SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 0-10894
ARNOLD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2200465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
625 South Fifth Avenue, Lebanon, Pennsylvania 17042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 274-2521
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, 1.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 27, 1998, reference to the immediately preceding
closing sale price of such stock (3/26/98), was $433,774,107.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 27, 1998
Common Stock 25,993,954
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Stockholders for the year ended
December 31, 1997, and Registrant's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 6, 1998, are incorporated into Parts
II and III, respectively, as set forth herein.
The total number of pages included in this report, including the cover
page, is 47.
The exhibit index is located on sequentially numbered page 17.
PART I
Item 1. BUSINESS
Arnold Industries, Inc. (hereinafter sometimes referred to as "Arnold
Industries" or the "Company") was incorporated on February 1, 1982, under the
laws of the Commonwealth of Pennsylvania at the direction of the Board of
Directors of New Penn Motor Express, Inc. to become a holding company and to
effect a reorganization pursuant to which, through requisite stockholder
approval, New Penn Motor Express, Inc. became a wholly owned subsidiary of
Arnold Industries as of March 31, 1982. The Company is engaged in the
trucking and warehousing businesses.
The Company's business activities are currently conducted by two (2)
operating subsidiaries and a non-operating, investment management subsidiary.
New Penn Motor Express, Inc. ("New Penn") is a less-than-truckload ("LTL")
transportation company. Arnold Transportation Services, Inc. ("Arnold
Transportation") provides truckload ("TL") service and, under the name Arnold
Logistics, warehousing and warehouse-related trucking service. On December
31, 1997, two truckload carriers previously acquired by the Company, Silver-
Eagle Transport, Inc. ("SilverEagle ") and D.W. Freight, Inc. ("DW"), were
merged with and into Arnold Transportation. Prior to the merger, operational
integration of the truckload carriers had already taken place. Maris, Inc.
("Maris") is a Delaware investment company active in the management of assets
generated by the operating subsidiaries.
In 1997, New Penn, the Company's LTL carrier, and Maris, contributed
approximately fifty-three percent (53%) of the Company's Operating Revenue.
The Company's combined TL carrier operations contributed forty percent (40%),
and Arnold Logistics, its warehousing and related trucking operations,
contributed approximately seven percent (7%).
NEW PENN MOTOR EXPRESS, INC.
New Penn maintains general offices in Lebanon, Pennsylvania, and
transports commodities by motor vehicle on a less-than-truckload basis,
operating primarily in interstate commerce in New England and the Middle
Atlantic states. The southeastern United States, Indiana, Ohio and Quebec and
Ontario, Canada, are serviced through correspondent agreements with certain
other high-service carriers in each area. Certain areas in Canada, including
Montreal, are now serviced directly by New Penn. Puerto Rico is serviced by
New Penn land service in conjunction with correspondent ocean service.
Commodities transported include paper products, food products, textiles,
building products, metal products, pharmaceuticals, office equipment and
supplies, and wearing apparel.
New Penn operates from twenty-two (22) terminals at which it receives,
consolidates and distributes freight. It also utilizes a correspondent's
terminal in Puerto Rico.
Rates and Regulations
In common with other interstate motor carriers, New Penn is subject to
limited Federal economic regulation of its operations, including the
territories it serves and the commodities it carries.
The ICC Termination Act of 1995, effective January 1, 1997, abolished the
Interstate Commerce Commission ("ICC") and the traditional economic regulatory
scheme administered by that agency, and replaced it with significantly
lessened economic regulation administered by the Federal Highway
Administration ("FHWA").
To the extent rates and charges assessed by New Penn for interstate
transportation are published on behalf of New Penn by regional tariff bureaus,
such collectively published rates and charges are exempt from the anti-trust
laws. However, price competition is now widespread, and such bureau-published
rates are of relatively little influence today.
As a result of the changes to the Federal law, neither interstate rates
nor intrastate rates are filed with any regulatory agencies of the Federal
government. Changes in rates and charges may now be effected without
regulatory approval.
The FHWA has jurisdiction over the qualification and the maximum hours of
service of drivers, insurance and the general safety of operations and motor
carrier equipment.
New Penn's operations are subject to limited regulation by the states
through which it operates.
Certificates
The authorized routes, territories and commodities to be transported for
all property carriers by motor vehicle (except carriers of exempt commodities)
are determined by operating authorities issued, in the case of interstate
operations, by FHWA (formerly by the ICC), and, in the case of intrastate
operations, by regulatory agencies of the individual states. Operating
authorities relating to the operations of New Penn have been issued to it by
the respective regulatory agencies having jurisdiction. Recent legislation
has greatly eased or in many cases eliminated the requirements for obtaining
interstate and intrastate operating authority.
Employees and Employee Relations
New Penn has approximately fourteen hundred and fifty (1,450) full-time
employees (including its officers). Most of the hourly paid employees are
covered by contracts with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen, and Helpers of America (Teamsters) effective April
1, 1994, through March 31, 1998. New Penn has agreed to accept the terms of
the recently negotiated Master Freight Agreement between the Teamsters and the
membership of Trucking Management, Inc. when ratified.
Most labor contracts in the unionized trucking industry are negotiated on
an industry-wide basis for three to five year periods and contain uniform wage
rates, fringe benefits and other working conditions applicable to all covered
motor carriers, including competitors of New Penn, subject to local
differences established in riders to the national contracts. New Penn
anticipates stable labor relations with its unionized employees during the
next five (5) years.
New Penn employs a sales staff of approximately sixty-five (65) people,
augmented by sales and related efforts of its four (4) regional managers and
twenty-two (22) terminal managers, together with various other marketing and
sales staff, to solicit new business and to handle service programs with
existing customers.
Competition
The motor carrier industry is highly competitive, particularly as a
result of deregulation of Interstate Commerce Commission operating
authorities. New Penn competes primarily with other motor common carriers,
motor contract carriers, private transportation and railroads. A very
substantial number of motor carriers operate within the same areas served by
New Penn. Some of the competing carriers are larger than New Penn in terms of
revenues, tonnage handled and net worth. Furthermore, as a result of
deregulation, even more carriers may begin to operate in interstate and
intrastate commerce in the same geographical territory in which New Penn is
currently operating.
New Penn believes the competitive position of a transportation company
depends upon rates as well as consistency and dependability of service. Price
cutting in the trucking industry has become intense. Profitability depends
upon New Penn's ability to maximize utilization of revenue equipment and to
minimize handling costs.
ARNOLD TRANSPORTATION SERVICES, INC.
Arnold Transportation changed its name from Lebarnold, Inc. on May 31,
1997. Arnold Transportation has two primary operating divisions: the TL
carrier division and the warehousing and related trucking division. The
warehousing and related trucking division operates under the trade name of
Arnold Logistics.
On December 31, 1997, two other regional truckload companies operated by
the Company were merged with and into Arnold Transportation, creating a "core
carrier." Many manufacturers in the United States are reducing the number of
regional carriers that they utilize and are concentrating their transportation
business in a smaller number of "core carriers." Carriers must be able to
transport goods across inter-regional boundaries if they are to compete for
the business of these manufacturers. By combining the operations of the
Company's three regional truckload carriers, the Company has created a core
carrier able to compete for inter-regional business. Integration of the three
carriers will have the added benefit of reducing duplicative expenses in the
areas of dispatch, record-keeping, administration, etc., with anticipated cost
reductions as a result.
Arnold Transportation's trucking division has 48-state authority to serve
the general public, although its basic business, that of truckload carriage,
is conducted east of the Mississippi and in the southwest. The main operating
location for this division is in Camp Hill, Pennsylvania, with other terminals
located in North Carolina, Georgia, Florida, Texas and Oklahoma. Arnold
Transportation also conducts operations from a customer's location in Ohio,
and a leased facility in New York. Most services are being performed in
company-owned equipment with company drivers, although in 1992 Arnold
Transportation began utilizing owner-operators to complement its fleet.
Arnold Logistics serves the assembly, distribution and warehousing needs
of its customers primarily from twelve (12) separate warehouse buildings in
four (4) operating locations with a total capacity of approximately two (2)
million square feet. These facilities are located in Camp Hill, Mountville
and Mechanicsburg, Pennsylvania, and Fort Worth, Texas. Arnold Logistics also
maintains approximately 300,000 square feet of warehouse in Wilmington, North
Carolina, presently leased to a third party.
Arnold Transportation has approximately seven hundred sixty (760)
employees (including its officers).
General
Truckload carriers no longer file tariff rates with the ICC. Arnold
Transportation's trucking operations are, in general, subject to limited
regulation and competitive factors similar to that experienced by New Penn.
Arnold Transportation is not subject to collective bargaining with its
labor force.
Item 2. PROPERTIES
Headquarters. Arnold Industries and New Penn maintain executive and
general offices at 625 South Fifth Avenue, Lebanon, Pennsylvania 17042.
Arnold Transportation maintains its principal office at 4410 Industrial Park
Road, Camp Hill, Pennsylvania 17011. Arnold Transportation operates regional
centers at 9523 Florida Mining Boulevard, Jacksonville, Florida 32257, and at
3375 High Prairie Avenue, Grand Prairie, Texas 75050. The companies own their
principal offices and regional centers.
Facilities. New Penn maintains general commodities terminal facilities
in twenty-two (22) cities situated in seven (7) states and Quebec province of
Canada. On December 31, 1997, eighteen (18) of the terminals were owned by
the Company or its subsidiaries and four (4) were leased from unrelated
parties. The terminals owned are located as follows: Southington, CT;
Elkridge, MD; Billerica, MA; South Kearny, NJ; Trenton, NJ; Albany, NY;
Newburgh, NY, Cheektowaga, NY; Maspeth (Long Island), NY; Rochester, NY; Camp
Hill, PA; Lancaster, PA; Cinnaminson, NJ; Neville Island, PA; Reading, PA;
Dunmore, PA; Milton, PA; and Cranston, RI. Leases for terminal sites in
Springfield, MA; Syracuse, NY; Altoona, PA; and Stanhope, Quebec, expire from
time to time over the next several years. Management believes the leases will
be renewed or replaced by other leases in the normal course of business. New
Penn also operates through a correspondent in Cantano, Puerto Rico.
In the mid-Atlantic, Arnold Transportation owns and operates trucking
terminals in Camp Hill, Pennsylvania, and Charlotte, North Carolina. It also
leases facilities in Selkirk, New York (near Albany), and Dayton, Ohio, which
it will renew or replace in the normal course of business. Arnold
Transportation owns and, through Arnold Logistics, operates ten (10) warehouse
buildings in three (3) locations, Camp Hill and Mechanicsburg, Pennsylvania,
and Fort Worth, Texas, totaling approximately 1,700,000 square feet. Arnold
Transportation also leases approximately 300,000 square feet of additional
warehouse space for Arnold Logistics' use in Mountville, Pennsylvania, and
25,000 square feet of warehouse space in Fort Worth, Texas. Management
believes that the leases will be renewed or replaced in the normal course of
business. In 1982, Arnold Transportation acquired, from an unrelated third
party, 90 acres near Wilmington, North Carolina, on which are located
approximately 320,000 square feet of warehouse space. This facility is
presently leased to an unrelated third party and is not operated by Arnold
Logistics.
In the southeast, Arnold Transportation maintains seven (7) terminals
and/or drop lots to support its operations. These are located in Jacksonville
and Jasper, Florida; Albany, Atlanta and Fairburn, Georgia; and Greensboro,
North Carolina. The terminals in Jacksonville, Jasper, Albany and Atlanta are
owned by Arnold Transportation; the drop lot in Fairburn, Georgia, is also
owned by the Company. The remaining facilities are leased from unrelated
third parties. These leases expire from time to time over the next several
years. Management believes these leases will be renewed or replaced in the
normal course of business.
In the southwest, Arnold Transportation maintains six (6) terminal and/or
drop-off locations in, respectively, Grand Prairie, Houston, Paris, Waco and
Dallas, Texas, and Muskogee, Oklahoma. Arnold Transportation owns its
facilities in Grand Prairie, Houston and Paris, Texas, and Muskogee,
Oklahoma. The Dallas and Waco facilities are under lease with unrelated
parties, which will expire or be renewed over the next several years.
Management believes the leases will be renewed or replaced in the normal
course of business. Arnold Transportation also owns two warehouses totaling
approximately 150,000 square feet in the Ft. Worth, Texas area, which are
managed by Arnold Logistics.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the the
Company or its subsidiaries are party or to which any of their property is
subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5. MARKET INFORMATION
There is incorporated herein by reference the information appearing under
the captions "Quarterly Performance" and "Price Range Common Stock" on page 17
of the Registrant's Annual Report to Stockholders for the year ended December
31, 1997. It is anticipated that comparable cash dividends will continue to
be paid in the future.
The number of holders of record of the Company's common stock as of March
27, 1998, was approximately 1,392. However, the Company believes there are
substantially more beneficial owners of Company stock than reflected by the
number of record holders.
The Registrant's common stock is traded in the over-the-counter market on
the NASDAQ National Market System under the symbol "AIND." Prices shown are
the actual high and low close for the periods given. The closing price of the
Company's common stock on March 26, 1998, was $16.69.
Item 6. SELECTED FINANCIAL DATA
There is incorporated herein by reference the information appearing under
the caption "Eleven-Year Financial Summary" on pages 20 and 21 of the
Registrant's Annual Report to Stockholders for the year ended December 31,
1997.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
There is incorporated herein by reference the information appearing under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 18 and 19 of the Registrant's Annual Report to
Stockholders for the year ended December 31, 1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Arnold Industries,
Inc. and its subsidiaries, included on pages 8 through 15 of the Registrant's
Annual Report to Stockholders for the year ended December 31, 1997, are
incorporated by reference herein:
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
Also, there is incorporated herein by reference the "Report of Independent
Accountants" and information appearing under the caption "Quarterly
Performance" on pages 16 and 17, respectively, of the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated herein by reference the information appearing under
the captions "Directors" and "Executive Officers" in the Registrant's
definitive proxy statement for the Annual Meeting of Stockholders on May 6,
1998.
There have been no events under the bankruptcy act, no criminal
proceedings and no judgments or injunctions during the past five (5) years
which would be material to an evaluation of any Director or Executive Officer.
Item 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information appearing under
the captions "Executive Officers", "Executive Compensation and Other
Benefits", "Performance Graph," "Report on Executive Compensation" and
"Compensation Committee Interlocks and Insider Participation" in the
Registrant's definitive proxy statement for the Annual Meeting of Stockholders
on May 6, 1998.
No other remuneration payments are proposed to be made in the future,
directly or indirectly, by or on behalf of Arnold Industries and its
subsidiaries, pursuant to any plan or arrangement, to any Director or
Executive Officer of the Company except as disclosed above.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information appearing under
the caption "Security Ownership of Directors, Officers and Certain Beneficial
Owners" in the Registrant's definitive proxy statement for the Annual Meeting
of Stockholders on May 6, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information appearing under
the caption "Certain Transactions" in the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders on May 6, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following consolidated financial statements of the registrant
and its subsidiaries, included on pages 8 to 15 in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997 and the report of
independent accountants on page 16 of such report are incorporated herein by
reference in Item 8:
Financial statements:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Accountants' Report
Selected Quarterly Financial Data - Years Ended December 31, 1997 and
1996:
Quarterly performance data, included on page 17 in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997, is incorporated
herein by reference.
(2) The following financial statement schedules for the years 1997, 1996
and 1995 are submitted herewith:
Schedule II - Valuation and qualifying accounts
and reserves
Report of Independent Accountants
All other schedules are omitted because they are not required, inapplicable or
the information is otherwise shown in the financial statements or notes
thereto.
(3) Exhibits included herein:
Exhibit 3 - Articles of Incorporation and Bylaws (Articles of Incorporation of
the Company, as amended, and Bylaws of the Company (filed as Exhibits 3.1 and
3.2 to Registrant's Form 10-K for the fiscal year ended December 31, 1989, and
incorporated herein by reference).
Exhibit 13 - 1997 Annual Report to Stockholders
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this report.
<TABLE>
<CAPTION>
ARNOLD INDUSTRIES, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1997, 1996 and 1995
Additions
Balance at Charged to Charged to
beginning costs and other Balance at
Description of period expenses accounts<FN1> Deductions<FN2> end of year
<C> <S> <S> <S> <S> <S>
Year ended December 31, 1997
Allowance for doubtful accounts $ 1,724,106 $ 821, 238 $194,215 $ 1,399,531 $ 1,340,028
Estimated liability for claims $20,140,931 $14,935,706 - $14,890,883 $20,185,754
Year ended December 31, 1996
Allowance for doubtful accounts $ 1,108,051 $ 1,232,565 $ 94,245 $ 710,755 $ 1,724,106
Estimated liability for claims $15,235,791 $17,666,656 - $12,878,516 $20,140,931
Year ended December 31, 1995
Allowance for doubtful accounts $ 895,563 $ 589,513 $ 88,797 $ 465,822 $ 1,108,051
Estimated liability for claims $15,045,879 $12,765,543 - $12,458,631 $15,352,791
<FN>
<FN1>
1 Recoveries
<FN2>
2 Accounts deemed to be uncollectible and charged to allowance for
doubtful accounts and payments made for estimated liability for
claims.
</FN>
</TABLE>
[Letterhead of Coopers & Lybrand L.L.P.]
Report of Independent Accountants
The Board of Directors
Arnold Industries, Inc.
Lebanon, Pennsylvania
Our report on the consolidated financial statements of Arnold Industries, Inc.
and Subsidiaries has been incorporated by reference in this Form 10-K from
page 16 of the 1997 Annual Report to Stockholders of Arnold Industries, Inc.
In connection with our audits of such financial statements, we have also
audited the related financial statement Schedule II included in this Form
10-K. This supplementary financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this supplementary financial statement schedule based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statement taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
February 27, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 30, 1998.
ARNOLD INDUSTRIES, INC.
By /s/ E. H. Arnold
E. H. Arnold, President
By /s/ Ronald E. Walborn
Ronald E. Walborn
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed by the following persons in their capacities as
indicated below.
Name Date
/s/ E. H. Arnold March 30, 1998
E. H. Arnold
President and Director
/s/ Kenneth F. Leedy March 30, 1998
Kenneth F. Leedy
Executive Vice President and Director
/s/ Ronald E. Walborn March 30, 1998
Ronald E. Walborn
Treasurer and Director
/s/ Heath L. Allen March 30, 1998
Heath L. Allen
Secretary and Director
INDEX TO EXHIBITS
Sequential Page No.
Exhibit 13 - 1997 Annual Report to Stockholders 18
Exhibit 21 - Subsidiaries of Registrant 44
Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P. 45
Exhibit 27 - Financial Data Schedule 46
APPENDIX TO ARNOLD INDUSTRIES, INC.
1997 ANNUAL REPORT
DESCRIBING GRAPHIC AND IMAGE MATERIAL
Front cover -
Picture of New Penn tractor and trailer on a divided highway.
Picture of Arnold Transportation Services tractor and trailer on an exit ramp
with city buildings in background.
Picture of employees at computer terminals.
Pie chart depicting allocation of revenue as stated verbally in accompanying
text.
Page 1 - President's Letter to Stockholders includes a picture of E.H. Arnold,
Company President.
Bar graph representing Operating Revenue (in millions) for years 1988 ($148);
1989 ($168); 1990 ($189); 1991 ($196); 1992 ($234); 1993 ($273); 1994 ($302);
1995 ($330); 1996 ($356) and 1997 ($383).
Pages 2 and 3 - Description of New Penn includes the following material:
Picture of New Penn tractor and trailer in urban setting;
Bar graph representing the number of full-time New Penn employees for year
1995 (1,315); 1996 (1,410) and 1997 (1,431);
Bar graph representing the number of tractors and trucks owned by New Penn in
1995 (651); 1996 (660) and 1997 (727);
Bar graph representing the number of trailers owned by New Penn in 1995
(1,315); 1996 (1,365) and 1997 (1,447);
Bar graph representing the number of shipments (in thousands) transported by
New Penn in 1995 (1,578); 1996 (1,757) and 1997 (1,932);
Bar graph representing the weight of freight (in millions of pounds)
transported by New Penn in 1995 (1,841); 1996 (2,017) and 1997 (2,163);
Map of Eastern and Middle United States with portions of Quebec and Ontario
Provinces and Puerto Rico shaded to indicate New Penn's Northeast regional
service, Inter-regional service and International service areas;
Bar graph representing New Penn revenue (in millions) for years 1993 ($157);
1994 ($159); 1995 ($167); 1996 ($182) and 1997 ($203);
Bar graph representing New Penn operating income (in millions) for years 1993
($35); 1994 ($33); 1995 ($34); 1996 ($33) and 1997 ($44);
New Penn logo;
Pages 4 and 5 - Description of Arnold Transportation Services includes the
following material:
Bar graph representing revenue of Arnold Transportation Services (in millions)
for years 1993 ($116); 1994 ($143); 1995 ($163); 1996 ($174) and 1997 ($180);
Bar graph representing operating income of Arnold Transportation Services (in
millions) for years 1993 ($12); 1994 ($16); 1995 ($15); 1996 ($8) and 1997
($7);
Bar graph representing the number of employees of Arnold Transportation for
years 1995 (1,760); 1996 (1,810) and 1997 (1,921);
Bar graph representing the number of owner-operators of Arnold Transportation
for years 1995 (262); 1996 (298) and 1997 (371);
Bar graph representing the number of tractors owned by New Penn in 1995 (990);
1996 (1,075) and 1997 (1,012);
Bar graph representing the number of trailers owned by Arnold Transportation
in 1995 (3,732); 1996 (4,248) and 1997 (4,415);
Picture of Arnold Transportation tractor and trailer on highway bridge;
Map of Eastern and Middle United States with various states shaded to indicate
Arnold Transportation's primary and secondary service areas;
Arnold Transportation Services logo;
Page 6 - Description of Arnold Logistics includes the following materials:
Picture of warehouse employees on a forklift and packing material on pallets;
Arnold Logistics logo;
Page 7 - Consolidated Five-Year Statistical Summary: the information on this
page of the Annual Report is presented in bar-graph format.
Page 8 - Table of Contents for Financial Statements.
(Front Cover)
ARNOLD INDUSTRIES, INC. 1997 ANNUAL REPORT
(Inside Front Cover)
CONTENTS
Letter to Stockholders
New Penn Motor Express
Arnold Transportation Services
Arnold Logistics
Consolidated Five-Year Statistical Summary
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
Quarterly Performance
Price Range Common Stock
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Eleven-Year Financial Summary
Board of Directors and Stockholder Information
Company Executives
FINANCIAL SUMMARY
(dollars in thousands except per share data)
1997 1996 Change
REVENUES $383,165 $356,335 7.5%
NET INCOME $ 32,210 $ 25,409 26.8%
NET INCOME PER SHARE-BASIC $ 1.23 $ .95 29.5%
STOCKHOLDERS' EQUITY $217,253 $209,147 3.9%
TOTAL ASSETS $317,040 $303,112 4.6%
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 15.1% 12.6% 2.5%
ARNOLD INDUSTRIES, INC.
Arnold Industries is a transportation and logistics holding company. Through
its operating units, New Penn Motor Express, Inc., Arnold Transportation
Services, Inc. and Arnold Logistics, the Company provides regional
less-than-truckload (LTL), truckload and value-added warehousing services.
1997 operating revenues totaled $383 million.
OPERATING REVENUE:
REGIONAL LTL - $203 million
TRUCKLOAD - $154 million
VALUE-ADDED WAREHOUSING - $ 26 million
NEW PENN
New Penn provides next-day LTL service in the Northeast region of the United
States. The company is widely regarded as a superior service provider and one
of the most efficiently operated carriers in the industry.
ARNOLD TRANSPORTATION SERVICES
Arnold Transportation Services was created through the merger of three
regional truckload subsidiaries and provides irregular route and dedicated
truckload services throughout the Eastern half of the United States.
ARNOLD LOGISTICS
Arnold Logistics is a division of Arnold Transportation Services and
specializes in integrated distribution services, order fulfillment and
contract packaging services. Arnold Logistics operates 2.3 million square
feet of warehousing space located primarily in Central Pennsylvania.
LETTER TO STOCKHOLDERS Arnold Industries achieved record revenues and
earnings in 1997 on the strength of outstanding performances at our
less-than-truckload (LTL) and logistics operating units. Basic earnings per
share increased 29% in 1997 compared to the prior year. Operating revenues
increased 8% to $383 million.
New Penn had an outstanding year with revenues up 12% and operating income up
34%. Operating revenues exceeded $200 million for the first time. Ken Leedy,
president of New Penn and Steve O'Kane, executive vice president, have
assembled the best team in the industry capable of continuing New Penn's
history of profitable growth. We were pleased to announce an early settlement
of the New Penn labor agreement. We believe the combination of market growth
and the low market share of New Penn will allow us to continue the growth of
New Penn without sacrificing margins. We continue to expand our infrastructure
and look for ways to serve a larger area from the Northeast.
The merger of our three regional truckload subsidiaries was completed at the
end of 1997 to create Arnold Transportation Services. The combination of the
three companies required major changes in personnel and computer systems.
These changes resulted in one-time charges that had a negative impact on
earnings. There will be additional charges in 1998 which management does not
expect to be material. At the same time, the integration repositioned the
company to take on new business in new markets that will be more profitable
long-term. Short-term, the new business resulted in an increase in empty
miles. An important area that showed improvement in 1997 was the recruitment
and retention of drivers. There has been an industry-wide shortage of
qualified drivers. Through improvements in compensation, recruiting and
retention we reduced our rate of driver turnover. Lower turnover and improved
recruiting of owner-operators throughout the service area will strongly
support future growth. Overall, the operating income at Arnold Transportation
Services declined by 8% in 1997.
There was no easy way to get from where we were, to where we needed to be in
the truckload arena. While there has been some short-term pain in the form of
reduced operating margins, the rationale for our strategy is sound. Our three
medium-sized truckload carriers were not well positioned to grow. The market
is consolidating and very small niche players and large carriers will survive.
Those in the middle will not. Our Fortune 500 clients are reducing the number
of carriers with whom they do business to a limited number of "core carriers."
Arnold Transportation Services is now positioned to be a "core carrier" for
our larger customers. While there is no quick-fix to improve our truckload
operating margins, revenues are increasing, a new organizational structure is
in place and management control systems are improving. Incremental margin
improvements have the potential to make a significant contribution to
earnings.
Arnold Industries now has a top 25 position in both the LTL and truckload
markets. Based on 1996 industry revenues, New Penn is the 22nd largest LTL
carrier and Arnold Transportation Services is the 23rd largest truckload
carrier. While our goal remains to be the best, not the biggest, we are now
positioned as a major player in the regional LTL and truckload markets
allowing us to meet the needs of our target market customers.
Arnold Logistics is a growing player in the value-added warehousing market. By
focusing on order fulfillment and contract packaging services, Doug Enck, vice
president and general manager of Arnold Logistics and his team have done an
excellent job increasing revenues and improving margins. To support future
growth, your Board of Directors has approved construction of 560,000 square
feet of new warehouse space to be built in Central Pennsylvania. Construction
is expected to be complete in late 1998. New services are now being offered in
Texas and we are investigating further geographic expansion to the Southeast.
Operating revenues at Arnold Logistics have grown 21% and 16% the past two
years. We anticipate growth will accelerate as the new facilities come on-line
in 1999.
On behalf of the Board of Directors, we say thank you to the 3,800 dedicated
employees of Arnold Industries, New Penn, Arnold Transportation and Arnold
Logistics. We also want to thank our valued customers without whom our company
has no purpose, and our shareholders whose confidence we do not take for
granted. The focus of our business has broadened over the years to include
LTL, truckload and logistic services. We have had to adapt our strategies to a
rapidly changing marketplace. However, our principles have not changed. We
remain committed to executing our strategies with discipline and consistency
to provide the best available service to our customers, and build value for our
shareholders.
E.H. Arnold
Chairman, President & CEO
March 3, 1998
NEW PENN
SCOPE OF OPERATIONS
New Penn Motor Express is a next-day regional less-than-truckload (LTL)
carrier of general commodities. The Company operates 23 terminal facilities
serving the twelve northeastern states, the Province of Quebec and the
Commonwealth of Puerto Rico. New Penn also provides services to Indiana and
Ohio, plus the southeastern United States and Ontario, Canada through
partnerships with other high-service regional carriers.
COMPETITIVE POSITION
New Penn is a superior service carrier in the Northeast market providing all
points coverage in the region. New Penn delivers high levels of speed and
reliability. Over 92% of New Penn's Northeast regional shipments are delivered
next-day. Service standards were improved from two-days to next-day on eight
additional traffic lanes during 1997. New Penn provides excellent
on-time service with 97% of shipments being delivered within the Company's
published service standards. Outstanding freight handling procedures result in
one of the lowest freight loss and damage ratios in the industry. New Penn's
cargo claim ratio was .38% in 1997 which indicates that less than 4/10ths of
one percent of revenues were paid to customers to settle cargo loss and damage
claims. During 1997, New Penn was rated among the "Best of the Best" in the
Distribution magazine "Quest for Quality Awards."
RECORD REVENUE AND OPERATING INCOME New Penn had an outstanding year in 1997
recording record revenues and operating income. Revenues totaled $203 million,
an increase of 12% compared to 1996. Operating income grew faster than
revenues in 1997 and totaled $44 million, an increase of 34% over the 1996
level. In August 1997, New Penn was recognized in Transport Topics for having
the lowest operating ratio (total expenses as a percentage of revenues) and
the best net profit margin for 1996 among the 100 largest trucking companies
in the U.S. For the year 1997, the operating ratio of New Penn improved by
over three points to 78.4%.
The excellent performance of New Penn in 1997 is attributable to several
factors including a strong economy, an improved pricing environment, superior
service quality, improved asset utilization, excellent cost identification and
control and the continued effort and dedication of New Penn employees. Above
average growth was achieved in the Canadian, Puerto Rico and Import/Export
markets. Pool distribution services also contributed to the growth experienced
in 1997 as shippers take advantage of the efficiencies and service improvements
available by combining the services of truckload carriers with New Penn's
next-day LTL service.
CAPITAL INVESTMENT New Penn invested in the areas of information technology,
equipment and facilities to increase its capacity to serve and maintain
efficiencies. As noted in the November 1997 issue of Logistics Management
magazine, "New Penn Motor Express has invested heavily in technology to
maintain its edge in a competitive Northeast LTL market." Information
technology investments allow New Penn to monitor and manage company activities
and respond quickly and accurately to customer inquiries. What is known as the
"year 2000 problem" received considerable attention during 1997. Modifications
have been completed in billing and operational systems that allow the
computer programs to properly recognize the year 2000. All systems are
scheduled to be "year 2000 compatible" by the end of 1998.
A new system for managing accounting, human resources and payroll functions is
being installed. The new system enhances information retrieval, reporting and
expense analysis. The Company's AS/400 computer system was upgraded. The
upgrade doubled data processing capacity.
The tractor and trailer fleets were expanded as indicated in the graphs below.
Investments were made in Scranton, PA and Rochester, NY to renovate and expand
terminal facilities. The Puerto Rico freight handling facility and the sales
office in S. Kearny, NJ were also renovated.
OUTLOOK New Penn continues to be the envy of the industry in terms of both
service levels provided and financial performance. The market remains
intensely competitive as low-cost carriers increase the scope of their services.
However, New Penn will continue to prosper based upon a service-oriented,
cost-conscious culture of continuous improvement, excellent operational
fundamentals, intelligent use of technology, strong management controls and
highly productive employees. The Company changed its approach to labor
negotiations in the fall of 1997 when it announced its intention to negotiate
independently for the renewal of the labor agreement. This change is believed
to be in the long-term best interests of New Penn employees and customers, as
well as Arnold Industries shareholders.
Continued growth is anticipated as the regional LTL market continues to
outpace the national market and, while New Penn is a major player in the
Northeast, its relative market share remains low. New Penn's next-day focus
positions the Company to meet the needs of shippers requiring outstanding
performance in an era of low inventories and just-in-time manufacturing.
ARNOLD TRANSPORTATION SERVICES
SCOPE OF OPERATIONS Arnold Transportation Services is a truckload and
logistic services company. The Company provides irregular route, multi-stop
and dedicated truckload services in the northeast, southeast, mid-west and
southwest sections of the United States. The Company operates from ten service
centers and provides regional and interregional service. Arnold Logistics
operates as a division of Arnold Transportation Services and is further
discussed on page 6 of this report.
COMPETITIVE POSITION The truckload operations of Arnold Transportation
Services were formed through the combination of three independently operated
regional subsidiaries of Arnold Industries. The merger officially took place
at the end of 1997. The resulting company ranks among the 25 largest truckload
carriers in the United States. Arnold Transportation Services has a
significant presence in the beverage, consumer products and retail industries.
The merger took place to position the Company to serve the regional and
interregional needs of its Fortune 500 clients. Many large companies today are
reducing the number of carriers with whom they do business by focusing their
shipping with a limited number of "core carriers." The integration of the
three regional subsidiaries positions Arnold Transportation Services to
compete for large contracts involving business within and between several
regions of the United States. While the interregional business is growing, the
current business mix continues to reflect the regional roots of the Company.
The average length-of-haul is approximately 350 miles. High service levels are
the norm with shipments generally being delivered same-day, next-day or
second-day, depending on the distance traveled and customer requirements.
A YEAR OF TRANSITION During 1997 the truckload operations made the
transition from operating as three small companies to one large company. As
expected, the process of integration necessitated significant changes in
people, operations and information systems. The operations planning and
customer service functions were consolidated in Jacksonville, FL. Truckload
revenues totaled $154 million in 1997 which was an increase of 1% compared to
1996. Combined truckload and logistics revenues at Arnold Transportation
Services totaled $180 million in 1997, a 3% increase over 1996. The costs
associated with combining the truckload operations had a negative impact on
operating income in 1997. The operating income for truckload and logistics
operations totaled $7 million in 1997, approximately an 8% decline compared to
the 1996 figure.
A YEAR OF PROGRESS Progress was made on several fronts to ensure the Company
benefits from the merger. The Company was restructured to reflect the regional
and interregional nature of the new organization. The Company is no longer
structured along geographic regions. The new structure will allow the Company
to manage the regional dedicated and irregular route activity while also
servicing the interregional market and creating a consistent corporate
culture. The sales force is now positioned to improve effectiveness by
pursuing opportunities within and between all regions. Significant
improvements were made in controlling workers compensation and auto insurance
claims with the total incurred claim cost being reduced by 47%. Improvements
were also made in the Company's safety performance with the number of
preventable accidents per million miles being reduced by 13%. Driver
recruiting and retention efforts were enhanced by centrally managing the
effort.
CAPITAL INVESTMENTS
Providing good service in the truckload arena is primarily a function of
having high quality equipment and drivers in position to provide service when
the customer calls. By the end of 1997, Arnold Transportation Services had
increased equipment capacity through additions to the fleet and additional
owner-operators. The 48' trailer fleet is being replaced with 53' trailers
which are preferred by customers. A key area of focus during 1997 was
management information systems. The merger requires that existing systems be
merged or new systems be developed that would improve effectiveness and
efficiency. Information systems were enhanced to facilitate the central
dispatch function. The sales automation system was fully implemented to
improve communication within the sales organization. A new billing system is
in development, and the Company will benefit from the new accounting, human
resources and payroll system. The installation of Qualcomm satellite tracking
units was completed on the national fleet used in interregional operations.
Satellite tracking capability is being added to selected regional operations
where the system enhances productivity or customer service.
OUTLOOK Many new customer opportunities have developed as a result of
positioning the Company to serve the regional and interregional markets. The
average length-of-haul and the revenue per truck are expected to increase. The
interregional business is less transaction-oriented in two ways: 1) there are
fewer billing transactions required to support the same amount of revenue, and
2) a higher percentage of the business is under contract rather than bid on a
day-to-day transactional basis. An increase in the percentage of interregional
business is expected to improve earnings. Overall, the market for truckload
services remains strong and the pricing environment suggests revenue
enhancements will be feasible in 1998. While some costs were incurred in 1997,
additional costs are anticipated in 1998 to fully integrate the information
and operational systems. Arnold Transportation Services is well positioned to
grow in the years ahead.
ARNOLD LOGISTICS
SCOPE OF OPERATIONS Arnold Logistics is a provider of value- added
warehousing and logistic services. This division of Arnold Transportation
Services operates over 2.3 million square feet of warehousing space.
Facilities are located in Pennsylvania, Texas and North Carolina.
Services provided include:
Distribution Services integrated warehousing, shipping and
transportation services, including
climate-controlled facilities
Fulfillment Services seamless integration of telemarketing,
credit card approval, online order entry,
warehousing, shipping and custom reports of
order entry and inventory analysis
Contract Packaging automated high-speed shrink-wrapping
and banding, collating, carton assembly,
UPC and date coding
COMPETITIVE POSITION Arnold Logistics is positioned to capitalize on several
broad business trends. There is a trend toward outsourcing ancillary
functions, including logistics and transportation since it is not considered a
core business function for many companies. The growth of mail-order business
is being addressed by Arnold Logistics through the development of order
fulfillment services. Lastly, the growth of the warehouse club retail format
has propelled the need for custom packaging. Arnold Logistics' customers
benefit by reducing capital investment in the logistics function, reducing
order-cycle times and increasing flexibility to address special projects.
Arnold Logistics has distinguished itself from competitors by offering unique
value-added services and customizing solutions to meet the unique needs of its
clients. Arnold Logistics has developed a culture that supports long-term
customer partnerships. Employees strive to develop innovative solutions that
create value for customers. Arnold Logistics serves customers in a variety of
industries including food, publications, software and consumer non-durables.
Again in 1997, Arnold Logistics received a perfect score in the American
Institute of Baking (AIB) audit for cleanliness of its food-grade facilities.
RECORD REVENUE Arnold Logistics achieved record revenue in 1997 of $26.2
million, a 16% increase compared to 1996. The growth was primarily in the
areas of order fulfillment and contract packaging. The Company continued to
expand its customer base. Contract packaging services were expanded to the
Texas facility during 1997. Focus on value-added services and modest
investments in automation, forklift trucks and the refurbishing of offices
allowed Arnold Logistics to improve its return on assets.
OUTLOOK Arnold Logistics will continue to emphasize value-added contract
packaging and order fulfillment services. These services will be further
expanded in the Dallas/Ft. Worth market and may be expanded in the
southeastern United States during 1998. Geographic expansion will allow the
company to provide services to its existing customer base in new markets. New
warehousing space of 560,000 square feet is currently under construction in
Central Pennsylvania. Additional information systems resources are also being
allocated to meet the customized data interchange and information reporting
requirements of its customers. These investments will allow Arnold Logistics
to grow as a premier provider of value-added warehousing services.
Consolidated Five-Year Statistical Summary
(dollars in thousands except per share data)
1993 1994 1995 1996 1997
Operating Revenues 272,697 302,390 330,136 356,335 383,165
Net Income 29,902 30,355 30,501 25,409 32,210
Net Income Per
Share 1.13 1.14 1.15 .95 1.23
Operating Revenues by Service
Warehousing/
Logistics 15,481 16,457 18,545 22,538 26,154
Truckload 100,694 126,300 144,534 151,926 153,712
Less-than-Truckload 156,522 159,633 167,057 181,871 203,299
FINANCIAL STATEMENTS
CONTENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
Quarterly Performance
Price Range Common Stock
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Eleven-Year Financial Summary
Board of Directors and Stockholder Information
Company Executives
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(dollars in thousands)
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ 26,505 $ 19,704
Marketable securities 9,786 21,917
Accounts receivable:
Trade (less allowance for doubtful
accounts of $1,340 and $1,724) 40,063 30,554
Officers and employees 363 95
Deferred income taxes 10,498 7,649
Prepaid expenses and supplies 4,462 3,765
Refundable income taxes 577 -
Total current assets 92,254 83,684
Property and equipment, at cost:
Land 16,970 16,435
Buildings 84,095 79,846
Revenue and service equipment 210,396 196,325
Other equipment and fixtures 31,170 27,538
Construction in progress 3,372 2,668
346,003 322,812
Accumulated depreciation 140,441 123,198
Total property and equipment 205,562 199,614
Other assets:
Goodwill, net of accumulated
amortization of $2,401 and $2,049 8,494 8,863
Investments in limited partnerships 9,616 10,145
Cash value of life insurance, net 804 530
Other 310 276
Total other assets 19,224 19,814
$317,040 $303,112
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 16,280 $ 16,222
Accounts payable, trade 10,155 9,332
Federal and state income taxes - 456
Estimated liability for claims 6,453 6,452
Salaries and wages 3,768 4,126
Accrued vacation 5,523 4,635
Accrued expenses - other 4,154 2,552
Total current liabilities 46,333 43,775
Other long-term liabilities:
Estimated liability for claims 13,733 13,689
Deferred income taxes 35,684 31,095
Notes payable 2,383 3,874
Other 1,654 1,532
Total other long-term liabilities 53,454 50,190
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $1.00; authorized
100,000,000 shares; 29,942,628 issued
in 1997 and 1996 29,942 29,942
Paid-in capital 483 209
Retained earnings 208,617 187,923
239,042 218,074
Less treasury stock, at cost - 4,020,442
and 3,279,108 shares in 1997 and 1996,
respectively (21,789) (8,927)
Total stockholders' equity 217,253 209,147
$317,040 $303,112
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(dollars in thousands, except per share data)
1997 1996 1995
Operating revenues $383,165 $356,335 $330,136
Operating expenses:
Salaries, wages and related
expenses 187,439 174,666 160,130
Supplies and expenses 59,387 57,552 50,542
Operating taxes and licenses 9,342 9,381 9,297
Insurance 7,471 9,837 6,816
Communication and utilities 5,247 4,680 4,297
Purchased transportation 29,650 28,066 22,755
Rental of buildings, revenue
equipment, etc., net 1,715 1,328 1,296
Depreciation and amortization 29,133 27,756 25,348
Miscellaneous 2,865 2,727 1,018
Total operating expenses 332,249 315,993 281,499
Operating income 50,916 40,342 48,637
Other expenses - net, including
interest income of $1,605,
$1,090 and $996 (27) (890) (736)
Income before income taxes 50,889 39,452 47,901
Income taxes 18,679 14,043 17,400
Net income $ 32,210 $ 25,409 $ 30,501
Per share amounts
Basic $ 1.23 $ 0.95 $ 1.15
Diluted $ 1.22 $ 0.94 $ 1.13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(dollars in thousands, except per share data)
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
Balance - December 31, 1994 $29,942 $ 75 $155,460 $ (9,019)
Net income - - 30,501 -
Distribution of treasury
stock due to exercise
of stock options - 78 - 49
Cash dividends paid
($.44 per share) - - (11,719) -
Balance - December 31, 1995 29,942 153 174,242 (8,970)
Net income - - 25,409 -
Distribution of treasury
stock due to exercise
of stock options - 56 - 43
Cash dividends paid
($.44 per share) - - (11,728) -
Balance - December 31, 1996 29,942 209 187,923 (8,927)
Net income - - 32,210 -
Distribution of treasury
stock due to exercise
of stock options - 274 - 203
Purchase of treasury stock - - - (13,065)
Cash dividends paid
($.44 per share) - - (11,516) -
Balance - December 31, 1997 $29,942 $483 $208,617 $(21,789)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(dollars in thousands)
1997 1996 1995
Cash flows from operating activities:
Net income $32,210 $25,409 $30,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29,636 28,269 25,546
Gain on disposal of property and equipment (588) (726) (1,452)
Equity in (earnings) losses of limited
partnerships (33) (5) 30
Provision for deferred taxes 1,740 1,860 6,750
Net (gain) loss on investments 24 176 (374)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,777) 695 (1,199)
(Increase) decrease in prepaid expenses and
supplies (698) 903 (196)
Increase (decrease) in accounts payable,
trade 823 2,016 (2,440)
Increase (decrease) in income taxes
payable (1,034) 1,874 (2,959)
Increase in estimated liability for
claims 45 4,692 322
Increase in accrued expenses 2,132 1,709 418
Other, net 122 128 128
Net cash provided by operating activities 54,602 67,000 55,075
Cash flows from investing activities:
Proceeds from sale of investment securities 19,075 3,103 11,546
Purchase of investment securities (6,967) (16,693) (1,587)
Proceeds from disposition of property
and equipment 5,649 4,830 7,602
Purchase of property and equipment (39,760) (31,279) (52,606)
Capital contributions in limited
partnerships (1,587) (1,646) (1,866)
Distributions from limited partnerships 46 22 32
Acquisitions of primary assets of
T.W. Owens & Sons, Inc. - - (11,121)
Increase in cash value of life insurance (274) - -
Other, net (34) 226 (69)
Net cash used in investing activities (23,852) (41,437) (48,069)
Cash flows from financing activities:
Proceeds from employee stock options
exercised 476 99 127
Cash dividends paid (11,516) (11,728) (11,719)
Principal payments on long-term debt 156 - (13,199)
Purchase of treasury stock (13,065) - -
Net cash used in financing activities (23,949) (11,629) (24,791)
Increase (decrease) in cash and cash
equivalents 6,801 13,934 (17,785)
Cash and cash equivalents at beginning of year 19,704 5,770 23,555
Cash and cash equivalents at end of year $26,505 $19,704 $ 5,770
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 1,373 $ 1,300 $ 1,741
Income taxes $17,971 $10,388 $13,618
Noncash investing activities in 1995 related to
the recognition of the fair value of future capital
contributions in limited partnerships of $6,951.
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business:
The Company operates in the motor carrier industry, principally in the Eastern
United States. Revenues are mainly generated proportionately from
less-than-truckload and truckload hauling.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Arnold Industries, Inc. and all of its subsidiaries. All material intercompany
transactions and balances have been eliminated.
Revenue Recognition:
In accordance with industry practice, revenues from less-than- truckload
hauling are allocated between reporting periods based on relative transit time
in each reporting period with expenses recognized as incurred, and revenues
from truckload hauling are recognized when the shipment is completed with
expenses recognized as incurred.
Cash and Cash Equivalents:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Marketable Securities:
At December 31, 1997 and 1996, marketable equity and debt securities have been
categorized as available for sale and as a result are recorded at fair value.
Realized gains and losses on the sale of securities are recognized using the
specific identification method and are included in other income in the
consolidated statements of income. Quoted market prices are used to determine
market value.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents, marketable
securities, and trade accounts receivable. The Company places its cash and
cash equivalents with high credit financial institutions, and limits the
amount of credit exposure to any one financial institution. The Company's
marketable securities consist principally of U.S. Government securities and
municipal bonds. These securities are subject to minimal risk. Concentrations
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different industries and geographies.
Property and Equipment:
The Company depreciates the cost, less estimated residual value, of revenue
equipment and other depreciable assets principally on the straight-line basis
over their estimated useful lives.
The estimated useful lives used in computing depreciation on the principal
classifications of property and equipment are as follows:
Buildings 15 - 31 years
Revenue equipment 3 - 7 years
Service equipment 3 - 6 years
Other equipment and fixtures 4 - 7 years
When buildings and equipment are retired or otherwise disposed of, the
property and accumulated depreciation accounts are relieved of the applicable
amounts and any resulting profit or loss is reflected in miscellaneous
operating expenses.
Goodwill:
The excess of the cost of investments in subsidiaries over the fair market
value of net assets acquired is shown as goodwill, which is being amortized on
a straight-line basis over a maximum period of 40 years. The Company's policy
is to record an impairment loss against the net unamortized cost in excess of
net assets of businesses acquired in the period when it is determined that the
carrying amount of the asset may not be recoverable. An evaluation is made at
each balance sheet date (quarterly) and it is based on such factors as the
occurrence of a significant event, a significant change in the environment in
which the business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the carrying amount
of the asset.
Investments in Limited Partnerships:
The Company's investments in low-income housing limited partnerships reflect
their cash investment plus the present value of required future contributions
net of amortization of any excess of cost over the estimated residual value.
Use of Estimates:
The preparation of the Company's financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The consolidated financial statements
include estimates for claims outstanding, the future recoverability of
deferred tax assets, the allowance for uncollectible accounts receivable and
residual value of several limited partnerships accounted for on a cost basis.
Actual results could differ from those estimates.
Income Taxes:
In accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (SFAS 109), deferred income taxes are accounted
for by the liability method, wherein deferred tax assets or liabilities are
calculated on the differences between the bases of assets and liabilities for
financial statement purposes versus tax purposes (temporary differences) using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Tax expense in the consolidated statements of income is equal to
the sum of taxes currently payable plus an amount necessary to adjust deferred
tax assets and liabilities to an amount equal to period-end temporary
differences at prevailing tax rates.
Treasury Stock:
Treasury stock is carried at cost, determined by the first-in, first-out
method.
Effective March 22, 1997, the Board of Directors authorized management to
repurchase up to 1,000,000 shares of common stock through open market
purchases. During 1997, the Company purchased 817,600 shares of its common
stock at an aggregate cost of approximately $13,100. Effective February 27,
1998, the Board authorized the repurchase of an additional 1,000,000 shares.
Per Share Amounts:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common
stock. SFAS 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share," by replacing the
presentation of primary earnings per share with a presentation of basic
earnings per share. It also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Restatement of all prior-period
earnings per share data is required upon adoption. The basic earnings per
share and diluted earnings per share are as follows:
1997 1996 1995
Basic and diluted
earnings per share:
Earnings $32,210 $25,409 $30,501
Basic earnings per
share, number of
share 26,172,232 26,655,125 26,635,327
Diluted earnings
per share, number
of shares 26,506,495 26,900,743 26,986,575
Basic earnings per
share $1.23 $0.95 $1.15
Diluted earnings per
share $1.22 $0.94 $1.13
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal
years beginning after December 15, 1997. This statement establishes standards
for the reporting and display of comprehensive income and its components.
Comprehensive income is defined to include all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The Company will adopt SFAS 130 and begin reporting comprehensive
income in the first quarter of 1998.
Segment Information:
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for the disclosure of segment
results. It requires that segments be determined using the "management
approach," which means the way management organizes the segments within the
enterprise for making operating decisions and assessing performance. The
Company will adopt SFAS 131 in the fourth quarter of 1998, and is still
evaluating its impact on the Company's financial statement disclosures.
2. MARKETABLE SECURITIES:
The cost and market value of investment securities at December 31, 1997 and
1996 follows:
1997 1996
Market Market
Cost Value Cost Value
U.S. treasury securities $ 99 $ 99 $ 95 $ 95
Municipal bonds 8,627 8,627 20,484 20,505
Equity securities 1,000 1,004 1,000 1,000
Accrued interest receivable 56 56 317 317
Total $9,782 $9,786 $21,896 $21,917
The net gain (loss) on marketable securities recorded during the years ended
1997, 1996 and 1995 amounted to $(24), $24 and $374, respectively.
The contractual maturities of debt securities available for sale at December
31, 1997 are as follows:
Market Value
Due within one year $8,270
Due after one year through five years 357
$8,627
3. NOTES PAYABLE:
The Company has unsecured working capital lines of credit with maximum
borrowings of $31,500 of which $14,790 was outstanding at December 31, 1997
and 1996. Borrowings under these agreements bear interest at fixed rates
quoted by the bank at the time of borrowing. The current interest rate on the
outstanding balance was 6.4%.
In connection with its investments in low income housing limited partnerships,
the Company is required as of December 31, 1997 to make additional
contributions over the next four years as follows: 1998, $1,712; 1999,
$1,209; 2000, $1,189; and 2001, $200. The additional contributions of $4,310
were discounted to $3,874 using the Company's incremental borrowing rate of
6%. Management anticipates that the cash flow from the tax credits generated
by these investments will approximate the additional contributions during this
period.
4. STOCK OPTION AND STOCK PURCHASE PLANS:
Stock Option Plan:
The Company has a 1987 and a 1997 stock option plan which provide for the
granting of options to purchase shares of the Company's stock to certain
executives, employees, consultants and directors. The 1987 stock option plan
expired on March 31, 1997 and was replaced by the 1997 stock option plan
effective April 1, 1997. No new options can be granted under the 1987 stock
option plan.
Under the 1997 stock option plan, options to acquire up to 2,000,000 shares of
the stock may be granted to executives, employees, consultants and directors
of the Company. Options under both plans carry various restrictions. Under the
plans, certain options granted to employees will be qualified incentive stock
options within the meaning of Section 422A of the Internal Revenue Code and
other options will be considered nonqualified stock options. The incentive
stock options may be granted for no less than market value at the date of
grant. A proposed amendment to the 1997 stock option plan requires that
nonqualified stock options be issued at a price not less than market value at
the date of grant. Options are exercisable starting three months from the date
of grant and expire no later than ten years after the date of grant. Also, no
employee may participate in the incentive stock option plans if immediately
after the grant he or she would own directly or indirectly more than 10% of
the stock of the Company.
Transactions and other information relating to the 1987 and 1997 stock option
plans for the three years ended December 31, 1997 are summarized as follows:
Stock Option Plans
Weighted
Average
Fair
Value of
Options
Granted
During
Shares Price Per Share the Year
Balance, outstanding -
December 31, 1994 1,104,110 $4.46 to $15.62
Options granted
Options exercised (18,730) $4.46 to $ 7.25
Options expired (28,700) $7.25 to $14.75
Balance, outstanding -
December 31, 1995 1,056,680 $ 4.46 to $15.62
Options granted 38,800 $13.63 $3.81
Options exercised (15,746) $ 4.46 to $ 7.25
Options expired (26,000) $13.63 to $14.75
Balance, outstanding -
December 31, 1996 1,053,734 $ 4.46 to $15.62
Options granted 526,500 $15.00 to $21.75 $5.09
Options exercised (76,268) $ 4.46 to $15.62
Options expired (72,600) $13.63 to $14.75
Balance, outstanding -
December 31, 1997 1,431,366 $ 4.46 to $21.75
Options exercisable -
December 31, 1997 905,631 $ 4.46 to $18.56
On June 26, 1996, stock options granted in 1994 for $18.25 per share to $18.50
per share have been repriced to $13.63 per share. All other provisions of the
1994 options granted have remained unchanged.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for options granted under the plans. Had compensation
costs for the Company's plans been determined based on the fair value at the
grant dates for awards under the plans consistent with the method of SFAS 123,
the impact on the Company's net income and earnings per share would be as
follows:
1997 1996 1995
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net
income $32,210 $30,917 $25,409 $25,281 $30,501 $30,501
Basic
earnings
per share $ 1.23 $ 1.18 $ 0.95 $ 0.95 $ 1.15 $ 1.15
Diluted
earnings
per share $ 1.22 $ 1.17 $ 0.94 $ 0.94 $ 1.13 $ 1.13
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: dividend yield
of 3.00%; expected volatility of 27.00% and 26.00%, respectively; risk-free
interest rate of 6.22% and 6.72%, respectively; and expected life of 6 years.
Stock Purchase Plan:
Effective November 15, 1992 the Company adopted a stock purchase plan which
replaced a similar plan adopted in 1975. The 1992 stock purchase plan is
available to all eligible employees. Under the plan, subscriptions of each
subscribing employee are remitted to a custodian for investment in the common
stock of the Company.
Minimum and maximum contributions under the 1992 plan are five hundred twenty
dollars and five thousand two hundred dollars for each employee in any one
year. The minimum and maximum contributions under the 1975 plan were three
hundred dollars and three thousand dollars for each employee in any one year.
At least monthly the custodian purchases the stock in the over-the- counter
market and the Company allocates all purchased shares based on average price
for all purchases and individual payroll deduction amounts.
Under the 1992 plan the Company is responsible for all costs of stock
purchases and stock sales within the plan and any administrative costs related
to issuance of stock certificates. Employees are responsible for the expense
of sale or transfer on issued stock certificates. The 1975 plan required that
employees pay all of the custodian and brokerage fees.
5. INCOME TAXES:
Consolidated income tax expense consists of the following:
1997 1996 1995
Currently payable:
Federal $13,803 $10,334 $ 8,960
State 3,136 1,849 1,690
16,939 12,183 10,650
Deferred:
Federal 1,272 1,517 5,626
State 468 343 1,124
1,740 1,860 6,750
Total income tax
expense $18,679 $14,043 $17,400
The effective income tax rates of 36.7% in 1997, 35.6% in 1996 and 36.3% in
1995 differ from the federal statutory rates for the following reasons:
1997 1996 1995
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 4.6 3.6 3.8
Tax-free investment income
and other (2.9) (3.0) (2.5)
36.7% 35.6% 36.3%
Deferred tax liabilities (assets) are comprised of the following at December
31:
1997 1996
Property and equipment, principally due
to differences in depreciation $35,183 $33,293
Limited partnership investments, principally
due to differences in tax basis 1,465 1,350
Other 329 294
Gross deferred tax liabilities 36,977 34,937
Estimated liability for claims, principally
due to differences in timing of
recognition of expense (7,424) (7,828)
Vacation liability, principally due to
differences in timing of recognition
of expense (1,925) (1,519)
Allowance for bad debts, principally due
to differences in timing of recognition
of expense (531) (673)
Deferred compensation, principally due to
differences in timing of recognition of
expense (794) (672)
Other (1,117) (799)
Gross deferred tax assets (11,791) (11,491)
$25,186 $23,446
6. PROFIT SHARING PLANS:
The Company has trusteed profit sharing plans for all employees meeting
certain eligibility tests. The plans may be amended at any time at the
discretion of the Board of Directors. Approximate charges to income for
contributions to the plans amounted to $2,031, $1,721 and $1,662 for 1997,
1996 and 1995, respectively.
7. PENSION PLANS:
Charges to income for pension expense for 1997, 1996, and 1995 approximate
$9,449, $7,919 and $6,599, respectively, representing payments to
multiemployer pension plans under the provisions of various labor contracts.
Under the Multiemployer Pension Plan Amendments Act of 1980 (the Act), an
employer withdrawing from a multiemployer pension plan is liable for a portion
of the unfunded vested benefit obligations of such plan. The Act treats an
employer as having withdrawn when the employer either permanently ceases to
have an obligation to contribute to the plan or permanently ceases all covered
operations under the plan. The Company presently has no plans to withdraw from
a multiemployer pension plan.
The Company also offers a supplemental defined benefit pension plan for
certain key officers and employees with payments to begin five years following
retirement. Death and disability benefits are also provided. The amount of
annual pension benefit is determined by the Board of Directors. The charge to
income for this plan was $146, $149 and $140 for 1997, 1996, and 1995,
respectively. The following table sets forth the supplemental plan's funded
status and amounts recognized in the Company's consolidated balance sheets at
December 31, 1997 and 1996:
1997 1996
Actuarial present value of benefit obligations:
Vested benefit obligation $ 872 $ 601
Accumulated benefit obligation $1,637 $1,480
Projected benefit obligation for service
rendered to date 1,637 1,480
Plan assets at fair value - -
Plan liability under projected benefit
obligation 1,637 1,480
Unrecognized net loss (29) -
Unrecognized net asset at transition 46 52
Accrued pension cost $1,654 $1,532
The following table sets forth components of net pension cost for the
supplemental plan recognized in the Company's consolidated income statements
for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Service cost - benefits earned
during the period $ 50 $ 61 $ 61
Interest cost on projected benefit
obligation 102 94 85
Net amortization and deferral (6) (6) (6)
Net pension cost $146 $149 $140
A discount rate of 7% is used in accounting for the pension plan as of
December 31, 1997 and 1996.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments include cash and cash equivalents, marketable
securities, investments in limited partnerships and notes payable. At December
31, 1997 and 1996 the carrying amount of cash equivalents approximates fair
value because of the short-term maturity of those instruments, and the
carrying value of marketable securities is fair market value. With respect to
investments in limited partnerships, management has determined that the
resulting carrying value approximates estimated fair market value. The fair
value of the Company's obligations for contributions to limited partnerships
approximates its carrying value.
The fair market value of the Company's notes payable approximates its carrying
value and was based on the borrowing rates currently available to the Company
for bank loans with similar terms and maturities.
9. TRANSACTIONS WITH AFFILIATES:
Accounting and legal fees totaling approximately $903, $746 and $733 in 1997,
1996 and 1995, respectively, were paid or accrued to firms in which certain
directors have financial interests.
10. COMMITMENTS AND CONTINGENCIES:
By agreement with its insurance carriers, the Company has assumed liability in
any single occurrence for Workmen's Compensation and Property Damage up to
$1,000 and for Public Liability up to $1,000 for the first occurrence and up
to $500 for each subsequent occurrence with excess liability assumed by the
insurance carriers up to $52,000. In conjunction with these agreements, the
Company has issued irrevocable letters of credit to guarantee future payments
of claims to the insurance carriers. At December 31, 1997, the outstanding
balance of the letters of credit was $7,553 on a total commitment of $12,000.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Arnold Industries, Inc.
Lebanon, Pennsylvania:
We have audited the accompanying consolidated balance sheets of Arnold
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arnold Industries, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
February 27, 1998
QUARTERLY PERFORMANCE
(dollars in thousands, except per share data)
Operating Operating Net
Revenues Income Income
QUARTER 1997 1996 1997 1996 1997 1996
First $ 90,539 $ 82,392 $ 11,548 $ 8,233 $ 7,321 $ 5,043
Second 97,341 90,111 15,051 11,467 9,510 7,154
Third 99,175 91,442 14,287 10,938 9,048 7,128
Fourth 96,110 92,390 10,030 9,704 6,331 6,084
$383,165 $356,335 $ 50,916 $ 40,342 $ 32,210 $ 25,409
Net Income Net Income Dividends
Per Share-Basic Per Share-Diluted Per Share
QUARTER 1997 1996 1997 1996 1997 1996
First $ .27 $ .19 $ .27 $ .19 $ .11 $ .11
Second .37 .27 .36 .27 .11 .11
Third .35 .27 .35 .26 .11 .11
Fourth .24 .22 .24 .22 .11 .11
$1.23 $ .95 $1.22 $ .94 $ .44 $ .44
PRICE RANGE COMMON STOCK
HIGH LOW HIGH LOW
QUARTER 1997 1996
First $16 $13 $17 7/8 $13
Second 18 3/8 13 7/8 16 1/2 13 1/2
Third 24 1/2 17 16 1/2 13 5/8
Fourth 25 5/8 16 3/4 16 1/2 15 1/4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Arnold Industries' 1997 operating revenue resulted from the activities of
four operating subsidiaries: New Penn Motor Express, Inc. ("New Penn"), Arnold
Transportation Services, Inc. (formerly known as Lebarnold, Inc.), SilverEagle
Transport, Inc. ("SilverEagle"), and D.W. Freight, Inc. and its wholly owned
subsidiary Dalworth Trucking Co. (collectively "Dalworth"). Arnold
Transportation Services, Inc. changed its name from Lebarnold, Inc. on May 31,
1997.
New Penn is a less-than-truckload (LTL) transportation company. Arnold
Transportation Services is a truckload (TL) carrier. At the end of calendar
year 1997, SilverEagle and Dalworth merged with and into Arnold Transportation
Services to provide regional and interregional truckload transportation
services. Throughout 1997, SilverEagle and Dalworth operated as separate
corporate entities, although the integration of services provided by all three
truckload carriers under the Arnold Transportation Services umbrella had begun
well before year-end. In addition, during the year certain operations were
shifted between the operating companies. The results of operations set forth
below combine the results reported by Arnold Transportation Services,
SilverEagle and Dalworth.
In addition to LTL and TL transportation services, Arnold Industries
provides specialty warehousing operations and related transportation services
under the name Arnold Logistics, a division of Arnold Transportation Services.
Operating Revenues
(dollars in millions) Total LTL
Amount % Increase Amount % Increase
1997 $383.2 8 $203.3 12
1996 356.3 8 181.9 9
1995 330.0 9 167.1 5
Warehousing/
Truckload Related Trucking
Amount % Increase Amount % Increase
1997 $153.7 1 $26.2 16
1996 151.9 5 22.5 21
1995 144.4 14 18.6 13
The revenue growth at New Penn increased primarily due to a tonnage
increase of 7% for 1997 over 1996 and 10% for 1996 over 1995. The tonnage
hauled increased from 1,008,566 for 1996 to 1,081,334 for 1997. The revenue
growth for both New Penn and Arnold Transportation Services for the last three
years was affected substantially by discounted pricing. Nevertheless, New
Penn's revenues increased by 12% in 1997, 9% in 1996 and 5% in 1995, and
Arnold Transportation Services' revenues increased by 1% in 1997, 5% in 1996
and 14% in 1995. The revenues for both companies were negatively impacted by
the extreme winter weather in early 1996 and by flooding in various parts of
the country which primarily affected the truckload divisions. The 1997 revenue
for Arnold Transportation Services was substantially affected by a number of
major customers who re-bid their contracts in 1997. New business was secured
on interregional lanes which substantially increased empty miles. Empty miles
will be reduced as backhaul revenue is secured. Also for 1996, the revenue of
Dalworth was negatively impacted due to deregulation in the State of Texas.
The warehousing division under the name of Arnold Logistics increased its
revenue 16% and 21% for 1997 and 1996 respectively due to increased business.
As a result of combining the three truckload divisions, the results of
operations for 1997 and thereafter will be reported to the shareholders as one
truckload carrier (Arnold Transportation Services).
Set forth below is a schedule showing revenues for New Penn, Arnold
Transportation Services (ATS), and the warehousing division Arnold Logistics.
1997 1996 1995
Amount % Amount % Amount %
New Penn $203.3 53 $181.9 51 $167.1 50
ATS 153.7 40 151.9 43 144.4 44
Arnold
Logistics 26.2 7 22.5 6 18.6 6
TOTAL $383.2 100% $356.3 100% $330.1 100%
The following tables set forth the percentages of operating expenses and
operating income to operating revenues for the years indicated.
New Penn Motor Express Arnold Transp.
& Related Companies Services
1997 1996 1995 1997 1996 1995
Operating Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses
Salaries, wages and
related expenses 57.3 60.0 58.4 39.5 37.6 38.3
Supplies and expenses 9.2 10.3 9.8 22.6 22.2 20.9
Operating taxes and
licenses 2.9 3.2 3.5 1.9 2.0 2.2
Insurance 1.5 1.8 1.5 2.4 3.8 2.7
Communication and
utilities 1.1 1.2 1.1 1.7 1.5 1.5
Purchased
transportation 1.1 1.0 1.0 15.3 15.0 12.9
Rental of buildings,
revenue equipment,
etc., net (0.2) (0.3) (0.4) 1.1 1.1 1.2
Depreciation and
amortization 4.7 4.8 4.9 10.9 10.9 10.5
(Gain) on sale of
equipment (0.1) (0.2) (0.4) (0.1) (0.1) (0.4)
Miscellaneous 0.9 0.2 0.4 0.8 1.7 1.1
Total Operating
Expenses 78.4 82.0 79.8 96.1 95.7 90.9
Operating Income 21.6% 18.0% 20.2% 3.9% 4.3% 9.1%
The operating expenses of New Penn and its related companies decreased to
78.4% of operating revenues in 1997 from 82.0% in 1996 and 79.8% in 1995.
Salaries, wages and related expenses decreased to 57.3% in 1997 from 60.0% in
1996 as a result of improved revenue yield and increased operating
efficiencies. These expenses had increased to 60.0% in 1996 from 58.4% in
1995 primarily as a result of discounting of revenues and increased drivers'
wages and benefits, including workers' compensation expense. Supplies and
expenses decreased in 1997 to 9.2% from 10.3% in 1996 and 9.8% in 1995. A fuel
surcharge was implemented in September 1996, which partially offset higher
operating costs in 1997. Insurance expense decreased to 1.5% in 1997 compared
to 1.8% in 1996. It had been 1.5% in 1995. The Company's insurance carrier
increased New Penn's insurance reserve during the year 1996 due to a prior
year's loss.
The salaries, wages and related expenses of the Arnold Transportation
Services companies increased to 39.5% in 1997 from 37.6% in 1996 and 38.3% in
1995. The expense increased in 1997 due to lower revenues per mile as a
result of fewer operating efficiencies due to an increase in empty miles.
Also, Arnold Transportation Services has experienced higher health benefit
costs in both 1997 and 1996. Supplies and expense have increased to 22.6% in
1997 from 22.2% in 1996 and 20.9% in 1995. This was partially due to higher
fuel costs in both 1997 and 1996, which were only partially offset by a fuel
surcharge in September and October of 1996. In addition, lower revenue per
mile and higher empty miles contributed to the increased percentages in both
1997 and 1996. Insurance decreased to 2.4% in 1997 from 3.8% in 1996 and 2.7%
in 1995. The insurance expense was impacted favorably in 1997 by decreased
claims. The increase in 1996 was due to the Company's insurance carrier
increasing Arnold Transportation Services reserves for 1996 due to changes in
prior year loss reserve estimates. Since July 1, 1995, the company has made
major changes to its insurance and risk management program, which has
substantially improved the Company's loss and reserve experience. Purchased
transportation costs increased to 15.3% in 1997 compared to 15.0% in 1996 and
12.9% in 1995. The Company has increased substantially the number of
owner-operators in both 1997 and 1996.
Miscellaneous operating expenses decreased to .8% in 1997 from 1.7% in
1996 and 1.1% in 1995. A number of shippers had declared bankruptcy in 1996
and 1995 which resulted in the writing off of accounts receivable balances.
The formation of Arnold Transportation Services resulted in certain
one-time charges for converting to commonly used management information
systems, standardizing certain employee benefit programs and applying Arnold
Transportation Services decals to revenue equipment. These charges reduced
operating income by approximately $750,000 for 1997. There will be additional
charges in 1998 which management does not expect to be material.
Total operating expenses increased to 96.1% for 1997 compared to 95.7% in
1996 and 90.9% in 1995.
Arnold Industries' operating income for 1997 increased $10.6 million or
26% over 1996 compared to a decrease of $8.3 million for 1996 or 17% from
1995. New Penn's operating income increased substantially for 1997, which
improved the overall operating results of Arnold Industries; however, Arnold
Transportation Services' reduced operating income adversely impacted the
overall operating results.
Other net non-operating expenses consist primarily of interest income,
other investment income and interest expense. Interest income increased $.5
million for 1997 over 1996 and 1995 due to additional investment securities.
Interest expense for 1997 was $1.4 million compared to $1.3 million for 1996.
The 1996 interest expense decreased $.4 million from 1995, primarily due to a
reduction in debt.
The effective income tax rates for 1997, 1996 and 1995 were 36.7%, 35.6%
and 36.3% respectively.
Net income for 1997 increased to $32.2 million compared to $25.4 million
for 1996 and $30.5 million for 1995. Basic net income per share in 1997 was
$1.23 compared to $.95 in 1996 and $1.15 in 1995. Diluted net income per share
was $1.22 for 1997 compared to $.94 in 1996 and $1.13 in 1995.
Capital Expenditures
In 1997, the Company authorized the purchase of up to one million shares
of its common stock. During the year, the Company purchased 817,600 shares
for a total cost of $13.1 million.
The total property and equipment purchases (net of dispositions) amounted
to $34.1 million for 1997, compared to $26.4 million for 1996 and $45.0
million for 1995. The Company is projecting capital expenditures of
approximately $50.0 million for 1998, excluding any acquisitions.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $36 million at
the end of 1997, compared to $42 million at the end of 1996 and $14 million at
the end of 1995. The decrease for 1997 was attributable to increased capital
expenditures and the purchase of the treasury stock. The increase in 1996
over 1995 was due to substantially lower capital expenditures. Working capital
amounted to $46 million, $40 million and $16 million at the end of 1997, 1996
and 1995, respectively. Net cash provided by operating activities was $55
million in 1997, $67 million in 1996 and $55 million in 1995.
The Company's current cash position, together with funds invested in
marketable securities and cash flow generated from future operations, are
expected to be sufficient to finance anticipated capital expenditures. These
funds may be supplemented when necessary or desirable by short or long-term
borrowing.
Inflation
During 1997, the Company believes that inflation had a minimal effect on
operating results. However, most of the Company's expenses are subject to
inflation, which results in increased costs.
Seasonality
In the trucking industry, results of operations show a seasonal pattern
because of customers' reduced shipments in the winter months. In addition,
operating expenses are usually higher during the winter months.
Current Trends
On January 2, 1998, New Penn announced a general rate increase of 5.4%.
However, most customer rates are subject to negotiated contracts and
agreements. Additionally, discounting in both the LTL and TL segments of the
industry has continued into 1998.
New Penn's revenue was up 4% for the fourth quarter of 1997. The
beginning of 1998 is showing some additional slowing of growth. Revenues at
Arnold Transportation Services are up slightly for 1998.
The truckload company merger of the three divisions was completed at the
end of 1997, and management believes that the restructuring will have a
positive effect on operating results during the latter part of the year 1998
through improved marketing, quality of revenue, reduced empty miles and
improved equipment utilization. The Company is continuing to improve
efficiency by continued refinement of information technology, which will
reduce costs and provide better service to its customers.
New Penn has agreed to accept the terms of the tentative new National
Master Freight Agreement with the Teamsters when ratified to replace the
current contract which expires March 31, 1998. This agreement is for a
five-year period expiring March 31, 2003.
Arnold Logistics is beginning construction in 1998 of approximately
560,000 square feet of warehouse space in Central Pennsylvania.
In February 1998, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock in open
market transactions. This newly authorized repurchase is in addition to the
182,400 shares remaining to be repurchased under the program announced in
1997. Management believes the Company's shares reflect good value and that
their repurchase is an appropriate use of Company funds.
The Company is devoting considerable resources to the modification of its
computer software to deal with the "year 2000 problem." In addition to its
internal costs, independent consulting costs to date total approximately
$640,000, and a new software program for managing accounting, human resources
and payroll functions was purchased at a cost of $500,000 in 1997. Although
significant progress has been made, it is anticipated that additional
consulting costs of approximately $500,000 will be incurred before all
software modifications are completed. All systems are scheduled to be "year
2000 compatible" by the end of 1998.
Management believes that tremendous growth opportunities remain for the
operating companies. The Company is continuing to evaluate possible expansion
of the LTL, TL and warehousing divisions.
<TABLE>
<CAPTION>
ELEVEN-YEAR FINANCIAL SUMMARY<FN1>
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Income
Operating revenues 383,165 356,335 330,136 302,390 272,697 233,620 196,202 188,830 167,589 148,196 124,176
Operating expenses
Depreciation and
amortization 29,133 27,756 25,348 21,120 17,811 14,222 11,500 10,527 11,021 9,906 8,973
Operating taxes and
licenses 9,342 9,381 9,297 8,924 7,908 6,780 5,887 4,836 4,537 4,147 3,593
Other 293,774 278,856 246,854 222,824 200,106 172,304 142,080 137,027 123,121 109,397 92,886
Operating income 50,916 40,342 48,637 49,522 46,872 40,314 36,735 36,440 28,910 24,746 18,724
Non-operating income (expense)
Interest income
(expense), net 225 (200) (711) 35 355 246 195 (1,123) (1,180) (923) (691)
Other (252) (690) (25) (429) 1,326 (71) 10 (449) 884 4,142 (287)
Income before income taxes,
extraordinary loss, and
cumulative effect of change
in accounting principle 50,889 39,452 47,901 49,128 48,553 40,489 36,940 34,868 28,614 27,965 17,746
Income taxes 18,679 14,043 17,400 18,384 18,651 14,660 13,512 12,452 10,939 10,543 8,171
Income before extraordinary
loss and cumulative
effect of change in
accounting principle 32,210 25,409 30,501 30,744 29,902 25,829 23,428 22,416 17,675 17,422 9,575
Extraordinary loss, net of
tax benefit<FN5> - - - 389 - - - - - - -
Cumulative effect of
change in accounting
for income taxes<FN6> - - - - - - - - 1,322 - -
Net income 32,210 25,409 30,501 30,355 29,902 25,829 23,428 22,416 18,997 17,422 9,575
Per Share Data<FN2>
Income before extraordinary
loss and cumulative effect
of change in accounting
principle - Basic 1.23 .95 1.15 1.16 1.13 .97 .88 .84 .67 .67 .37
Diluted 1.22 .94 1.13 1.14 1.11 .96 .88 .84 .67 .67 .37
Net income - Basic 1.23 .95 1.15 1.14 1.13 .97 .88 .84 .71 .67 .37
Diluted 1.22 .94 1.13 1.12 1.11 .96 .88 .84 .72 .67 .37
Cash dividends declared .44 .44 .44 .41 .35 .32 .29 .25 .22 .11 .06
Book value 8.38 7.84 7.33 6.63 5.90 5.12 4.46 3.86 3.31 2.76 2.16
Financial Position - Year End
Cash, temporary investments
and marketable
securities<FN3> 36,291 41,621 14,273 41,643 38,285 45,186 57,558 37,184 26,826 25,318 15,029
Working capital<FN4> 45,921 39,909 16,219 24,839 24,093 29,856 55,664 30,877 24,049 23,575 11,558
Property and
equipment-net 205,562 199,614 199,822 169,603 144,148 110,674 88,250 91,393 83,540 67,346 58,291
Total assets 317,040 303,112 276,877 260,279 228,361 197,203 170,668 159,973 136,313 116,197 94,081
Long-term debt 2,383 3,874 5,049 - - 476 17,603 19,479 19,749 14,812 12,840
Stockholders' equity 217,253 209,147 195,367 176,458 156,867 136,015 118,502 102,362 87,681 72,589 55,520
Other Data
Percentage return on average
stockholders' equity 15.1 12.6 16.4 18.2 20.4 20.3 21.2 23.6 23.7 27.2 19.0
Net cash provided by operating
activities 54,602 67,000 55,075 60,524 51,299 34,518 35,898 36,639 29,471 25,195 23,136
<FN>
<FN1>
1 D.W. Freight, Inc. was acquired in April 1992 and is accounted for under the
purchase method - asset acquisitions from H.R. Hill and T.W. Owens occurred in
March 1994 and January 1995, respectively
<FN2>
2 Adjusted to give retroactive effect to the two-for-one stock split in 1993,
the two-for-one stock split in 1991, the three-for-two stock split in 1988,
the five-for-four stock split in 1987
<FN3>
3 Excludes restricted cash prior to 1992
<FN4>
4 Certain liabilities with respect to claims were reclassified as
long-term beginning in 1991
<FN5>
5 Write-off of the unamortized balance of intrastate operating rights
<FN6>
6 The Company adopted SFAS No. 96, "Accounting for Income Taxes," in 1989
</FN>
</TABLE>
BOARD OF DIRECTORS
E. H. Arnold Heath L. Allen, Esq. Arthur L. Peterson
Chairman, President, CEO Secretary and Director Director
and Director Partner - Keefer Wood President - Center
Wood Allen & Rahal, LLP for the Study of
Harrisburg, PA of the Presidency
New York, NY
Kenneth F. Leedy Ronald E. Walborn, CPA Carlton E. Hughes
Director CFO, Treasurer and Director Director
President - New Penn Motor President - Walborn Shambach Chairman- Stewart-
Express, Inc. Associates Amos Steel, Inc.
Harrisburg, PA Harrisburg, PA
STOCKHOLDER INFORMATION
Counsel
Messrs. Keefer Wood Allen and Rahal, LLP
210 Walnut Street
Harrisburg, PA 17101
Auditors
Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, PA 17101
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Stock Listing
Arnold Industries common stock is traded on the NASDAQ National Market System.
The stock symbol is AIND. In newspapers, the stock is listed as "ArnoldInd",
"Arnold Inds" or similar variations. There were 1,392 record-holders of the
Company's common stock as of March 16, 1998. The number of beneficial owners
is considerably greater.
Annual Meeting of Stockholders
The Arnold Industries 1998 Annual Meeting of Stockholders will be held 4:00
PM, May 6, 1998 at the Lebanon Country Club, 3375 West Oak Street, Lebanon,
Pennsylvania.
Investor Information
Stockholders, securities analysts, portfolio managers, representatives of
financial institutions and individuals seeking financial and operating
information, including copies of Form 10-K, may contact:
Corporate Secretary
Arnold Industries, Inc.
P.O. Box 210
Lebanon, PA 17042
(717) 273-9058
Copies of the Company's Form 10-K will be supplied to stockholders upon
request without charge.
Dividend Reinvestment/Cash Purchase Plan
This plan enables you, as a stockholder, to apply your dividends on the
Company's stock towards the purchase of additional shares of Arnold
Industries, Inc. common stock on an automatic basis. Also, at your option, you
may make quarterly cash payments from $25 to $3,000 to purchase additional
stock. The Company pays the brokerage commissions and administrative fees
connected with your participation in this Plan. Participation in the Plan is
entirely voluntary and you may enroll or withdraw at any time. The Plan is
administered by Registrar and Transfer Company, Arnold Industries' stock
transfer agent. For information call 800-368-5948.
Quarterly Reports
The Company presently sends to its stockholders of record a quarterly report
from its President, Edward H. Arnold, summarizing results of operations for
the most recent quarter. If you are not a stockholder of record, but instead
hold your stock in the name of a broker or other nominee, you may also receive
these quarterly reports by requesting this report and supplying your mailing
address to the Company. Requests should be mailed to the Company to the
attention of the Corporate Secretary.
The nature of Arnold Industries operations subject it to changing economic,
competitive, regulatory and technological conditions, risks, and
uncertainties. In accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Arnold Industries provides the
following cautionary remarks regarding important factors which, among others,
could cause future results to differ materially from the forward-looking
statements about our management confidence and strategies for performance;
expectations for new and existing technologies and opportunities; and
expectations for market segment and industry growth.
These factors include, but are not limited to: (1) changes in the business
environment in which Arnold Industries operates, including licensing
restrictions, interest rates and capital costs; (2) changes in governmental
laws and regulations, including taxes; (3) market and competitive changes,
including market demand and acceptance for new services and technologies; and
(5) other risk factors listed from time to time in Arnold Industries SEC
reports. Arnold Industries does not intend to update this information and
disclaims any legal liability to the contrary.
COMPANY EXECUTIVES
ARNOLD INDUSTRIES, INC.
Heath L. Allen, Esq., Secretary
E.H. Arnold, Chairman, President & CEO
Timothy D. Hoffman, VP, Properties
Donald G. Johnson, Senior Vice President
Andrew J. Kerlik, VP, Personnel & Safety
Ronald E. Walborn, CPA, CFO & Treasurer
NEW PENN MOTOR EXPRESS, INC.
Steven D. Gast, VP, Corporate Planning
Steven J. Ginter, VP, Marketing
Charles J. Kachel, VP, National Accounts
Robert C. Kemp, VP, National Accounts
Kenneth F. Leedy, President
John G. McCloy, VP, Central Division
Thomas P. McDonald, VP, Sales, Central Division
Anthony S. Nicosia, VP, Sales, Eastern Division
Shawn P. Nolan, VP, Western Division
Stephen M. O'Kane, Executive Vice President
Terrence P. Ryan, VP, Sales, Western Division
Frank Santanella, VP, Eastern Division
Daniel W. Schmidt, VP, Labor Relations
Charles A. Zaccaria, VP, Northern Division
ARNOLD TRANSPORTATION SERVICES
Kurt E. Antkiewicz, VP, Sales & Marketing
J. Michael Driggers, VP, Operations
Michael J. Gregerson, VP, Safety/Fleets
Kurt E. Morgan, VP, Terminals
Robert J. Petruzzi, COO
ARNOLD LOGISTICS
Douglas B. Enck, Vice President/General Manager
Exhibit 21 - Subsidiaries of the Registrant
On December 31, 1997, at 11:59 p.m., the Registrant had three
wholly-owned subsidiaries, all of which are included in the consolidated
financial statements, as follows:
Organized Under the
Name Laws of
New Penn Motor Express, Inc. Pennsylvania
Arnold Transportation Services, Inc. Pennsylvania
MARIS, Inc. Delaware
Exhibit 23.1 - Consent of Coopers & Lybrand L.L.P.
LETTERHEAD OF COOPERS & LYBRAND L.L.P.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the Registration Statement
(No. 33-41454) on Form S-8, the Registration Statement (No. 33-61005)
on Form S-8 and the Registration Statement (No. 33-64923) on Form S-4 of our
reports dated February 27, 1998, on our audits of the consolidated financial
statements and financial statement schedules of Arnold Industries, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and for the years ended
December 31, 1997, 1996 and 1995, which reports appear on page 16 of the
1997 Annual Report to Stockholders and on page 15 of the Annual Report on
Form 10-K, respectively, of Arnold Industries, Inc.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, PA 17101
March 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN ARNOLD INDUSTRIES, INC.'S FORM 10-K
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,504,782
<SECURITIES> 9,786,175
<RECEIVABLES> 41,403,379
<ALLOWANCES> 1,340,028
<INVENTORY> 0
<CURRENT-ASSETS> 92,254,963
<PP&E> 346,003,319
<DEPRECIATION> 140,441,244
<TOTAL-ASSETS> 317,040,416
<CURRENT-LIABILITIES> 46,333,605
<BONDS> 0
0
0
<COMMON> 29,942,628
<OTHER-SE> 187,310,328
<TOTAL-LIABILITY-AND-EQUITY> 317,040,416
<SALES> 0
<TOTAL-REVENUES> 383,164,535
<CGS> 0
<TOTAL-COSTS> 332,249,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 851,230
<INTEREST-EXPENSE> 1,379,932
<INCOME-PRETAX> 50,889,105
<INCOME-TAX> 18,678,890
<INCOME-CONTINUING> 32,210,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,210,215
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.22
</TABLE>
