securities 4,849 9,786 Accounts receivable: Trade (less allowance for doubtful accounts of $1,184 and $1,340) 39,555 40,063 Officers and employees 604 363 Notes receivable, current 874 - Deferred income taxes 6,263 10,498 Prepaid expenses and supplies 7,458 4,462 Refundable income taxes 707 577 Total current assets 79,743 92,254 Property and equipment, at cost: Land 17,691 16,970 Buildings 88,206 84,095 Revenue and service equipment 213,524 210,396 Other equipment and fixtures 34,337 31,170 Construction in progress 16,400 3,372 370,158 346,003 Accumulated depreciation 149,459 140,441 Total property and equipment 220,699 205,562 Other assets: Goodwill, net of accumulated amortization of $2,592 and $2,401 8,303 8,494 Investments in limited partnerships 9,120 9,616 Notes receivable, long-term 1,091 - Cash value of life insurance, net 875 804 Other 280 310 Total other assets 19,669 19,224 $320,111 $317,040 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 15,864 $16,280 Accounts payable, trade 10,352 10,155 Estimated liability for claims 5,079 6,453 Salaries and wages 3,387 3,768 Accrued vacation 5,889 5,523 Accrued expenses - other 4,041 4,154 Total current liabilities 44,612 46,333 Other long-term liabilities: Estimated liability for claims 10,714 13,733 Deferred income taxes 35,307 35,684 Notes payable 1,310 2,383 Other 1,768 1,654 Total other long-term liabilities 49,099 53,454 Commitments and contingencies (Note 10) Shareholders' equity: Common stock, par value $1.00; authorized 100,000,000 shares; 29,942,628 issued in 1998 and 1997 29,942 29,942 Paid-in capital 658 483 Retained earnings 232,418 208,617 263,018 239,042 Less treasury stock, at cost - 5,123,476 and 4,020,442 shares in 1998 and 1997, respectively (36,618) (21,789) Total shareholders' equity 226,400 217,253 $ 320,111 $317,040 The accompanying notes are an integral part of the consolidated financial statements
consolidated statements of income for the years ended December 31, 1998, 1997, and 1996 (dollars in thousands, except per share data)
1998 1997 1996 Operating revenues $403,721 $383,165 $356,335 Operating expenses: Salaries, wages and related expenses 190,629 187,439 174,666 Supplies and expenses 52,229 59,387 57,552 Operating taxes and licenses 9,793 9,342 9,381 Insurance 9,101 7,471 9,837 Communication and utilities 5,615 5,247 4,680 Purchased transportation 46,406 29,650 28,066 Rental of buildings, revenue equipment, etc., net 1,145 1,715 1,328 Depreciation and amortization 30,585 29,133 27,756 Miscellaneous 2,021 2,865 2,727 Total operating expenses 347,524 332,249 315,993 Operating income 56,197 50,916 40,342 Other income (expenses) - net, including interest income of $1,674, $1,605 and $1,090 (355) (27) (890) Income before income taxes 55,842 50,889 39,452 Income taxes 20,726 18,679 14,043 Net income $ 35,116 $ 32,210 $25,409 Per share amounts Basic $ 1.37 $ 1.23 $ 0.95 Diluted $ 1.36 $ 1.22 $ 0.94
consolidated statements of shareholders' equity for the years ended December 31, 1998, 1997, and 1996 (dollars in thousands, except per share data)
Common Paid-in Retained Treasury Stock Capital Earnings Stock 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) Net income - - 35,116 - Distribution of treasury stock due to exercise of stock options - 175 - 213 Purchase of treasury stock - - - (15,042) Cash dividends paid ($.44 per share) - - (11,315) - Balance - December 31, 1998 $ 29,942 $ 658 $232,418 $(36,618) The accompanying notes are an integral part of the consolidated financial statements
consolidated statements of cash flows for the years ended December 31, 1998, 1997, and 1996 (dollars in thousands)
1998 1997 1996 Cash flows from operating activities: Net income $35,116 $32,210 $25,409 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,099 29,636 28,269 Gain on disposal of property and equipment (2,096) (588) (726) Equity in earnings of limited partnerships (33) (33) (5) Provision for deferred taxes 3,858 1,740 1,860 Net loss on investments 5 24 176 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 267 (9,777) 695 (Increase) decrease in prepaid expenses and supplies (2,996) (698) 903 Increase in accounts payable, trade 197 823 2,016 (Increase) decrease in refundable income taxes (130) (1,034) 1,874 Increase (decrease) in estimated liability for claims (4,393) 45 4,692 Increase (decrease) in accrued expenses (128) 2,132 1,709 Other, net 114 122 128 Net cash provided by operating activities 60,880 54,602 67,000 Cash flows from investing activities: Proceeds from sale of investment securities 5,604 19,075 3,103 Purchase of investment securities (672) (6,967) (16,693) Proceeds from disposition of property and equipment 8,655 5,649 4,830 Purchase of property and equipment (54,240) (39,760) (31,279) Capital contributions in limited partnerships (1,489) (1,587) (1,646) Distributions from limited partnerships 16 46 22 Increase in cash value of life insurance (71) (274) - Repayment on loans to employees 185 - - Other, net 29 (34) 226 Net cash used in investing activities (41,983) (23,852) (41,437) Cash flows from financing activities: Proceeds from employee stock options exercised 388 476 99 Cash dividends paid (11,315) (11,516) (11,728) Principal payments on long-term debt - 156 - Purchase of treasury stock (15,042) (13,065) - Net cash used in financing activities (25,969) (23,949) (11,629) Increase (decrease) in cash and cash equivalents (7,072) 6,801 13,934 Cash and cash equivalents at beginning of year 26,505 19,704 5,770 Cash and cash equivalents at end of year $19,433 $26,505 $19,704 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,173 $ 1,373 $ 1,300 Income taxes $17,029 $17,971 $10,388 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 from less-than-truckload hauling, truckload hauling, and warehousing/logistics. 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. Segment Information: In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (Note 7). 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. Revenues for warehouse/distribution services are recognized as the related services are rendered and associated costs 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, 1998 and 1997, 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 - 10 years Service equipment 3 - 6 years Other equipment and fixtures 3 - 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. In 1998, certain revenue equipment was sold to employees for $2,150 and interest-bearing notes with established repayment terms were received. This has been treated as a non-cash transaction on the 1998 consolidated statement of cash flows. 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 December 28, 1998, February 27, 1998 and 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 1998 and 1997, the Company purchased 1,182,400 and 817,600 shares, respectively, of its common stock at an aggregate cost of $15,042 and $13,065, respectively. 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. The basic earnings per share and diluted earnings per share are as follows:
1998 1997 1996 Basic and diluted earnings per share: Earnings $ 35,116 $ 32,210 $ 25,409 Basic earnings per share, number of shares 25,668,457 26,172,232 26,655,125 Effect of dilutive securities - stock options 133,352 334,263 245,618 Diluted earnings per share, number of shares 25,801,809 26,506,495 26,900,743 Basic earnings per share $ 1.37 $ 1.23 $ 0.95 Diluted earnings per share $ 1.36 $ 1.22 $ 0.94
Stock options to purchase 200,000 shares of common stock at $18.56 per share were outstanding during all of 1998, but were not included in the computation of diluted earnings per share because the stock options' exercise price was greater than the average market price of the common stock. 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 has adopted SFAS 130 and has determined that net income is its only component of comprehensive income. Derivative Instruments: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for all fiscal quarters for all fiscal years beginning after June 15, 1999. This statement requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. It is not anticipated that the adoption of SFAS 133 will have a significant effect on the Company's results of operations or its financial position. 2. Marketable Securities: The cost and market value of investment securities at December 31, 1998 and 1997 follows: 1998 1997 Market Market Cost Value Cost Value U.S. treasury securities $ 102 $ 102 $ 99 $ 99 Municipal bonds 3,730 3,731 8,627 8,627 Equity securities 1,000 1,004 1,000 1,004 Accrued interest receivable 12 12 56 56 Total $4,844 $4,849 $9,782 $9,786
The net gain (loss) on marketable securities recorded during the years ended 1998, 1997 and 1996 amounted to $(5), $(24) and $24, respectively. The contractual maturities of debt securities available for sale at December 31, 1998 are all due within one year of December 31, 1998. 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, 1998 and 1997. 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 5.87%. In connection with its investments in low income housing limited partnerships, the Company is required as of December 31, 1998 to make additional contributions over the next three years as follows: 1999, $1,209; 2000, $1,189; and 2001, $200. The additional contributions of $2,598 were discounted to $2,384 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. Both incentive stock options and nonqualified stock options may be granted for no 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 qualified incentive stock option plans if immediately after the grant he or she would directly or indirectly own 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, 1998 are summarized as follows:
Stock Option Plans Weighted Average Fair Value of Options Granted Price During Shares Per Share the Year 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 granted 642,500 $12.19 to $15.25 $3.20 Options exercised (79,366) $ 4.46 to $13.94 Options expired (336,400) $13.63 to $21.75 Balance, outstanding - December 31, 1998 1,658,100 $ 7.25 to $18.56 Options exercisable - December 31, 1998 864,300 $ 7.25 to $18.56
On June 26, 1996, stock options granted in 1994 for $18.25 per share to $18.50 per share were repriced to $13.63 per share. All other provisions of the 1994 options granted have remained unchanged. On October 15, 1998, 2,500 stock options granted in 1998 and 325,500 stock options granted in 1997 for $15.00 per share to $21.75 per share were cancelled and reissued at $12.19 per share. The reissued stock options are considered newly granted options under the provisions of the 1997 stock option plan. 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:
1998 1997 1996 As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma Net income $35,116 $34,796 $32,210 $30,917 $25,409 $25,281 Basic earnings per share $ 1.37 $ 1.36 $ 1.23 $ 1.18 $ 0.95 $ 0.95 Diluted earnings per share $ 1.36 $ 1.35 $ 1.22 $ 1.17 $ 0.94 $ 0.94
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 1998, 1997 and 1996; dividend yield of 3.00%; expected volatility of 29.10%, 27.00% and 26.00%, respectively; risk-free interest rate of 4.55%, 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 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 plan are five hundred twenty dollars and five thousand two hundred 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 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. 5. Income Taxes: Consolidated income tax expense consists of the following:
1998 1997 1996 Currently payable: Federal $13,670 $13,803 $10,334 State 3,198 3,136 1,849 16,868 16,939 12,183 Deferred: Federal 3,096 1,272 1,517 State 762 468 343 3,858 1,740 1,860 Total income tax expense $20,726 $18,679 $14,043
The effective income tax rates of 37.1% in 1998, 36.7% in 1997 and 35.6% in 1996 differ from the federal statutory rates for the following reasons:
1998 1997 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 4.6 4.6 3.6 Tax-free investment income and other (2.5) (2.9) (3.0) 37.1% 36.7% 35.6%
Deferred tax liabilities (assets) are comprised of the following at December 31:
1998 1997 Property and equipment, principally due to differences in depreciation $35,262 $35,183 Limited partnership investments, principally due to differences in tax basis 1,571 1,465 Other 370 329 Gross deferred tax liabilities 37,203 36,977 Estimated liability for claims, principally due to differences in timing of recognition of expense (3,719) (7,424) Vacation liability, principally due to differences in timing of recognition of expense (2,092) (1,925) Allowance for bad debts, principally due to differences in timing of recognition of expense (472) (531) Deferred compensation, principally due to differences in timing of recognition of expense (867) (794) Other (1,009) (1,117) Gross deferred tax assets (8,159) (11,791) $29,044 $25,186
6. Pension and Other Postretirement Benefit Plans: The Company participates in several multiemployer pension plans under various labor contracts, offers a supplemental defined benefit pension plan for certain key officers and employees, and has a trusteed profit sharing plan and a 401(k) plan for all employees meeting certain eligibility tests. The following summarizes the obligations, assumptions, and activity of the plans as of and for the year ended December 31:
1998 1997 Change in benefit obligation: Benefit obligation at beginning of year $1,654 $1,532 Service cost 57 50 Interest cost 104 102 Amortization of unrecognized transition asset (6) (6) Benefits paid (41) (24) Benefit obligation at end of year $1,768 $1,654
The supplemental defined benefit pension plan is unfunded. The Company has recorded a liability for all benefit obligations.
1998 1997 Discount rate 6.75% 7.00% Rate of compensation increase 0.00% 0.00%
1998 1997 1996 Components of net periodic benefit cost: Service cost $ 57 $ 50 $ 61 Interest cost 104 102 94 Amortization of unrecognized net transition asset (6) (6) (6) Net periodic benefit cost $155 $146 $149
In addition to the above supplemental defined benefit plan, the Company has a profit sharing plan, participates in multiemployer pension plans and began a 401(k) plan in 1997. The Company contributed $1,443, $1,452, and $1,721 to the profit sharing plan and $9,841, $9,449, and $7,919 to the multiemployer pension plans for 1998, 1997, and 1996, respectively, and $568 and $591 to the 401(k) plan for 1998 and 1997, respectively. 7. Segment Information: In 1998, the Company adopted SFAS 131 and has determined that its reportable segments are those that are based on the Company's methodology of internal reporting, which disaggregates its business by product category. The accounting policies of the segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on operating income. The Company's reportable segments are: less-than-truckload hauling, truckload hauling, and warehousing/logistics services. The less-than- truckload hauling segment provides next day service in the Northeast region of the United States. The truckload hauling segment provides irregular route and dedicated services throughout the Eastern, Midwestern and Southwestern regions of the United States. The warehousing/logistics services segment specializes in integrated distribution services, order fulfillment, and contract packaging services in Pennsylvania and Texas. The following tables present information about reported segments for the years ending December 31:
Ware- Less-than- housing/ Segment truckload Truckload Logistics Total 1998 Operating revenues $202,910 $171,366 $29,445 $403,721 Operating income $ 43,098 $ 7,113 $ 5,532 $55,743 Total assets $136,983 $157,563 $39,287 $333,833 Depreciation and amortization $ 9,952 $ 18,435 $ 2,198 $30,585 Purchase of pro- perty and equipment $ 14,590 $ 28,295 $11,355 $54,240 1997 Operating revenues $203,299 $153,712 $26,154 $383,165 Operating income $ 44,213 $ 2,066 $ 4,887 $51,166 Total assets $123,840 $155,886 $29,053 $308,779 Depreciation and amortization $ 9,450 $ 17,661 $ 2,022 $29,133 Purchase of pro- perty and equipment $ 13,111 $ 24,971 $ 1,678 $39,760 1996 Operating revenues $181,871 $151,926 $22,538 $356,335 Operating income $ 32,656 $ 3,631 $ 3,921 $40,208 Depreciation and amortization $ 8,724 $ 17,045 $ 1,987 $27,756 Purchase of pro- perty and equipment $ 11,324 $ 17,675 $ 2,280 $31,279
A reconciliation of total segment operating revenue to total consolidated operating revenue, total segment net income to consolidated net income, and total segment assets to total consolidated assets for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 Total segment operating revenues $403,721 $383,165 $356,335 Consolidated operating revenues $403,721 $383,165 $356,335 Total segment operating income $ 55,743 $ 51,166 $ 40,208 Unallocated corporate operating income (loss) 454 (250) 135 Interest income 1,673 1,605 1,090 Interest expense (1,173) (1,380) (1,289) Other (855) (252) (692) Consolidated net income before taxes $ 55,842 $ 50,889 $ 39,452 Total segment assets $333,833 $308,779 Unallocated corporate assets 11,380 14,765 Elimination of intercompany balances (25,102) (6,504) Consolidated assets $320,111 $317,040
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, 1998 and 1997 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 $778, $903 and $746 in 1998, 1997 and 1996, 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 through June 30, 1998 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 $50,000. Subsequent to June 30, 1998, the Company's assumed liability has been reduced to $25 per occurrence, except Workmen's Compensation in New Jersey which is $250 per occurrence. 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, 1998 and 1997, the outstanding balance of the letters of credit was $4,000 and $7,553, respectively, on a total commitment of $12,000. Effective February 28, 1999, the Company transferred its accrued liabilities of $10,975 for claims years ended June 30, 1998, 1997, and 1996 to an outside insurance carrier for approximately $11,000. report of independent accountants To the Board of Directors Arnold Industries, Inc. Lebanon, Pennsylvania In our opinion, the accompanying consolidated balance sheets at December 31, 1998 and 1997 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998, present fairly, in all material respects, the consolidated financial position of Arnold Industries, Inc. and subsidiaries (the Company) and the consolidated results of its operations and its cash flows, in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP One South Market Square Harrisburg, Pennsylvania March 5, 1999 quarterly performance (dollars in thousands, except per share data)
Operating Operating Net Revenues Income Income QUARTER 1998 1997 1998 1997 1998 1997 First $ 96,002 $ 90,539 $11,532 $11,548 $ 7,226 $7,321 Second 102,264 97,341 14,155 15,051 8,888 9,510 Third 102,228 99,175 14,945 14,287 9,377 9,048 Fourth 103,227 96,110 15,565 10,030 9,625 6,331 $403,721 $383,165 $56,197 $50,916 $35,116 $32,210
Net Income Net Income Dividends Per Share-Basic Per Share-Diluted Per Share QUARTER 1998 1997 1998 1997 1998 1997 First $ .28 $ .27 $ .28 $ .27 $ .11 $.11 Second .34 .37 .34 .36 .11 .11 Third .37 .35 .36 .35 .11 .11 Fourth .38 .24 .38 .24 .11 .11 $1.37 $1.23 $1.36 $1.22 $ .44 $.44
price range common stock
HIGH LOW HIGH LOW QUARTER 1998 1997 First 18-1/8 15-1/4 16 13 Second 17-3/4 14-3/8 18-3/8 13-7/8 Third 15-1/2 11-5/8 24-1/2 17 Fourth 16-11/16 12 25-5/8 16-3/4
management's discussion and analysis of financial condition and results of operations Results of Operations Arnold Industries' 1998 operating revenues are from two operating subsidiaries: New Penn Motor Express, Inc. ("New Penn") Arnold Transportation Services, Inc. ("ATS") New Penn is a less-than-truckload (LTL) transportation company. ATS is a truckload (TL) carrier which provides regional and interregional transportation services. In addition to LTL and TL transportation services, Arnold Industries provides specialty warehousing operations and related transportation services under the name of "Arnold Logistics," a division of ATS. Prior to 1998, ATS's truckload operation was operated by three separate subsidiaries: SilverEagle Transport, Inc., D.W. Freight, Inc. and Lebarnold, Inc. At the end of 1997, these three companies were merged into one company. The results of operations are set forth below for the three separate segments. Operating Revenues (dollars in millions)
Total LTL Amount % Increase Amount % Increase 1998 $403.7 5 $202.9 - 1997 383.2 8 203.3 12 1996 356.3 8 181.9 9
Warehousing/ Truckload Related Trucking Amount % Increase Amount % Increase 1998 $171.4 12 $29.4 12 1997 153.7 1 26.2 16 1996 151.9 5 22.5 21
Operating Income
1998 1997 1996 Amount % Amount % Amount % New Penn $43.1 77 $44.2 86 $32.7 81 ATS 7.1 13 2.1 4 3.6 9 Arnold Logistics 5.5 10 4.9 10 3.9 10 TOTAL $55.7 100% $51.2 100% $40.2 100%
The percentage of revenue for the last three years is set forth below:
1998 1997 1996 Amount % Amount % Amount % New Penn $202.9 50 $203.3 53 $181.9 51 ATS 171.4 43 153.7 40 151.9 43 Arnold Logistics 29.4 7 26.2 7 22.5 6 TOTAL $403.7 100% $383.2 100% $356.3 100%
The revenue at New Penn was basically flat for the year 1998 compared to 1997, even though tonnage decreased 3% to 1,050,685 from 1,081,334. This compares to revenue increases of 12% in 1997 and 9% in 1996. ATS revenues increased by 12% in 1998, compared to 1% in 1997 and 5% in 1996. ATS revenues increased as additional new business was secured. The revenue had been affected negatively in 1997 by a number of major customers who rebid their contracts. Arnold Logistics revenue increased by 12% for 1998 as a result of additional value added services being provided to their customers. This compares to revenue increases of 16% and 21% for 1997 and 1996, respectively. The following tables set forth the percentage of operating expenses to operating revenue for New Penn, ATS and Arnold Logistics.
NEW PENN ATS 1998 1997 1996 1998 1997 1996 Operating Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating Expenses Salaries, wages and related expenses 58.2 57.3 60.0 33.3 37.4 36.4 Supplies and expenses 8.7 9.2 10.3 18.9 25.3 24.1 Operating taxes and licenses 2.8 2.9 3.2 2.0 1.9 1.9 Insurance 1.5 1.5 1.8 3.5 2.7 4.2 Communication and utilities 1.1 1.1 1.2 1.5 1.4 1.2 Purchased transportation 1.2 1.1 1.0 25.7 17.9 17.3 Rental of buildings, revenue equipment, etc., net (0.4) (0.2) (0.3) 0.3 0.3 0.3 Depreciation and amortization 4.9 4.7 4.8 10.8 11.5 11.2 (Gain) on sale of equipment (0.3) (0.1) (0.2) (0.9) (0.1) (0.1) Miscellaneous 1.1 0.8 0.2 0.7 .4 1.1 Total Operating Expenses 78.8 78.3 82.0 95.8 98.7 97.6 Operating Income 21.2% 21.7% 18.0% 4.2% 1.3% 2.4%
ARNOLD LOGISTICS 1998 1997 1996 Operating Revenues 100.0% 100.0% 100.0% Operating expenses - salaries, wages and related expenses 52.3 51.6 45.8 Other operating expenses 17.2 18.0 22.5 Depreciation and amortization 7.5 7.7 8.8 Miscellaneous 4.3 4.0 5.6 Total Operating Expenses 81.3 81.3 82.7 Operating Income 18.7% 18.7% 17.3%
The operating expenses of New Penn decreased to 78.8% for 1998 and 78.3% for 1997, compared to 82.0% for 1996. Salaries, wages and related expenses increased to 58.2% for 1998 from 57.3% in 1997. This compared to a decrease for 1997 to 57.3% from 60.0% in 1996. Supplies and expenses continue to decrease as a result of a continuous decline in fuel prices. The fuel surcharge which was implemented in September 1996, was discontinued in March, 1998. Insurance expense was 1.5% for both 1998 and 1997 compared to 1.8% in 1996. The year 1996 was affected by the Company's insurance carrier increasing the reserve for a prior year's loss. The total operating expenses of ATS decreased to 95.8% for 1998. This compared to 98.7% and 97.6% for 1997 and 1996, respectively. The years 1998, 1997 and 1996 were affected negatively by the merger of the three truckload companies. Beginning in the second half of 1998, ATS began to see a turnaround of their operation with increased revenue, higher revenue per mile, improved asset utilization and a reduction in empty miles. The salaries, wages and related expenses of ATS decreased to 33.3% in 1998 compared to 37.4% in 1997 and 36.4% in 1996. This substantial decrease was due to the use of a greater number of owner-operators in 1998 compared to the prior two years. Likewise, this use of increased owner-operators reduced supplies and expenses to 18.9% in 1998 compared to 25.3% for 1997 and 24.1% for 1996. In addition, the continuous decline in fuel prices also reduced operating supplies and expenses for 1998. Insurance expense increased in 1998 to 3.5% which compared to 2.7% for 1997 due to increased claims. This compared to 4.2% for the year 1996. Purchased transportation expense increased to 25.7% for 1998 compared to 17.9% in 1997 and 17.3% in 1996, due to the substantial number of additional owner-operators. The Arnold Logistics operating expenses were 81.3% for 1998 compared to 81.3% and 82.7% for 1997 and 1996, respectively. The salaries, wages and related expenses were 52.3%, 51.6% and 45.8% for 1998, 1997 and 1996, respectively. The increase in these expenses is primarily due to the revenue growth in the areas of order fulfillment and contract packaging which are labor intensive requiring additional employees. Arnold Industries' operating income for 1998 increased $5.3 million or 10% over 1997 compared to an increase of $10.6 million, or 26% over 1996. New Penn's operating income decreased $1.1 million compared to 1997, whereas 1997 operating income was up $11.5 million compared to 1996. New Penn signed a five-year contract with the Teamsters' Union effective April 1, 1998. This contract expires March 31, 2003. During the negotiations in the first quarter of 1998, a number of customers diverted a portion of their freight to non-union companies which had a negative effect on New Penn's revenues for the entire year 1998. The operating income of ATS for 1998 increased $5.0 million, or 238% compared to 1997. This compares to a decrease of $1.5 million or 42% for 1997 compared to 1996. Arnold Logistics' operating income for 1998 increased by $.6 million, or 12% compared to 1997. This compares to an increase of $1.0 million or 26% for 1997 compared to 1996. Other net non-operating expenses consist primarily of interest income, other investment income and interest expense. Interest income increased $.1 million for 1998 over 1997. Interest income increased $.5 million in 1997 over 1996 due to additional investment securities. Interest expense for 1998 was $1.2 million compared to $1.4 million and $1.3 million for 1997 and 1996, respectively. This reduction was due to lower interest rates in 1998. The effective income tax rates for 1998, 1997 and 1996 were 37.1%, 36.7% and 35.6%, respectively. Net income for 1998 increased to $35.1 million compared to $32.2 million for 1997 and $25.4 million for 1996. Basic net income per share in 1998 was $1.37 compared to $1.23 in 1997 and $.95 in 1996. Diluted net income per share was $1.36 in 1998 compared to $1.22 in 1997 and $.94 in 1996. Capital Expenditures In 1997, the Company authorized the purchase of up to one million shares of common stock of which the Company purchased 817,600 shares at a total cost of $13.1 million in 1997. In 1998, the balance of 182,400 shares together with an additional 1,000,000 shares which was authorized for purchase in 1998, was completed at a total cost of $15.0 million. The Company authorized on December 28, 1998 the purchase of an additional one million shares. The total capital expenditures for real estate and equipment (net of dispositions) amounted to $45.6 million for 1998, compared to $34.1 million for 1997 and $26.4 million for 1996. The Company is projecting the purchase of real estate and equipment in 1999 of approximately $51.0 million. Liquidity and Capital Resources Cash, cash equivalents, and marketable securities totaled $24 million at the end of 1998, compared to $36 million and $42 million at December 31, 1997 and 1996, respectively. The decrease for 1998 and 1997 was attributable to increased capital expenditures and the substantial purchase of treasury stock. Working capital amounted to $35 million, $46 million and $40 million at the end of 1998, 1997 and 1996, respectively. Net cash provided by operating activities was $61 million in 1998, $55 million in 1997 and $67 million in 1996. 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 1998 and 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 would result in increased costs in the event inflation began to increase. 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 In September 1998, New Penn announced a general rate increase of 5.4%. However, most customer rates are subject to negotiated contracts and agreements. New Penn's revenues were up approximately 2% for the fourth quarter of 1998. However, New Penn's first quarter 1999 revenues are running slightly behind the revenues of the first quarter of 1998. The revenues at ATS were up approximately 13% for the fourth quarter of 1998. Because of the termination of a close working relationship of ATS with Raven Transport Company, Inc., a minority owned brokerage/ carrier based in Jacksonville, the revenues may be affected negatively in the first and second quarters of 1999. The truckload company merger of the three divisions at the end of 1997 should continue to have a favorable impact on operations in the year 1999. Arnold Logistics completed a 562,000 S.F. warehouse in early 1999, which should be completely full by mid-year 1999. This will increase substantially the revenue for Arnold Logistics in 1999. Arnold Logistics is expanding its order fulfillment services to allow Internet and catalog marketers to completely outsource their order processing, inventory management and small package shipping. The three operating companies are continuing to improve efficiencies through refinement of information technology, which will continue to reduce operating costs and provide better service to customers. Management is continuing to evaluate the complete transportation market, which includes LTL, TL and logistics operations. Year 2000 Compliance The Company continues its on-going project to assure Year 2000 ("Y2K") readiness. Y2K readiness involves assuring that all essential functions of the Company, including activities that are not directly computer dependent, remain operative upon arrival of the Year 2000. The Company's project to correct and/or replace internally produced information technology ("IT") software is now 100% complete. All of the Company's major business units, including New Penn Motor Express, Arnold Transportation Services and Arnold Logistics, have corrected and successfully tested their IT programs. The cost of the Company's internal IT project, all of which cost has been incurred and paid for from operating revenues of the Company, was $1,650,000. No other projects or capital expenditures were deferred or canceled due to diversion of resources to Y2K compliance. The Company also continues to monitor and assess the progress of third parties upon whom the Company relies for externally produced software, including non-IT software, communications software, etc., as well as suppliers of basic materials, such as fuel, parts, tires, etc. In some cases, the Company is incurring expense to correct and/or replace software acquired from third parties. The Company monitors the progress of significant customers upon whose continued business the Company relies for revenues. These monitoring efforts have revealed areas of concern with respect to Y2K readiness by the Company's vendors, suppliers and customers. To the extent reasonably practicable, the Company is taking steps to assure timely compliance or the availability of alternative software, services and supplies. The cost of maintaining and completing the external Y2K project, including correction and/or replacement costs and testing, is anticipated to be $150,000. The additional cost will be funded entirely from operating revenues of the Company. The Company faces the risk of disruptions to service if significant vendors, suppliers and/or customers do not become Y2K compliant in a timely manner. Failure by vendors and suppliers to become compliant would result in the loss of systems controlling dispatch, billing and payroll, among other essential functions of the Company. The Company does not believe that these risks will come to fruition because of the efforts to date to become Y2K compliant. The Company is developing contingency plans to acquire electricity, fuel and essential parts from other sources and vendors in the event of a Y2K malfunction by a prime supplier. Contingency plans include advance purchase and retention of higher levels of inventory for such items as tires and spare parts. As necessary, electricity will be available at most of the Company's facilities, at least temporarily, through use of generators that the Company routinely maintains for power outages. The Company has no contingency plans for loss of revenue from shippers who do not become Y2K compliant. eleven year summary (dollars in thousands, except per share data)
Fiscal Year 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Income Operating revenues 403,721 383,165 356,335 330,136 302,390 272,697 233,620 196,202 188,830 167,589 148,196 Operating expenses Depreciation and amortization 30,585 29,133 27,756 25,348 21,120 17,811 14,222 11,500 10,527 11,021 9,906 Operating taxes and licenses 9,793 9,342 9,381 9,297 8,924 7,908 6,780 5,887 4,836 4,537 4,147 Other 307,146 293,774 278,856 246,854 222,824 200,106 172,304 142,080 137,027 123,121 109,397 Operating income 56,197 50,916 40,342 48,637 49,522 46,872 40,314 36,735 36,440 28,910 24,746 Non-operating income (expense) Interest income (expense), net 500 225 (200) (711) 35 355 246 195 (1,123) (1,180) (923) Other (855) (252) (690) (25) (429) 1,326 (71) 10 (449) 884 4,142 Income before income taxes, extraordinary loss, and cumulative effect of change in accounting principle 55,842 50,889 39,452 47,901 49,128 48,553 40,489 36,940 34,868 28,614 27,965 Income taxes 20,726 18,679 14,043 17,400 18,384 18,651 14,660 13,512 12,452 10,939 10,543 Income before extraordinary loss and cumulative effect of change in accounting principle 35,116 32,210 25,409 30,501 30,744 29,902 25,829 23,428 22,416 17,675 17,422 Extraordinary loss, net of tax benefit - - - - 389 - - - - - - Cumulative effect of change in accounting for income taxes - - - - - - - - - 1,322 - Net income 35,116 32,210 25,409 30,501 30,355 29,902 25,829 23,428 22,416 18,997 17,422 Per Share Data Income before extraordinary loss and cumulative effect of change in accounting principle - Basic 1.37 1.23 .95 1.15 1.16 1.13 .97 .88 .84 .67 .67 - Diluted 1.36 1.22 .94 1.13 1.14 1.11 .96 .88 .84 .67 .67 Net income - Basic 1.37 1.23 .95 1.15 1.14 1.13 .97 .88 .84 .71 .67 - Diluted 1.36 1.22 .94 1.13 1.12 1.11 .96 .88 .84 .72 .67 Cash dividends declared .44 .44 .44 .44 .41 .35 .32 .29 .25 .22 .11 Book value 9.12 8.38 7.84 7.33 6.63 5.90 5.12 4.46 3.86 3.31 2.76 Financial Position - Year End Cash, temporary investments and marketable securities 24,282 36,291 41,621 14,273 41,643 38,285 45,186 57,558 37,184 26,826 25,318 Working capital 35,131 45,921 39,909 16,219 24,839 24,093 29,856 55,664 30,877 24,049 23,575 Property and equipment-net 220,699 205,562 199,614 199,822 169,603 144,148 110,674 88,250 91,393 83,540 67,346 Total assets 320,111 317,040 303,112 276,877 260,279 228,361 197,203 170,668 159,973 136,313 116,197 Long-term debt 1,310 2,383 3,874 5,049 - - 476 17,603 19,479 19,749 14,812 Shareholders' equity 226,400 217,253 209,147 195,367 176,458 156,867 136,015 118,502 102,362 87,681 72,589 Other Data Percentage return on average stockholders' equity 15.8 15.1 12.6 16.4 18.2 20.4 20.3 21.2 23.6 23.7 27.2 Net cash provided by operating activities 60,880 54,602 67,000 55,075 60,524 51,299 34,518 35,898 36,639 29,471 25,195 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 Adjusted to give retroactive effect to the two-for-one stock split in 1993, the two-for-one stock split in 1991 and the three-for-two stock split in 1988 Excludes restricted cash prior to 1992 Certain liabilities with respect to claims were reclassified as long-term beginning in 1991 Write-off of the unamortized balance of intrastate operating rights 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, Allen Scott Professor of & Rahal, LLP Leadership Studies, Harrisburg, PA Rocky Mountain College, Billings, MT Kenneth F. Leedy Ronald E. Walborn, CPA Carlton E. Hughes Director CFO, Treasurer and Director Director President - New Penn President - Walborn Shambach Chairman-Stewart-Amos Motor Express, Inc. Associates Steel, Inc. Harrisburg, PA Harrisburg, PA shareholder information Counsel Keefer, Wood, Allen & Rahal, LLP 210 Walnut Street Harrisburg, PA 17101 Auditors PricewaterhouseCoopers LLP 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 1,535 record-holders of the Company's common stock as of March 1, 1999. The number of beneficial owners is considerably greater. Annual Meeting of Shareholders The Arnold Industries 1999 Annual Meeting of Shareholders will be held at 10:00 AM, May 5, 1999 at the Lebanon Country Club, 3375 West Oak Street, Lebanon, Pennsylvania. Investor Information Shareholders, 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 This information is also available on-line through the company's web site at: www.aind.com Copies of the Company's Form 10-K will be supplied to shareholders upon request without charge. Dividend Reinvestment/Cash Purchase Plan This plan enables you, as a shareholder, 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 shareholders 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 shareholder 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, Inc. 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, Inc. 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 (4) other risk factors listed from time to time in Arnold Industries, Inc. SEC reports. Arnold Industries, Inc. does not intend to update this information and disclaims any legal liability to the contrary. (Inside Back Cover) 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 Cheryl M. Wells, VP, Communications ARNOLD TRANSPORTATION SERVICES, INC. Brian F. Abel, VP, Planning & Customer Service Kurt E. Antkiewicz, VP, Sales & Marketing John R. Blessinger, VP, Linehaul Operations Michael J. Gregerson, VP, Safety/Fleets Kurt E. Morgan, VP, Terminals David A. Sempeles, VP, Finance Michael S. Walters, President and CEO NEW PENN MOTOR EXPRESS, INC. Morris C. Galante, VP, Loss Prevention Steven D. Gast, VP, Corporate Planning Steven J. Ginter, VP, Marketing Charles J. Kachel, VP, National Accounts Michael J. LaPierre, VP, Sales, Northern Division 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 LOGISTICS Douglas B. Enck, Vice President/General Manager John R. Miller, Director, Marketing Lawrence W. Pechart, Jr., Director, Fulfillment Operations Jeffrey J. Reuscher, Director, Food Group Operations (Back Cover) LOGO Arnold Industries, Inc. P.O. Box 210 Lebanon, PA 17042 (717) 273-9058 www.aind.com copyright 1999 Arnold Industries, Inc. APPENDIX TO ARNOLD INDUSTRIES, INC. 1998 ANNUAL REPORT DESCRIBING GRAPHIC AND IMAGE MATERIAL Front cover - Picture of New Penn tractor and trailer on an interstate highway. Picture of Arnold Transportation Services tractor and trailer on an interstate highway. Picture of warehouse employees performing fulfillment duties. Time lapse photograph of nighttime highway scene. Inside front cover - Small time lapse photograph of nighttime highway scene. Pie graph representing Operating Revenues (in millions) for Regional LTL ($203); Truckload ($171); Warehousing/Logistics ($30). Small photograph of Company headquarters building (exterior view) located in Lebanon, Pennsylvania. Page 1 - President's Letter to Stockholders includes a picture of E.H. Arnold, Company President. Bar graph representing Revenue (in millions) for years 1989 ($168); 1990 ($189); 1991 ($196); 1992 ($234); 1993 ($273); 1994 ($302); 1995 ($330); 1996 ($356); 1997 ($383); and 1998 ($404). Pages 2 and 3 - Description of New Penn includes the following material: New Penn logo; Bar graph representing the number of full-time New Penn employees for year 1996 (1,410); 1997 (1,431) and 1998 (1,462); Bar graph representing the number of tractors and trucks owned by New Penn in 1996 (660); 1997 (727) and 1998 (728); Bar graph representing the number of trailers owned by New Penn in 1996 (1,365); 1997 (1,447) and 1998 (1,469); Bar graph representing the number of shipments (in thousands) transported by New Penn in 1996 (1,757); 1997 (1,932) and 1998 (1,920); Bar graph representing the weight of freight (in millions of pounds) transported by New Penn in 1996 (2,017); 1997 (2,163) and 1998 (2,101); Bar graph representing New Penn revenue (in millions) for years 1994 ($159.6); 1995 ($167.1); 1996 ($181.9); 1997 ($203.3) and 1998 ($202.9); Bar graph representing New Penn operating income (in millions) for years 1994 ($32.9); 1995 ($33.6); 1996 ($32.7); 1997 ($44.2) and 1998 ($43.1); Picture of New Penn tractor and trailer at loading dock; Picture of New Penn driver conferring with a customer in front of a New Penn tractor in a dock area; 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, Interregional service and International service areas; Pages 4 and 5 - Description of Arnold Transportation Services includes the following material: Arnold Transportation Services logo; Bar graph representing the number of employees of Arnold Transportation for years 1996 (1,410); 1997 (1,431) and 1998 (1,381); Bar graph representing the number of owner-operators of Arnold Transportation for years 1996 (298); 1997 (371) and 1998 (599); Bar graph representing the number of tractors owned by Arnold Transportation in 1996 (1,075); 1997 (1,012) and 1998 (894); Bar graph representing the number of trailers owned by Arnold Transportation in 1996 (4,188); 1997 (4,355) and 1998 (4,172); Bar graph representing revenue of Arnold Transportation Services (in millions) for years 1994 ($126.3); 1995 ($144.5); 1996 ($151.9); 1997 ($153.7) and 1998 ($171.4); Bar graph representing operating income of Arnold Transportation Services (in millions) for years 1994 ($12.9); 1995 ($11.6); 1996 ($3.6); 1997 ($2.1) and 1998 ($7.1); Picture of Arnold Transportation tractor and trailer on rural interstate highway; Panoramic picture of Arnold Transportation tractor and trailer on interstate highway; Map of Eastern and Middle United States with various states shaded to indicate Arnold Transportation's service areas; Page 6 - Description of Arnold Logistics includes the following materials: Arnold Logistics logo; Bar graph representing revenue of Arnold Logistics (in millions) for years 1994 ($16.5); 1995 ($18.5); 1996 ($22.5); 1997 ($26.2) and 1998 ($29.4); Bar graph representing operating income of Arnold Logistics (in millions) for years 1994 ($3.5); 1995 ($3.3); 1996 ($3.9); 1997 ($4.9) and 1998 ($5.5); Picture of warehouse employees performing fulfillment duties. Picture of custom-packaged boxes with bar code equipment in an employee's hand. Page 7 - Consolidated Five-Year Statistical Summary: the information on this page of the Annual Report is presented in bar-graph format. Page 8 - Time lapse photograph of nighttime highway scene and Table of Contents for Financial Statements. Inside back cover - Time lapse photograph of nighttime highway scene and listing of Company executives. Back cover - Logo of Arnold Industries, Inc. and Company address, telephone number and web site.
EX-21 3 On December 31, 1998, 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 Consent of Independent Accountants We consent to the incorporation by reference in the Registration Statement of Arnold Industries, Inc. on Form S-8 (No. 33-41454), the Registration Statement on Form S-8 (No. 33-61005) and the Registration Statement on Form S-4 (No. 33-64923) of our reports dated March 5, 1999, on our audits of the consolidated financial statements and financial statement schedule of Arnold Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996, which reports are included or incorporated by reference in this Annual Report on Form 10-K. 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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 19,432,802 4,848,974 40,739,084 1,184,147 0 79,742,788 370,157,592 149,458,462 320,110,711 44,611,953 0 0 0 29,942,628 196,456,884 320,110,711 0 403,720,595 0 347,524,055 0 536,367 1,173,356 55,841,376 20,725,528 35,115,848 0 0 0 35,115,848 1.37 1.36
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