ARROW TRANSPORTATION CO, 10-K, 1997-04-16

ARROW TRANSPORTATION CO
10-K, 1997-04-16
TRUCKING (NO LOCAL)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 1996: Commission File No. 0-21922

ARROW TRANSPORTATION CO.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Oregon 93-1103182
- ---------------------------- ----------------------------
(State or other jurisdiction (.R.S. Employer
of incorporation) Identification No.)

10145 N. Portland Road, Portland, Oregon 97203
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)

(503) 286-3661
--------------------------------------------------
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of The Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

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 ( )

As of December 31, 1996 4,191,366 shares of Common Stock were outstanding, and
the aggregate market value of the Common stock of Arrow Transportation Co. held
by nonaffiliates (2,998,702 shares) was approximately $1,686,770 based on the
market price at that date.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

<PAGE>
ARROW TRANSPORTATION CO.
1996 FORM 10-K ANNUAL REPORT
PART I

ITEM 1. BUSINESS

General

Arrow Transportation Co. is headquartered in Portland, Oregon and through a
wholly-owned subsidiary, Arrow Transportation Co. of Delaware, is engaged
primarily in the transportation of bulk liquid chemical products in intrastate
and interstate commerce. Such companies are hereinafter collectively referred to
as "Arrow" or the "Company." The Company commenced operations in 1931 and
currently serves a wide variety of manufacturing and industrial users in the
United States and Western Canada. The Company's operations are concentrated in
Oregon, Washington, California and Texas in the United States and Alberta and
British Columbia in Canada. Interstate operations between these locations and
points throughout the United States are served.

The Company transports a wide variety of chemical products, including water
treatment chemicals, paints and coatings, adhesives, acids, alcohols,
chlorinated solvents, liquid plastics, corrosives, caustic materials and refined
chemicals. The Company does not transport food products. Each of the products
transported requires specialized trailers and experienced personnel with special
skills necessary for safe and efficient handling of these various chemicals. The
Company has received several national awards for safety and has consistently
maintained a satisfactory rating from the United States Department of
Transportation ("DOT"). The Company's strategy is to offer a complete line of
chemical transportation services and to provide dependable, safe and timely
service designed to meet the specialized needs of its customers.

Arrow also offers rail/truck bulk transfer services which enable shippers to
take advantage of rail linehaul economics. The Company's domestic and
international bulk intermodal container service and rail transloading operations
allow Arrow to provide a portfolio of services to its customers.

At December 31, 1996, Arrow was approximately the 40th largest bulk commodity
motor carrier in the United States and the leading bulk chemical commodity motor
carrier in the Pacific Northwest. At December 31, 1996, Arrow operated a fleet
of 162 tractors and 235 trailers. The Company's equipment is based at terminals
in Portland, Oregon, Longview and Tacoma, Washington, Richmond and Downey,
California, and Houston, Texas. The Company has a limited service satellite
terminal in Eugene, Oregon. Arrow's terminal facilities cover the major Western
and Southwestern traffic lanes, providing the Company with the ability to
efficiently meet the needs of shippers in the United States and Western Canada.

Arrow Transportation Co. was organized in February 1992 under Oregon law to
become the "parent" company of its wholly-owned subsidiary, Arrow Transportation
Co. of Delaware, a corporation organized under the laws of the State of Delaware
in 1931. The Company's executive offices are located at 10145 North Portland
Road, Portland, Oregon 97203 and its telephone number is (503) 286-3661.

Historical Background

Arrow was established in 1931 as a transporter of bulk liquid petroleum
products. The Company principally served the Pacific Northwest, transporting
products such as gasoline, diesel fuel, lubrication oils, aviation fuels and
fuel oils. During the mid 1980's, recognizing a need to diversify and expand its
transportation service capabilities, Arrow acquired Inland Transportation
Company of Seattle in 1985 and Widing Transportation of Portland in 1986. These
acquisitions expanded Arrow's primary service area and range of products
transported to include chemicals, compressed gasses and fertilizers.

<PAGE>
In the summer of 1993, in order to take advantage of market opportunities, Arrow
completed a public stock offering, raising approximately $4.3 million to provide
the equity required to purchase modern revenue producing equipment, expand
terminal facilities, and pay off debt.

After the public offering, the Company purchased 95 tractors, 87 trailers, and
expanded its terminal network into the Texas and the southern U.S. The Company
experienced rapid growth until the fall of 1994 when it experienced a strike by
its mechanics and drivers in Oregon. The Company lost business as a result of
service disruptions caused by the labor problems in 1994 and then several
factors developed which negatively impacted its profitability. Slowing growth in
the durable goods producing segments of the economy translated to soft freight
demand during 1995. Additionally, intrastate deregulation in Oregon, Washington
and Texas impacted rates and volume negatively as increased competition entered
those markets.

Both revenue and earnings declined in 1995 as a result of overly aggressive
geographic and fleet expansion in 1994 and 1995. The terminals and carrying
capacity added in late in 1994 and early 1995 added to operating and overhead
expense and were not effectively utilized because of lower business levels.
Business volume declined in 1995 as a result of business lost from service and
pricing issues, sluggish freight demand, the impact of deregulation of
intrastate transportation and business lost as a result of service disruptions
caused by 1994's labor problems. This low level of capacity utilization and lack
of balance in its newer longhaul traffic lanes were the primary factors which
contributed to the losses experienced in 1995.

Recognizing a need to improve Arrow's performance, the Company implemented a
business plan in 1996 designed to restructure the Company and restore
profitability. During the first three quarters of 1996, the Company implemented
phase I of its business plan. This plan was designed to enhance the Company's
overall competitiveness, productivity and efficiency through a reduction in
operating and overhead costs. The plan downsized and restructured the
organization to better serve its customers. Terminals were closed and excess
linehaul carrying capacity was eliminated as Arrow sold 43 power units. An
integral part of the business plan was the installation of a formal Total
Quality Management ("TQM") program throughout the organization. Installation of
the Company's TQM program included the training of all corporate and terminal
staff and resulted in the empowerment of its front line managers and associates,
streamlined terminal operations and it strengthened customer service.

The Company has made significant changes and continues to make changes to its
operations in order to achieve reductions in its operating cost structure.
During the fourth quarter of 1996, the Company began implementation of phase II
of its profit improvement plan. The phase II plan included additional reductions
in corporate and support staff, selected fleet downsizing, operating cost
reductions, redeployment of equipment and the restructuring of the Company's
term debt and lease arrangements. The changes the Company is making are meant to
focus the Company on its core competencies, to reduce waste and redundancies in
its processes, and improve cash flow. Although the changes the Company has made
and continues to make have reduced its operating cost structure and are expected
to produce improved results, given the Company's leverage position, business
volume must improve for the full benefit of the many actions the Company has
taken to be realized.

Business Strategy

Arrow's business strategy is to offer high quality, environmentally secure,
specialized chemical transportation services in the tank truckload carrier
market. Arrow concentrates its resources and efforts primarily on the
transportation of bulk chemicals. Management believes that there are significant
opportunities to improve Arrow's profitability, operating efficiency and expand
its customer base. Key aspects of the Company's business and growth strategies
are as follows:

FOCUSED MARKETING EFFORT. The Company plans to increase business volume by
focusing Arrow's business development efforts on the Western United States and
Canada. Arrow will focus on those markets where it believes it has a competitive
advantage, the Pacific Northwest and California. As an integral part of this
strategy, the Company will focus its Texas long haul business only on those
traffic lanes from Texas where the Company can obtain balanced freight demand
with minimal empty miles.

<PAGE>
IMPROVE UTILIZATION OF CARRYING CAPACITY. The Company plans to increase
utilization of Arrow's carrying capacity and achieve balance between equipment
levels and anticipated demand for Arrow's services. Arrow sold 43 excess
tractors during 1996 and plans to sell certain equipment in 1997 to achieve an
improvement in the balance of demand and equipment levels.

REDUCE ARROW'S OPERATING COST STRUCTURE. The Company has taken action to reduce
staff, downsize and close certain terminals and to instituted strict spending
controls to reduce costs. It has also undertaken a formal program to lower its
operating costs and improve its operating efficiency and effectiveness through
the implementation of an integrated total quality management program throughout
the entire Company.

SEEK REPLACEMENT OF PRIVATE TANK TRUCK FLEETS. The Company continues to seek
growth by replacing aging, less efficient private fleets operated by
manufacturers, distributors and users of chemicals. The advantages of private
fleet operations have been reduced since federal deregulation in 1980.
Intrastate deregulation which became effective January 1, 1995 should further
reduce the advantages of private fleet operation. Analysts who follow the
truckload industry expect private fleet conversions to be an increasing source
of growth.

INCREASE MARKET SHARE DURING INDUSTRY CONSOLIDATION. The highly fragmented tank
truck industry is undergoing a consolidation as shippers are concentrating their
business with fewer carriers. The safety and liability issues associated with
transporting chemicals has lead the Chemical Manufacturers Association ("CMA")
to develop the Responsible Care Program, which established rigid standards to
ensure the proper handling and transportation of chemical products. Generally,
only carriers that have modern equipment, insurance and safety programs that
comply with the CMA's Responsible Care Program standards are becoming core
carriers.

PROVIDE VALUE ADDED SERVICES. In addition to the Company's high quality
transportation services, the Company provides other value-added services to its
customers such as logistical coordination, rail tank car storage, transloading
and private fleet and third party maintenance services. Intermodal
transportation of International Standards Organization ("ISO") containers and
cleaning services are additional sources of revenue. These services have
enhanced the west coast distribution capabilities of chemical shippers and have
established the Company as an integral part of its customers manufacturing and
distribution networks.

Operations

The Company focuses its operational strategy on providing bulk chemical liquid
transportation services to clients located across the U.S. and Canada. Arrow's
primary source of revenue is received from linehaul services. Additional sources
of revenue include rail/truck transloading services, rail car storage, ISO
container intermodal services, maintenance services and third party tankwash
services at Company operated tankwash facilities.

Arrow believes that its structure, based on interlinked operating terminals that
provide the Company with a strong regional presence, customer contacts and
operating controls of a regional carrier and centralized controls and operating
guidelines that provide the Company with the coordination and efficiencies of a
national carrier, allows the Company to maximize operating efficiency at all
levels.

Terminal operations are regulated by specific safety, maintenance, customer
service and other operating procedures established by the Company, which each
terminal manager is responsible for implementing and maintaining. The
implementation of Company policies is reviewed during field trips both by safety
personnel and other Arrow executives while visiting the terminals. These
regulations provide the basis for the uniform efficiency and safety of Arrow's
operations and allow terminal managers to focus on managing the employees and
equipment resources at their terminal rather than on setting operating
procedures.

All terminals work together in an integrated and coordinated fashion. Constant
monitoring of each terminal's operations and financial performance, as well as
overall safety, training and customer service is undertaken at the Portland
headquarters. Arrow's online communication system is also designed to facilitate
this coordination by enabling the interaction of the various terminals among
themselves as well as providing

<PAGE>
terminal managers with updates of operating data.

Transload Operations

The Company conducts a rail transloading operation which enables product to be
transloaded directly from rail car to tank trailer. This allows shippers from
outside the user's area to combine the economics of long- haul rail
transportation with the service requirements of local truck delivery. Large
volume shipments through a transload facility significantly improve the
utilization of dedicated trailers over normal truck operations. The Company's
first transload facility was established in 1991 at the Portland, Oregon
terminal. The Company continues to explore opportunities to develop additional
rail transloading capabilities.

Intermodal Operations

Arrow offers a wide range of intermodal services by transporting ISO containers
on specialized chassis to and from a primary mode of transportation such as
rail, barge or vessel. Arrow's intermodal operations provide both domestic and
international service. The Company's strategically located facilities are
staffed with highly trained operating personnel. The intermodal work force has
been trained in operations, safety and quality assurance for a wide range of
liquid chemical products. Arrow is focusing on the liquid chemical ISO container
as the centerpiece of this service.

Tank Wash Operations

The Company operates three EPA and state licensed tank washing facilities, one
in California, one in Oregon and one in Washington. These facilities are used
for both Company equipment and as a means to generate additional tank washing
revenue from shippers and other motor carriers. Management believes the
availability of these facilities enables the Company to provide an integrated
service package to its customers.

Equipment Rental Operations

In addition to its transport business, the Company also leases tractors and tank
trailers to shippers. Trailers rented by shippers are used for standing storage
or are transported by the Company on behalf of the shippers. Tractors are rented
by customers in connection with their private fleet operations. The rental fee
for these tractors and trailers is typically paid monthly.

Maintenance

All Arrow terminals, except Eugene, Oregon have full service maintenance
facilities. The Portland, Oregon terminal has tractor and trailer rebuilding
capabilities. All terminals are provided with computer generated reports which
indicate when inspection and/or servicing of units is required. Arrow exceeds
all requirements set forth by the DOT by performing periodic inspections on its
tractors every 6,000 miles, and trailers every 60 days as part of its
service/inspection program. All Arrow maintenance facilities are registered with
the DOT and are qualified to perform all tank tests and inspections required
under HM 183 for the Company's fleet and third parties.

Arrow fleet maintenance has been certified by the National Board of Boiler and
Pressure Vessel Inspectors as being ASME qualified to perform cargo tank
repairs,modifications and alterations. In 1995, the Comapny aquired the "R"
stamp and certification. Since that time, maintenance services have been
expanded to provide cargo tank and ISO container testing and repair services to
private fleets and other tank truck operatiors.

Marketing and Customers

The Company has a sales, customer service and marketing staff supplemented by
active client development work by senior management. Arrow's salespeople focus
on covering accounts located in the Pacific Northwest, California and Texas as
well as nationally at the corporate headquarters of its customers.

<PAGE>
Major customers are added only after credit review and analysis by Arrow's
credit manager. Arrow's salespeople are also aided by terminal managers and the
dispatchers, who act as regional customer service representatives and
continually coordinate the transportation needs of specific customers in their
geographical area.

The Company operates under 49 State General Commodity Contract Authority and 49
State Interstate General Commodity Common Authority and intrastate authorities
granted by various state public service commissions. Approximately, 75% of
Arrow's revenues are generated pursuant to contractual agreements and each of
the Company's 50 largest customers is under contract.

During the year ended December 31, 1996, the Company booked revenue from over
1,000 customers. Its largest customer represented approximately 4% of total
revenues while the top twenty-five customers combined represented approximately
53% of total revenues. The Company's one hundred largest accounts represented
approximately 85% of total revenues and approximately 75% of these accounts have
been served by the Company for over 10 years.

Fleet

Tractor Operations
As of December 31, 1996, the Company operated 162 tractors (32 owned and 130
leased under lease agreements). The Company's tractor fleet is comprised of the
following:

Model Year Owned Leased Total as of 12/31/96
- ---------- ----- ------ --------------------
1995 - 35 35
1994 25 70 95
1993 - 25 25
1986 2 - 2
1984 1 - 1
1980-1983(1) 4 - 4
----- ----- -----
Total 32 130 162

(1) All 1980-1986 model tractors were removed from active service effective
January 1, 1997 and are scheduled for sale in 1997.

The Company has purchased or leased primarily new Freightliner tractors.
Standardization of purchases enabled the Company to simplify its own training,
control the cost of spare parts inventories and optimize its preventive
maintenance programs. In accordance with the Company's restructuring plan, 43
tractors were sold during 1996.

Trailer Operations
As of December 31, 1996, the Company operated 235 trailers (201 owned and 34
leased under lease agreements). The Company's tank trailer fleet is comprised of
the following:

Model Year Owned Leased Total as of 12/31/96
- ---------- ----- ------ --------------------
1995 18 - 18
1994 37 23 60
1993 48 - 48
1992 1 - 1
1990 1 10 11
1989 20 1 21
1988 14 - 14
1986 3 - 3
1984 1 - 1
1980-1983(1) 6 - 6
1970-1979 40 - 40
1960-1969 10 - 10
1958-1959 2 - 2
----- ------ -------
Total 201 34 235

(1) Forty-Eight of the pre- 1984 trailers have been reconditioned.

A typical stainless steel trailer operated by the Company is 42.5 feet long
(tandem axle), 8 feet wide, and 10.5 feet high.

<PAGE>
The interior volume of these trailers typically ranges from 5,000 to 7,200
gallons, and their weight capacity ranges up to 65,000 pounds.

Employees

As of December 31, 1996, the Company employed 283 people, of whom 184 were
drivers, 24 were mechanics, 12 were tank washers, 15 were rail yard and service
personnel, and 48 were support personnel, including management and
administration. Most terminals are headed by a terminal manager who has
responsibility for hiring drivers and administrative personnel and, where
applicable, mechanics, customer service and tank wash personnel.

The Company's drivers, tank cleaners, and shop and service personnel are
represented by the Teamsters. Its mechanics are represented by the International
Association of Machinist and Aerospace Workers. In 1994, during the process of
contract negotiations, the Company experienced a four week strike by mechanics
and drivers at its Portland, Oregon terminal. The strike ended upon ratification
of five-year labor agreements. The new labor agreements, which cover all union
employees, expire June 30, 1999.

Drivers

As of December 31, 1996, the Company utilized the services of 184 Company
drivers who work exclusively for Arrow. Company drivers are selected in
accordance with specific guidelines which focus primarily on safety records,
driving experience and personal evaluations. The Company only employs qualified
tank truck drivers with a minimum of two years of over-the road driving
experience in trucks with a gross weight in excess of 26,000 pounds. These
drivers are then enrolled in a training program which is administered by the
Company's full time driver trainer.

Due to demographic and macroeconomic trends, the ability to attract and retain
qualified drivers has become an increasingly difficult problem for the trucking
industry. Management believes that Arrow's policy of utilizing Company drivers
and its labor agreement provide the Company a competitive advantage with respect
to driver retention and recruitment. Arrow's collective bargaining agreement
with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and
Helpers of America ("Teamsters") provides working conditions and a comprehensive
benefit package which encourages longevity.

Driving hours are regulated by the DOT. Drivers can only drive for up to ten
continuous hours. They must then rest for at least eight hours and cannot in any
case drive more than 70 hours per eight day period.

Competition

The tank truck services business is extremely competitive and fragmented. The
Company competes primarily with other tank truck carriers and private carriers
in various states. With respect to certain aspects of its business, the Company
also competes with intermodal transportation, railroads, flatbed and
less-than-truckload carriers. Intermodal transportation has increased in recent
years as reductions in train crew size and the development of new rail
technology have reduced costs of intermodal shipping.

Competition for freight transported by the Company is based primarily on rates
and service. Management believes that Arrow's overall size and availability of a
wide range of equipment, together with its geographically dispersed local
marketing/sales network and west coast terminals facilities present the Company
with competitive advantages over many other truckload carriers in its core west
coast market.

The Company's largest competitors are Matlack Systems, Inc., Chemical Leaman
Tank Lines, Inc., Trimac Transportation Services, Ltd., and Montgomery Tank
Lines and its affiliated companies as well as a number of privately held western
regional carriers. There are approximately 200 recognized tank truck carriers,
most of whom are primarily regional operators.

<PAGE>
Insurance

The primary risks associated with the Comany's business are bodily injury and
property damage, workers' compensation claims and cargo loss damage. The Company
purchases insurance coverage against these risks. The Company has liability
insurance coverage which meets or exceeds regulatory requirements. Coverage is
provided for bodily injury and/or property damage liability resulting from the
sudden and accidental "discharge, dispersal, release or escape of the
pollutants" caused directly by the loading, unloading, upset, overturn or damage
of a company vehicle as a result of its maintenance or use. The pollution
coverage is more favorable than that purchased by certain other transporters,
who may have only the federally mandated endorsement on their policy. The
Company's policy does not allow the insurance carrier to charge back to the
Company the amount paid for certain pollution losses arising out of the
operation of the Company's vehicle. The Company's automobile liability policy
provides comprehensive coverage with $10 million limit of liability per
occurrence with no deductible. The insurance carrier is responsible for third
party automobile liability claims on a first dollar basis. Each insurance policy
is reviewed annually with outside insurance consultants to determine its
adequacy in meeting losses and anticipating industry trends.

Safety

Management regularly communicates to employees concerning the interrelationship
of Arrow's safety and insurance programs through the employee orientation
process, newsletter, and regularly scheduled meetings at all locations. A safety
award program affiliated with the National Safety Council is in place to
recognize employees for their performance.

During 1996 the Company had 0.56 reportable accidents per million miles. A
reportable accident, as defined by the DOT, is one involving death, personal
injury with treatment sought immediately away from the accident or a disabled
vehicle requiring towing. DOT has awarded the Company its highest safety rating
for more than 15 consecutive years. Additionally, the Company has received
national safety awards from the National Tank Truck Carriers Association. In
addition to following DOT regulations requiring random drug test and post-
accident drug testing, the Company rigorously enforces its accident reporting
and follow-up standards.

A full time Environmental Manager, Safety Director and Driver Trainer are
employed to supervise the implementation of Arrow's hiring and training
function. Routine inspections are carried out by regulatory agencies in addition
to those carried out by Arrow's consultants and insurance providers.

Regulation

As a motor carrier, the Company is regulated by the DOT and various state
agencies. There are additional regulations specifically relating to the tank
truck industry including testing and specifications of equipment and product
handling requirements. The Company may transport most types of freight to and
from any point in the United States over any route selected by the Company. The
trucking industry is subject to possible regulatory and legislative changes
(such as increasingly stringent environmental regulations or limits on vehicle
weight and size) that may affect the economics of the industry by requiring
changes in operating practices or by changing the demand for common or contract
carrier services or the cost of providing truckload services. In addition, the
Company's tank wash facilities are subject to stringent local, state and federal
environmental regulations.

The Federal Motor Carrier Act of 1980 (the "Act") served to increase competition
among motor carriers and limit the level of regulation in the industry
(sometimes referred to as "deregulation"). The Act also enabled applicants to
obtain ICC operating authority more readily and allowed interstate motor
carriers such as the Company to change their rates by a certain percentage each
year without ICC approval. The law also removed many route and commodity
restrictions on the transportation of freight. In 1994, Congress adopted the
Negotiated Rates Act which requires, among other things, written contracts
between shippers and carriers.

Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. Such matters as weight and dimension of equipment are
also subject to federal and state regulations. Since 1989, DOT

<PAGE>
regulations have imposed mandatory drug testing of drivers. To date, the DOT's
national commercial driver's license and drug testing requirement have not
adversely affected the availability to the Company of qualified drivers. New
alcohol testing rules adopted by the DOT became effective in January 1995,
require certain tests for alcohol levels in drivers and other safety personnel.
The Company does not believe the new rules will adversely affect the
availability of qualified drivers.

The "Airport Improvement Act" (the "Act"), which became effective on January 1,
1995, essentially deregulated intra-state transportation of motor carriers. This
Act prohibits individual states from regulating entry, pricing or service
levels. However, the states retained the right to continue to require
certification of carriers, but this certification is based only upon two primary
fitness criteria: that of safety and insurance. Prior to January 1, 1995, the
Company held intra-state authority in several states. Since that date, the
Company has either been "grandfathered in" or has obtained the necessary
certification to continue to operate in those states. In states that the Company
was not previously authorized to operate, it has obtained certificates (or
permits) allowing it to operate or is in the process of obtaining said
certificates in order of importance to the Company.

From time to time, various legislative proposals are introduced to increase
federal, state, or local taxes on motor fuels. The Company cannot predict
whether, or in what form, any increase in such taxes applicable to the Company
will be enacted.

Fuel

Any increase in fuel taxes or in fuel prices could have a direct impact on the
Company's operating results to the extent that such increases could not be
passed along to its customers. During 1996, fuel prices increased significantly.
Market conditions did not allow the Company to fully recapture this increased
cost.

<PAGE>
ITEM 2. PROPERTY

The principal properties of the Company consist of six full service terminal
locations, and one satellite terminal location. The Company's executive offices
occupy a portion of the Portland terminal. Also at the Portland facility, a rail
spur allows for rail/truck transloading services. The tank wash facilities at
the full service terminals, which are regulated by the EPA and state
authorities, and are used for both Company equipment and as a means to generate
additional tank washing revenue from shippers and other motor carriers.

Management believes the availability of these facilities enables the Company to
provide an integrated service package to its customers.

The following table is a summary of Arrow's facilities:
<TABLE>
<CAPTION>
Owned or
Location Leased Function
-------- --------- --------
<S> <C> <C>

Portland, Oregon Leased Executive Offices, Dispatch, Intermodal,
Maintenance, Transloading, and Tank
Cleaning Facilities

Eugene, Oregon Leased Satellite

Tacoma, Washington Leased Dispatch, Intermodal, Maintenance, and
Tank Cleaning Facilities

Longview, Washington Leased Dispatch, Maintenance and Intermodal
Facilities

Richmond, California Leased Dispatch, Intermodal, Maintenance, and
Tank Cleaning Facilities

Downey, California Leased Dispatch, Intermodal, and Maintenance

Houston, Texas Leased Dispatch, Intermodal,and Maintenance,
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

See Managements' Discussion and Analysis, "Contingencies"

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.

<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's common stock traded on the Nasdaq Small Cap Market tier of the
Nasdaq Stock Market under the symbol "ARRW", until March 11, 1997. On March 11,
1997 the Company's common stock was delisted by Nasdaq as it no longer met
Nasdaq's minimum listing requirements. Effective March 12, 1997, the Company's
common stock began trading on the OTC Electronic Bulletin Board System. The
following table sets forth the high and low closing prices as reported by the
Nasdaq Stock Market.

Prices
Quarter Ended Low High
------------- --- ----
March 31, 1995 3 5
June 30, 1995 2 3/4 3 3/8
September 30, 1995 1 3/4 3
December 31, 1995 1 1/4 2 1/2

March 31, 1996 11/16 1 1/2
June 30, 1996 11/16 1 1/8
September 30, 1996 13/16 1
December 31, 1996 11/32 15/16

The Company has not paid any cash dividends on the common stock in the past and
anticipates that, for the foreseeable future, it will retain any earnings
available for dividends for use in its business. Further, the Company's credit
arrangement with its lender does not allow the Company to declare or pay
dividend on its common stock. There were approximately 1,500 shareholders of
common stock as of March 31, 1997.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial statements
(including the Notes thereto) presented elsewhere. The selected consolidated
financial data have been derived from the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Five Year Selected Financial Data
(Dollars in thousands, except per share amounts)

Year Ended December 31, 1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 27,579 $ 31,416 $ 34,110 $ 24,824 $ 24,990
Income (loss) $ (1,787) $ (1,820) $ 18 $ 753 $ 857
Net income (loss) per common
and equivalent share $ (.43) $ (.43) $ 0.00 $ .21 $ .28

At December 31,
Total assets $ 16,639 $ 20,847 $ 24,184 $ 21,060 $ 12,222
Long-term indebtedness $ 7,814 $ 11,264 $ 10,548 $ 10,124 $ 5,333
Shareholders' equity (deficit) $ 1,063 $ 2,259 $ 4,282 $ 4,189 $ (751)
</TABLE>

<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

The following discussion should be read in conjunction with the Financial
Statements of the Company and notes thereto appearing elsewhere herein.

Results of Operations

The following table sets forth certain financial data as a percentage of
operating revenues:

Years Ended
December 31,
1996 1995 1994
------- ------- -------
Operating revenues 100.00% 100.00% 100.00%
Operating expenses
Compensation 57.18 55.16 53.25
Supplies and maintenance 11.97 12.74 11.16
Fuel and fuel taxes 9.05 8.14 8.14
Depreciation and amortization 8.80 8.88 7.83
Taxes and licenses 3.92 4.36 4.26
Insurance and claims 3.07 2.82 3.22
Selling and administration 4.58 4.70 4.45
Rent and purchased transportation 4.15 4.47 2.76
Communications and utilities 1.89 1.94 1.61
Restructuring expense - 1.70 -
Gain on disposition of revenue equipment (0.12) (0.10) (0.58)
------- ------- -------

Total operating expenses 104.49 104.81 96.10
------- ------- -------

Operating income (loss) (4.49) (4.81) 3.90
Interest expense (3.55) (3.91) (3.78)
Non-operating income (expense), net 0.17 (0.47) 0.07
------- ------- -------
Income (loss) before income taxes
and extraordinary item (7.87) (9.19) 0.05
Income tax (benefit) expense (1.93) (3.40) 0.00
------- ------- -------
Net income (loss) before extraordinary item (5.94) (5.79) 0.05
Extraordinary item, net (0.54) - -
------- ------- -------
Net income (loss) (6.48%) (5.79%) 0.05%
======= ======= =======

This report contains forward looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Factors that might cause
such differences include but are not limited to those discussed below.

The Company made significant changes in 1996 and continues to make changes to
its operations in order to achieve reductions to its operating cost structure.
The Company recently began implementation of phase II of its profit improvement
plan. The phase II plan includes reductions in corporate and support staff,
selected fleet downsizing, operating cost reductions, redeployment of equipment
and the restructuring of certain term debt and lease arrangements. The changes
the Company is making are meant to focus the Company on its core competencies,
to reduce waste and redundancies in its processes, and improve cash flow.

<PAGE>
Although the changes the Company has made and continues to make have reduced its
operating cost structure and are expected to produce improved results, the full
benefit of the many actions the Company has taken have yet to be realized.

The Company's leverage position requires business volume to improve before
profitability will return. The Company did not achieve adequate business volume
in its target markets in 1996 to effectively utilize its fleet. During 1996
business volume was impacted by intense competition due to industry
over-capacity, sluggish freight demand, terminal closures and severe winter
weather conditions. Operating costs were adversely impacted by sharply higher
fuel prices, especially on the west coast, and higher union wage and benefit
rates. These factors contributed significantly to the loss experienced during
1996. Competition in the tank truck industry remains intense with business
increasingly becoming price sensitive. Arrow's focus will continue to be on its
core western market where the Company believes it has a competitive edge.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Results of Operations

Operating Revenues

Revenue for the twelve months ended December 31, 1996 decreased $3,800,000, or
12.2% to $27,579,000 from $31,416,000 for the year ended December 31, 1995. The
Company's revenue declined in 1996 because of terminal closures and the reasons
noted above. During 1996, as part of its restructuring plan, the Company closed
terminals in Baton Rouge, LA, Chattanooga, TN, Port Neches, TX and Tulsa, OK. It
also downsized and refocused its Houston, TX terminal on those lanes of traffic
upon which it could achieve balanced freight demand.

Total shipments decreased 8.0% from 33,265 in 1995 to 30,602 in 1996. Average
miles per shipment decreased to 405 from 431 in 1995, average revenue per
shipment decreased to $901 from $944 in 1995, and revenue per mile increased
from $2.16 to $2.18 for 1996. These changes reflect the elimination of some
non-contributory long-haul business associated with the company's terminals in
Texas and the Southern U.S. The effect of industry over-capacity on pricing also
effected revenue per shipment.

Operating Expenses

Excluding the effect of the 1995 restructuring charge, operating expenses as a
percentage of revenue ("operating ratio") increased from 103.1% in 1995 to
104.5% in 1996. Contractual increases in union wages and benefits combined with
intense pricing pressure, the Company's inability to recover significantly
increased fuel costs and the Company's low levels of capacity utilization in
certain markets offset reductions in expenses that were achieved as part of the
TQM program.

Compensation expense increased as a percentage of revenue to 57.18% from 55.2%
in 1995. The increase was primarily a result of contractually increased union
wages and benefits.

Supplies and maintenance expenses decreased as a percentage of revenue to 12.0%
from 12.7% in 1995. The decrease was primarily a result of a reduction in the
use of non-Company tank cleaning and repair services with the closure of
terminals in the Southeast.

Fuel and fuel taxes increased to 9.1% of revenue from 8.1% of revenue in 1995.
The increase reflects a significant increase in fuel prices, which the Company
was not able to fully recapture due to market conditions.

Depreciation expense decreased $363,000 to 8.8% of revenue from 8.9% of revenue
in 1995. The decrease primarily reflects the sale of 43 power units in 1996 as
part of the Company's fleet downsizing

<PAGE>
Taxes and licenses decreased to 3.9% of revenue from 4.4% of revenue due to a
reduction in licensing expenses due to the fleet downsizing and some
non-recurring 1995 expenses.

Insurance and claims expense increased to 3.1% of revenue from 2.8% in 1995 due
to the decreased sales volumes as the Company's fleet insurance expense was
consistent from 1995 to 1996.

Selling and administration expenses decreased $211,000 to 4.6% of revenue from
4.7% in 1995. The decrease in selling and administration expenses was primarily
a result of non-recurring 1995 expenses for costs associated with the opening of
new terminals and lower levels of professional service fees, offset by costs
incurred in 1996 to implement the TQM program.

Rent and purchased transportation decreased $260,000 to 4.2% of revenue compared
to 4.5% in 1995. The decrease is primarily attributable to moratoriums on
payments granted by creditors.

Interest and Other

Interest expense decreased $249,000 from 1995 to 1996 primarily due to the fleet
downsizing and restructuring of the Company's long-term debt and capital lease
obligations.

The Company reported $48,000 of non-operating income in 1996 compared to
$148,000 of non-operating expense in 1995. The 1995 expense included a
non-recurring $152,000 charge to write down specific receivables to net
realizable value.

Income Taxes

The effective rate of income tax benefit decreased from 37% in 1995 to 25% in
1996 as the Company recorded a valuation allowance against its deferred tax
asset in 1996.

Extraordinary Item, Net

The Company recorded a $150,000 charge for the net effect of restructuring its
long-term debt obligations and the disposal of capital lease assets and the
related obligations with the Company's creditors. The restructuring reduced
payments due in 1997 by approximately $1 million.

Net Income (Loss)

The Company incurred a net loss of $1,787,000 or $.43 per share in 1996 compared
to a net loss of $1,820,000 or $.43 per share in 1995. Decreased business volume
caused by industry over-capacity, sluggish freight demand, terminal closures and
severe winter weather conditions impacted revenues. Operating costs were
adversely impacted by sharply higher fuel prices, especially on the west coast,
and higher union wage and benefit rates. These factors along with the
extraordinary charge to restructure the Company's obigations contributed
significantly to the loss experienced during 1996.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.

Both revenue and earnings declined in 1995 as a result of overly aggressive
geographic and fleet expansion in 1994 and 1995. The terminals and carrying
capacity added in late 1994 and early 1995 added operating and overhead expense
and were not effectively utilized because of lower business levels. Arrow
utilized less than 60% of its carrying capacity in 1995. This low level of
capacity utilization and lack of balance in its new longhaul traffic lanes were
the primary factors which contributed to the losses experienced in 1995.

<PAGE>
Results of Operations

Operating Revenues

Revenue for the twelve months ended December 31, 1995 decreased $2,694,000, or
7.9% to $31,416,000 from $34,110,000 for the year ended December 31, 1994. The
Company's revenue declined in 1995 as a result of business lost from service and
pricing issues, sluggish freight demand from slow growth in the durable goods
producing sectors of the economy, the impact of deregulation of intrastate
transportation and business lost as a result of service disruptions caused by
1994's labor problems.

Total shipments in 1995 were 33,265 compared to 40,515 in 1994 a decrease of
17.9% from the prior year. Average miles per shipment increased to 431 from 380
in 1994. Average revenue per shipment increased to $944 from $822 in 1994. The
increases in miles and revenue per shipment reflect the higher mileage shipments
associated with business generated at the company's terminals in Texas and the
Southern U.S. Revenue per mile decreased slightly to $2.15 from $2.16. Excess
empty miles associated with the higher mileage shipments from Texas and the
Southern U.S. were primarily responsible for this decline.

Operating Expenses

Operating expenses as a percentage of revenue ("operating ratio"), increased to
104.8% in 1995 from 96.1% in 1994. The terminals and carrying capacity added in
1994 and in the first half of 1995 were not effectively utilized because of
lower business levels. The Company's expansion and fleet modernization programs
added to the Company's operating costs and carrying capacity. During 1995 the
Company experienced higher operating expenses associated with increased union
wages and benefits, the purchase/lease of new revenue equipment as well as costs
associated with the Company's expansion into new markets. These increases
combined with lower revenue levels and a restructuring charge of $535,000,
recorded in the fourth quarter of 1995, were the primary reasons for the
increase in the Company's operating ratio.

Compensation expense increased as a percentage of revenue to 55.2% from 53.3% in
1994. The increase was primarily a result of increased union wages and benefits
and compensation costs associated with personnel added to staff the Company's
new terminals.

Supplies and maintenance expenses increased as a percentage of revenue to 12.8%
from 11.2% in 1994. The increase was primarily a result of a higher use of
outside tank cleaning, equipment additions and increased parts, supplies and
repair costs associated with the Company's new terminals.

Depreciation expense increased $120,000 to 8.9% of revenue from 7.8% in 1994.
The increase was the result of equipment additions in late 1994 and in 1995 as
part of the Company's fleet modernization program.

Insurance and claims expense decreased in 1995 to 2.8% of revenue from 3.2% in
1994. The decline was attributable to lower insurance costs which resulted from
the company's favorable claims experience.

Selling and administration expenses increased to 4.7% of revenue from 4.5% in
1994. The increase in selling and administration expenses was primarily a result
of certain costs associated with the opening of new terminals and higher levels
of professional service fees.

Rent and purchased transportation increased to 4.5% of revenue compared to 2.8%
in 1994. The increase was principally attributable to the addition of revenue
equipment financed through operating leases.

Communications and utilities expense increased to 1.9% of revenue from 1.6% in
1994. The increase was

<PAGE>
a result of increased data line and cellular communications costs associated
with the Company's terminal and fleet expansion.

During the fourth quarter of 1995, the Company's board of directors approved a
profit improvement plan for 1996 to refocus the Company's operations on those
markets where management and the board believe the Company has a competitive
edge. The implementation of the plan will result in a downsizing of the
company's fleet, a reduction in its corporate staff and the closure of terminals
in Baton Rouge, LA, Chattanooga, TN and Tulsa, OK. The Company recorded a
restructuring charge of $535,000 in the fourth quarter of 1995 to reflect the
costs associated with implementing the profit improvement plan.

Interest and Other

Interest expense declined slightly in 1995 from 1994. Lower debt levels were
primarily responsible for the decrease. The Company recorded net other expense
of $148,000 in 1995 compared to $22,000 in 1994. The increase in net other
expense was primarily related to an increase in reserves related to other assets
the Company has determined may not be fully realizable.

Income Taxes

The estimated effective rate of income tax (benefit) for 1995 was 37%. In 1994,
due to low earnings, there was no tax expense recognized.

Net Income(Loss)

The Company recorded a net loss of $1,820,000 or $.43 per share in 1995 compared
to net income of $18,000 or $.00 per share in 1994. The net loss for 1995 was
primarily caused by overexpansion of the Company's fleet and terminal network
and a lack of balance in its new higher mileage traffic lanes from the Southern
US. Lower revenue levels in 1995 combined with an increase in costs associated
with the Company's increased carrying capacity and expanded terminal network
resulted in a low level of capacity utilization in 1995. The low level of
capacity utilization combined with higher operating costs related to the
Company's expansion, labor agreement, fleet modernization program and
restructuring charges were the principal reasons for the loss in 1995.

Liquidity and Capital Resources
- -------------------------------

Net cash provided by operating activities was approximately $1,263,000 for 1996
and $2,019,000 for 1995. Capital expenditures were $102,000 for 1996 compared to
$1,671,000 for 1995. In 1995, the Company leased 35 new tractors and acquired 13
new stainless steel tank trailers due to purchase commitments.

In order to finance its operations and fund capital expenditures, the Company
obtained loans from its principal lender and loans, capital and operating leases
from equipment manufacturers and other asset based lenders/lessors for its
revenue equipment. The equipment loans/leases, which are of shorter duration
(four to five years for tractors, five to seven years for trailers) than the
economic useful lives of the equipment, result in maturities that contribute to
working capital deficits. At December 31, 1996 the Company had a working capital
deficiency of approximately $3,367,000 compared to a deficiency of $489,000 at
December 31, 1995. The equipment modernization program and associated financing
combined with recent losses by the Company have created the working capital
deficit. The increase in the Company's working capital deficiency from 1995 to
1996 also reflects a change in classification of the Company's line of credit
borrowings to a current liability in 1996 due to its November 1997 maturity
date.

<PAGE>
lesser of $4,000,000 or 85% of eligible accounts receivable which were
$2,321,000 at December 31, 1996. The unused portion of the line of credit was
$79,000 at December 31, 1996.

The combined credit arrangement includes various restrictive covenants
including, a prohibition on dividends and minimum adjusted net worth. At
December 31, 1996, the Company was in compliance with all of the debt covenants
relating to this credit arrangement.

During the first quarter of 1996, the Company, implemented a downsizing and
restructuring plan to reduce costs, improve operating efficiency and cash flow,
and to restore profitability. In September 1996, the Company began implementing
phase II of its profit improvement plan. The phase II plan included reductions
in corporate and support staff, selected fleet downsizing, operating cost
reductions, redeployment of equipment and the restructuring of certain term debt
and lease arrangements. In the opinion of management, provided the plan is
successful and the Company's results of operation improve, funds expected to be
generated from future operations, proceeds from its credit arrangements and the
Company's ability to rely upon secured borrowing/leases should provide adequate
liquidity.

To date the Company has not achieved business volume sufficient to effectively
utilize its fleet and as a result, the profit improvement plan has yet to
restore the Company to a positive cash flow position. In the event the Company's
profit improvement plan is not successful and its results of operations fail to
demonstrate improvement, (due to unanticipated expenses, delays, problems,
difficulties or otherwise) available cash and credit facilities will not prove
to be sufficient to fund operations. The Company would then be required to seek
additional debt or equity financing or obtain relief from its creditors.
Although the Company obtained an additional $250,000 in capital during the
second quarter of 1996 and restructured many of its term debt and lease
obligations in the fourth quarter of 1996, other than the Company's current
credit arrangements, the Company has no current arrangements with respect to
other sources of additional financing at this time. There can be no assurance
that additional financing or accomodations from creditors, if required, will be
available to the Company on commercially reasonable terms, or at all.

In January 1997, the Company entered a loan agreement ("the Agreement") with the
holder of the Company's preferred stock (the "Lender"). The Lender has agreed to
advance funds to the Company at the Company's request. The principal balance of
all funds advanced by the Lender shall bear interest at the rate of 10%, and all
amounts loaned under the Agreement (including interest) shall be payable within
ten days of written demand by Lender. The Company borrowed $100,000 from the
Lender in January 1997.

Contingencies

The Company is party to four potentially material actual or pending proceedings:

(a) The Washington Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and served an administrative enforcement order on
the Company and 16 other companies associated with the Yakima Railroad Area
("YRRA") in Yakima, Washington. Ecology alleges in the order that all 17 of the
companies have some connection with the presence of the chemical
Perchloroethylene ("PCE") in the ground water underlying the YRRA. The Company
used carbon filtration to treat wash water from its trucks.

The spent carbon was taken by an independent transporter to the Cameron Yakima
facility located within the YRRA. This transporter directly contracted with the
Cameron-Yakima recycling facility. Ecology claims that Cameron-Yakima is a
source of PCE contamination, along with other facilities located within the
YRRA. The principal parties with respect to the enforcement order are Ecology,
the Company and the 16 other companies that were served with the order. There
are many other parties, not named on the order, who used Cameron- Yakima and are
potentially liable for contamination at the site. The order directs the
respondent parties to develop and implement a remedial investigation/feasibility
study ("RI/FS") of the YRRA to identify the nature and extent of PCE
contamination in the ground water. The order further directs the respondents to
provide bottled drinking water to certain households within the YRRA, if PCE is
detected in sampled domestic tap water. It is possible that, upon completion of
the RI/FS, Ecology could order the Company and other parties to take further
action, including remediation. Ecology has settled claims with a number of other
potentially responsible parties at this site, but thus far the Company has not
been able to settle this claim on a basis acceptable to the Company. If the
Company is unable to reach a separate settlement, the Company may be potentially
liable for remediation costs that are not recovered from the settling parties
and for contribution.

<PAGE>
Given the current status and inherent uncertainties in this matter the Company
is unable to determine or quantify in any meaningful way its potential
liability, and therefore, cannot determine whether it will have a material
effect on the Company's financial condition, results of operations, or cash
flows. The settlements thus far proposed by Ecology would have had material
adverse effects on the Company's financial condition and cash flows.

(b) In 1991, the Company was added as a defendant to a case entitled Department
of Labor & Industries vs. Puget Sound Trucklines, et al., in King County,
Washington Superior Court, that alleges the Company, among others, has violated
the overtime pay provisions of Washington state law. Puget Sound Truck Lines
reached an out of court settlement with the Department of Labor and Industries
in 1995. In May 1996, the case was restyled Rex W. Allen et al vs. Arrow
Transportation Company. The action, as to the Company, now involves 30 current
and former Company employees. Eight plaintiffs reached a settlement with the
Company in 1996. The remaining plaintiffs seek unspecified overtime pay,
interest and attorney's fees.

The plaintiff has indicated that it intends to amend its claim against the
Company to include the Company's payment practices since 1991. If permitted and
proven, this expansion would have the effect of increasing the Company's
potential liability to the plaintiffs, and might affect the Company's future
employment practices in the State of Washington. The Company is unable at this
time, however, to determine what effect, if any, this litigation will have on
the Company's financial condition, results of operations, or cash flows.

(c) The Washington Department of Natural Resources ("DNR") filed an action
against the Company and several other parties in November 1995. It sought to
recover cleanup costs totaling $389,000 from Arrow and the other parties, who
all at various times leased a site in Seattle which was later acquired by the
Department. Arrow leased a portion of the site for five years. The Company has
reached an agreement in principle with DNR to settle this claim for a $47,500.
The Company recognized the cost of this settlement in the fourth quarter of
1996.

(d) An action was filed against the Company on May 7, 1996, by Sal N. Cincotta
in the United States District Court for the District of Oregon alleging breach
of contract and unpaid wages. Mr. Cincotta was previously employed by the
Company as its President and Chief Executive Officer, and was a director of the
Company prior to his resignation on May 3, 1996. On October 18, 1996, Mr.
Cincotta filed a motion for summary judgement in this action, seeking $458,139
in total damages. On February 11, 1997, a Magistrate Judge entered a Proposed
Findings and Recommendation in favor of Mr. Cincotta, including an award of pre-
judgement interest. The Company strongly objected to the Proposed Findings and
Recommendation and appealed the issue to a District Court Judge. The Company
continues to vigorously defend the matter. The Company cannot determine whether
costs of defense or the probable result of this litigation will have a material
effect on the Company's financial condition, results of operations, or cash
flows. A ruling by the District Court Judge in favor of Mr. Cincotta, unless
stayed and reversed on appeal would have a material adverse effect on the
Company's financial condition and cash flows.

The Company is a defendant in various claims and other legal proceedings arising
in the ordinary course of business. While resolution of these matters cannot be
predicted with certainty, management believes that the ultimate outcome of such
litigation will not have a materially adverse effect on the Company's financial
position, results of operations or cash flows. In addition to legal
contingencies, management estimates the Company's liability for property,
freight and workers' compensation claims based upon prior claim experience and
records such liabilities in its financial statements.

Seasonality

Seasonality causes variations in the operations of the Company as well as
industry-wide. Demand for the Company's services is generally highest during the
summer and fall months. Historically, expenses are greater as a percentage of
revenues in the winter months as operating efficiency is lower because of lower
utilization rates and weather related costs.

<PAGE>
Inflation

The effect of inflation on the Company has not been significant during the last
two years. However, an extended period of inflation could be expected to have an
impact on the Company's earnings by causing interest rates, fuel and other
operating costs to increase. Unless freight rates could be increased on a timely
basis, operating results would be adversely affected.

Deregulation

The Company has historically derived significant revenue from intrastate
shipments in the states of Oregon and Washington pursuant to operating
authorities granted, and tariff rates approved, by the regulatory bodies in
those states. Effective January 1, 1995, the authority of those states to
regulate entry into those markets and the rates charged for such intrastate
shipments were terminated by federal statute. This termination has resulted in
increased competition and downward pressure on rates charged by the Company in
these markets. In 1995 and 1996, deregulation negatively impacted the Company's
business in the Northwest as the Company lost business to new entrants into this
market.

Item 8. Financial Statements and Supplementary Data

(a) Financial statements and exhibits filed under this item are
listed in the index appearing on Page F-1 of this report.

(b) Quarterly financial information (in thousands except per share
data)(unaudited)
<TABLE>
<CAPTION>
1996 1st quarter 2nd quarter 3rd quarter 4th quarter
- ----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $ 6,739 $ 7,419 $ 7,099 $ 6,322
Income (loss) from operations (425) (298) (163) (351)
Income (loss) before extraordinary item (633) (545) (453) (634)
Net income (loss) (390) (332) (281) (784)
Net income (loss) per share
before extraordinary item (.09) (.08) (.07) (.15)

1995 1st quarter 2nd quarter 3rd quarter 4th quarter
- ----- ----------- ----------- ----------- -----------
Operating revenues $ 7,912 $ 8,414 $ 8,237 $ 6,853
Income (loss) from operations (30) 354 6 (1,840)
Income (loss) before income taxes (307) 65 (282) (2,363)
Net income (loss) (185) 39 (169) (1,505)
Net income (loss) per share (.04) .01 (.04) (.36)
</TABLE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

The Company has not experienced a change in independent auditors or had any
disagreements with its independent auditors, Deloitte & Touche LLP. Deloitte &
Touche LLP has served as the Company's independent auditors since its inception
and served as independent auditors of its subsidiary Arrow Transportation Co. of
Delaware since 1988.

<PAGE>
PART III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth information regarding the directors and executive
officers of the Company:

Name Age Position with the Company
- ------------------------ --- ----------------------------------------------
Robert H. Cutler 77 Chairman, Chief Executive Officer
John D. Erwin 51 President, Chief Operating Officer
William J. Stanners, Jr. 42 Senior Vice President, Chief Financial Officer
William R. Blosser (1) 52 Director
James N. Cutler (1) 45 Director
Jerry A. Parsons (1) 61 Director
Thomas D. Taylor 80 Director

(1) member of Audit Committee

The directors hold office until the next annual meeting of shareholders or until
their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors.

ROBERT H. CUTLER(1) Chairman, Chief Executive Officer, has been a director of
the Company since 1982. Mr. Cutler was elected Chairman in January 1996. Mr.
Cutler has over 50 years experience in the transportation industry. Mr. Cutler
served as President of the American Trucking Association from 1967-1968. He
served as Assistant to the President of Consolidated Freightways from 1946-1949,
Executive Vice President of Bekins Van Lines from 1949-1952, President of
Texas-Arizona Motor Freight from 1952-1962 and Chairman and Chief Executive
Officer of Illinois-California Express from 1962 until his retirement in 1988.
Mr. Cutler is Chairman of The Cutler Corporation. He also serves as a director
of R&K Industrial Products, Laurance David, Inc. and Jen-Cel-Lite Co.

JOHN D. ERWIN was elected President, Chief Operating Officer in November 1996.
He had served as Senior Vice President with responsibility for marketing and
operations since joining the Company in 1993. He has over 25 years experience in
the tank truck industry. Prior to joining Arrow, Mr. Erwin served as Vice
President - Western Region of Matlack Systems, Inc., from 1984 to 1993.

WILLIAM J. STANNERS, JR. Senior Vice President, Chief Financial Officer, has
served as CFO and corporate secretary since 1991. Prior to joining Arrow, Mr.
Stanners served for 15 years in the financial services industry, concentrating
in corporate finanace.

WILLIAM R. BLOSSER became a Director of the Company in May 1993. He is Manager
of Planning and Environmental Sciences at CH2M Hill, one of the world's largest
environmental engineering and consulting firms, headquartered in Denver,
Colorado. Mr. Blosser is also the founder and owner of Sokol Blosser Winery, one
of Oregon's largest wineries. He has served as Chairman of the State of Oregon
Water Resources Commission, Chairman of the State of Oregon Land Conservation
and Development Commission, and as a member of the Western States Water Council.

JAMES N. CUTLER, JR.(1) has been a director of the Company since September 1982.
He is the President and a director of The Cutler Corporation, a holding company
for two manufacturing firms. Mr. Cutler is also chairman of the Elk Island
Corporation, a director and President of R&K Industrial Products Company of
California and Chairman of Jen-Cel-Lite Corporation in Seattle, Washington. He
also serves as President of Mid-Pacific Leasing Corporation and as a director of
Hollywood Entertainment Corporation.

- --------
(1) Mr. Robert Cutler is James Cutler, Jr.'s uncle.

<PAGE>
JERRY A. PARSONS became a Director of the Company in May 1993. He is the
Executive Vice President Chief Financial Officer of Willamette Industries, Inc.,
a Fortune 500, diversified, integrated forest products company headquartered in
Portland, Oregon.

THOMAS D. TAYLOR, was elected to the Board in June 1996. Mr. Taylor has over 50
years experience in the transportation industry. He served as President of
Freightliner Corporation from 1946-1959 and Senior Vice Presdient of
Consolidated Freightways, from 1956-1960. He was Owner and Chairman of Cummins
Diesel, Cummins Northwest and Cummins Hawaii from 1961-1992. He is currently
Chairman of Palaau Corporation.

Committees

The members of the Audit Committee are William R. Blosser, James N. Cutler, Jr.
and Jerry A. Parsons. The Audit Committee represents the Board in discharging
its responsibilities relating to the accounting, reporting and financial control
practices of the Company and subsidiary. The Committee has general
responsibility for surveillance of financial controls, as well as for accounting
and audit activities of the Company and subsidiary.

The Committee annually reviews the qualifications of the independent certified
public accountants, makes recommendations to the Board as to their selection,
reviews the scope, fees and results of their audit and approves their non-audit
services and related fees.

Item 11. Management Remuneration and Transactions

Executive Compensation

The following table sets forth the total compensation paid or accrued by the
Company for services rendered during the year ended December 31, 1996 by the
Chief Executive Officer of the Company and each of the other most highly
compensated executive officers of the Company whose total cash compensation for
the year ended December 31, 1996, exceeded $100,000.

Name of Individual Annual Compensation
Position Year Salary Bonus
-------- ---- -------- -----
Robert H. Cutler 1996 $ 2,000 -0-
Chairman, CEO 1995 $ 2,000 -0-
1994 $ 65,000 -0-

John D. Erwin 1996 $109,633 -0-
President, COO 1995 $109,093 -0-
1994 $102,799 -0-

Sal N. Cincotta 1996 $ 60,637 -0-
Former President, CEO 1995 $157,611 -0-
1994 $142,921 -0-

In December 1995, in conjunction with the Company's restructuring and profit
improvement plan, the board of directors placed Mr. Cincotta on an indefinite
leave of absence from the Company. In January 1996, Robert H. Cutler was elected
chairman and in February 1996 was elected Interim Chief Executive Officer. On
April 3, 1996, the board of directors approved a resolution to terminate Mr.
Cincotta's contract. Mr. Cincotta was provided formal notice of the board of
directors decision on that day and payments under this contract terminated on
May 3, 1996. Mr. Cincotta resigned as an officer and director of the Company on
May 3, 1996. Mr. Cutler was elected Chief Executive Officer in June 1996 and
currently receives no compensation other than Board of Directors fees for his
services as Chief Executive Officer.

<PAGE>
Mr. Erwin joined the Company in August 1993. The Company, on August 30, 1993,
entered into a three-year Employment agreement with Mr. John D. Erwin, pursuant
to which he served as Senior Vice President of the Company. Mr. Erwin's contract
was canceled in March 1996. In November 1996, Mr. Erwin was elected President
and Chief Operating Officer.
<TABLE>
<CAPTION>

Option Grants in Last Year

Potential
Number of Percent of Realizable Value at
Securities Total Options Assumed Annual Rates
Underlying Granted to of Stock Price Appreciation
Options Employees in Exercise Expiration for Five Year Option Term (2)
Name Granted (1) Fiscal Year Price Date 5% 10%
- ---- ----------- ------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John D. Erwin 100,000 35.7% $0.50 11/20/02 63,814 80,525
</TABLE>
(1) Each of the options reflected in this table was granted pursuant to
Arrow Transportation Co.'s 1992 Non-Statutory Stock Option Plan. The
exercise price of each option is equal to the fair market value of the
Company's Common Stock on the date of grant. The options have a 5-year
term and vest over four years.

(2) These assumed rates of appreciation are provided in order to comply
with the requirements of the SEC and do not represent the Company's
expectation as to the actual rate of appreciation of the Common Stock.
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over
the full option term. The actual value of the options will depend on
the performance of the Common Stock and may be greater or less than the
amounts shown.

Year - End Options Values

Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year End
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
John D. Erwin 65,000 35,000 0 0

Compensation of Directors.

Each director who is not an employee of the Company is paid $500 per meeting for
their attendance at Board meetings in addition to their out-of-pocket expenses
for attendance.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each of the Company's directors,
(iii) the Company's executive officers and (iv) directors and executive officers
as a group.

<PAGE>
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership Of Class
- ---------------- --------------------- --------
Robert H. Cutler 516,760 12.33%
James N. Cutler Jr. 651,000(1) 15.53%
Jerry A. Parsons 10,000(2) 0.24%
William R. Blosser 2,000(3) 0.05%
Sal N. Cincotta 518,000(4) 12.36%
William J. Stanners, Jr. 11,137(5) 0.27%
John D. Erwin 1,767(6) 0.04%
All executive officers and
directors as a group (6 persons) 1,192,664 28.45%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Messrs. Robert Cutler, James Cutler, Jr. and Sal Cincotta entered into a
shareholders agreement to provide that (i) Mr. Cincotta will have a right of
first refusal to purchase any shares sold by either Robert Cutler of James
Cutler , Jr. and (ii) Mr. Cincotta and Messrs. Robert Cutler and James Cutler,
Jr. will each have co- sale rights in the event of a sale of shares by the
other, unless such sale is made pursuant to Rule 144.

In May 1996, the Company issued to Thomas D. Taylor 50,000 unregistered shares
of Class A convertible preferred stock with a par value of $5.00 per share under
a Preferred Stock Purchase and Option Agreement ("the Agreement"). The Agreement
includes an option to purchase an additional 50,000 shares of Class A
convertible preferred stock at an exercise price of $5.00 per share. The option
expires on June 30, 2001. Each share of preferred stock is convertible at any
time at the option of the holder, into ten shares of the Company's common stock.
The preferred stock bears a 7% annual dividend, payable each May at the
Company's option either in cash or in additional shares of preferred stock. The
preferred stock will be entitled to vote on an as-converted basis, and to a
preference on any liquidation of the Company.

During the year ended December 31, 1994, the Company paid Robert Cutler $60,000
as consultant fees. The consulting fees of $5,000 per month paid to Mr. Robert
Cutler was discontinued in December 1994. There were no consulting fees paid to
any director or related party in 1995 and there are no arrangements to pay any
further consulting fees.

During the year ended December 31, 1994, the Company leased three automobiles
used by officers and employees of the Company from Mid Pacific Leasing
Corporation which is owned by James N. Cutler, Jr.
- --------

(1) Includes 4,000 shares owned as trustee for the Alexandra Merrill Cutler
Trust.

(2) Also owns options to purchase up to 10,000 shares under the Company's 1992
Incentive and Non-Statutory Stock Option Plan which are currently exercisable.

(3) Also owns options to purchase up to 10,000 shares under the Company's 1992
Incentive and Non-Statutory Stock Option Plan which are currently exercisable.

(4) Includes 85,000 shares owned by Lottie M. Cincotta spouse of Sal N.
Cincotta.

(5) Also owns options to purchase up to 100,000 shares under the Company's 1992
Incentive and Non-Statutory Stock Option Plan which are 60,000 are currently
exercisable.

(6) Also owns options to purchase up to 100,000 shares under the Company's 1992
Incentive and Non-Statutory Stock Option Plan of which 65,000 are currently
exercisable.
23

<PAGE>
All the leases expired or were terminated in 1994. No rent was paid in 1995.
Rent totaling $22,921 was paid to Mid Pacific Leasing Corporation in 1994. In
addition, the Company leased ten trailers from C&C Joint Venture, a partnership
consisting of Robert H. Cutler and James N. Cutler, Jr. The trailer lease, which
was dated July 10, 1990 and expired June 13, 1995, and provided for a monthly
rental of $10,813. At the expiration of the lease the Company had the option to
purchase the trailers for an amount equal to nine months additional rental. In
1995, the Company exercised its option and purchased the trailers for $97,317
from C&C Joint Venture.

During the year ended December 31, 1994, the Company held a note receivable from
The Cutler Corporation in the amount of $100,000. This note was non-interest
bearing and was unsecured. The amount outstanding represented the balance
remaining on a note dated April 14, 1989 which resulted from a loan made by the
company to The Cutler Corporation. This note was repaid on March 7, 1994 by
offsetting the balance of the note against the conversion of the Company's
preferred stock owned by The Cutler Corporation.

During the year ended December 31, 1994, the Company had a note payable to Mr.
Robert Cutler in the amount of $80,000 as of January 1, 1994. The note bore
interest at 8%. Principal payments of $8,265 plus interest were paid monthly
directly to Sun West Bank on Mr. Cutler's behalf. This note, which represented
the balance remaining on a loan made by Mr. Cutler to the Company in 1986, was
repaid in 1994.

On December 17, 1991, The Cutler Corporation acquired 500,000 shares of
preferred stock of the Company for $500,000. The preferred shares were
non-voting, non-dividend bearing, nonparticipating and non-convertible. The
preferred shares were exchanged at par for common stock of the Company on March
7, 1994. Since The Cutler Corporation owed the Company $100,000, as discussed
above, the Company exchanged such preferred shares for 59,260 shares of common
shares on March 7, 1994 at a net par value of $400,000.

Stock Option Plan

Under the Company's 1992 Incentive and Non-Statutory Stock Option Plan (the
"Plan"), 350,000 shares of Common Stock are reserved for issuance upon exercise
of stock options. The Plan is designed as a means to retain and motivate key
employees, and to provide incentives or compensation to certain other
non-employees, including the independent directors of the Company. The Board of
Directors administers and interprets the Plan and is authorized to grant options
thereunder to all eligible employees of the Company, including officers and
non-employee directors.

The Plan provides for the granting of both incentive stock options (as defined
in Section 422 of the Internal Revenue Code) and non-statutory stock options.
Options are granted under the Plan on such terms and at such prices as
determined by the Board of Directors, except that the per share exercise price
of incentive stock options cannot be less than the fair market value of the
Common Stock on the date of grant. Each option is exercisable after the period
or periods specified in the option agreement, but no option may be exercisable
after the expiration of ten years from the date of grant. Options granted under
the Plan are not transferable other than by will or by the laws of descent and
distribution.

<PAGE>
ITEM 14. INDEX TO EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3(i) - Articles of incorporation Arrow Transportation Co. dated as of
February 10, 1992 (incorporated by reference in Exhibit 3.1 to the
Registration Statement on Form SB-2, Registration Statement No. 33-
63712-S, as filed with the Securities and Exchange Commission on July
16, 1993 [hereinafter the "1993 SB-2"]).

3(ii) - Bylaws of the Company (incorporated herein by reference to Exhibit 3.2
to the 1993 SB-2).

4.1 - Incentive Stock Option Plan (incorporated herein by reference to
Exhibit 4.1 to the 1993 10-KSB).

4.2 - Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 4.2 to the 1993 10-KSB).

10.2 - Lease agreement on the Houston facility (incorporated herein by
reference to Exhibit 10.2 to the 1993 10-KSB).

10.5 - Incentive Stock Option Agreements dated July 22, 1993 (incorporated
herein by reference to Exhibit 10.5 to the 1993 10-KSB).

10.6 - Incentive Stock Option Agreement dated August 26, 1993 (incorporated
herein by reference to Exhibit 10.6 to the 1993 10-KSB).

10.7 - Loan Agreement with Thomas D. Taylor.

21 - A list of subsidiaries (incorporated by reference to Exhibit 22 to the
1993 SB-2).

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period covered
by this report.

<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Arrow Transportation Co.

Dated April 11, 1997

By: \s\ Robert H.Cutler
----------------------
Robert H. Cutler, Chairman
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.

Signature Title Date
--------- ----- ----

\s\ Robert H. Cutler Director, Chairman, April 11 , 1997
- ------------------------------ Chief Executive Officer ----
Robert H. Cutler

\s\ John D. Erwin President April 11 , 1997
- ------------------------------ Chief Operating Officer ----
John D. Erwin

\s\ William J. Stanners, Jr. Senior Vice President April 11 , 1997
- ------------------------------ Chief Financial Officer ----
William J. Stanners, Jr.

\s\ William R. Blosser Director April 11 , 1997
- ------------------------------ ----
William R. Blosser

\s\ James N. Cutler, Jr. Director April 11 , 1997
- ------------------------------ ----
James N. Cutler, Jr.

\s\ Jerry A. Parsons Director April 11 , 1997
- ------------------------------ ----
Jerry A. Parsons

\s\ Thomas D. Taylor Director April 11 , 1997
- ------------------------------ ----
Thomas D. Taylor

<PAGE>
EXHIBIT 10.7

LOAN AGREEMENT

This Loan Agreement ("Agreement"), effective January , 1997, is by and
between Arrow Transportation Company, an Oregon corporation ("Borrower") and
Thomas D. Taylor, a resident of the State of Oregon ("Lender").

RECITALS

Lender has agreed to loan funds to Borrower pursuant to one or more
advances upon the terms and conditions contained in this Agreement. Repayment of
the loan is unsecured.

The parties agree as follows:

AGREEMENT

1. Loan Terms.

1.1 Nature of Loan. Subject to the terms and conditions set
forth in this Agreement, Lender may, in its sole discretion, advance funds to
Borrower at Borrower's request.

1.2 Interest Rate. The principal balance of all funds advanced
by Lender under this Agreement, together with any interest accrued but unpaid
after any due date, shall bear interest at a fixed rate of ten percent (10%) per
annum (the "Interest Rate").

1.3 Calculation of Interest. Interest accrued on any monies
advanced under this Agreement shall be calculated on the basis of a 360 days per
year factor applied to the actual days on which there exists an unpaid principal
balance.

1.4 Record of Advances. All advances, including interest and
cost accruals, will not be memorialized by promissory notes, but rather will be
recorded on a ledger maintained by Lender. The amounts so recorded may be
reviewed by Borrower at any time, but will be conclusively deemed to be accurate
45 days after the date of entry on Lender's ledger.

1.5 Repayment Terms. All amounts loaned under this Agreement,
including all accrued and unpaid interest, shall be payable within ten (10) days
of written demand therefor by Lender.

2. Borrower's Covenants. Borrower covenants and agrees, during the term
of the Agreement and while any obligations to Lender are outstanding and unpaid,
to perform all acts and promises set forth below.

Page 1 - LOAN AGREEMENT

<PAGE>
2.1 Payment and Performance. Borrower shall pay and perform
all obligations under this Agreement in full when and as due, time being
strictly of the essence.

2.2 Further Assurances. Borrower agrees to execute such other
documents as may from time to time in the reasonable opinion of Lender be
necessary to confirm the purposes and intentions of this Agreement.

2.3 Assignment. Borrower shall not assign or attempt to assign
this Agreement or any of its rights hereunder.

3. Default.

3.1 Events of Default. Any of the following events shall be
considered a default of this Agreement (an "Event of Default") and shall entitle
Lender to exercise the rights and remedies under Section 3.2 below.

3.1.1 Default in Payment. If at any time Borrower
fails to make any payment when due under this Agreement, Borrower shall be in
default of this Agreement.

3.1.2 Failure to Perform Covenants. If Borrower fails
to perform any of the covenants provided in Article 2, Borrower shall be in
default of this Agreement.

3.1.3 False Statements. If any financial statement,
representation, warranty or certificate made or furnished by Borrower to Lender
in connection with this Agreement, or as an inducement to enter into this
Agreement, or in any separate statement or document to be delivered to Lender,
shall be materially false or incomplete when made, Borrower shall be in default
of this Agreement.

3.2 Remedies. On the happening of any Event of Default, Lender
may: (a) accelerate and call due the unpaid principal balance of all advances
and all accrued interest and other sums due hereunder; (b) file suit against
Borrower; (c) seek specific performance or injunctive relief to enforce
performance of the undertakings, duties and agreements provided in this
Agreement, whether or not a remedy exists at law or is adequate; and (d)
exercise all other rights and remedies provided by this Agreement.

3.3 Remedies Cumulative. The rights and remedies provided in
this Agreement or otherwise under applicable laws shall be cumulative and the
exercise of any particular right or remedy shall not preclude the exercise of
any other rights or remedies in addition to, or as an alternative of, such right
or remedy.

Page 2 - LOAN AGREEMENT

<PAGE>
3.4 Notice of Default. Lender shall provide Borrower with five
business days notice and opportunity to cure any default arising from the
failure of Borrower to satisfy an obligation of payment under this Agreement and
with fifteen (15) calendar days notice and opportunity to cure any other act or
omission constituting an Event of Default. Notwithstanding anything to the
contrary stated herein, Borrower shall not be entitled to notice or opportunity
to cure any of the Events of Default particularized in Section 3.1.3.

3.5 Obligations of Borrower Hereunder Unconditional. The
payment and performance of the obligations under this Agreement shall be the
absolute and unconditional obligations of Borrower and shall be independent of
any defense or any rights of setoff, recoupment or counterclaim which Borrower
might otherwise have against Lender. Borrower shall pay during the term of this
Agreement the payments of principal and interest to be made on account of the
advances and all other payments required hereunder, free of any deductions and
without abatement, diminution or setoff.

4. Miscellaneous Provisions.

4.1 Interpretation. This Agreement shall be interpreted
in a manner consistent with the following acknowledgements.

(a) Ambiguities. The parties acknowledge that each
party and its counsel has materially participated in the drafting of this
Agreement; consequently, the rule of contract interpretation, that ambiguities,
if any, in a writing be construed against the drafter, shall not apply.

(b) Headings. The section headings in this Agreement
are included for convenience only; they do not give full notice of the terms of
any portion of this Agreement and are not relevant to the interpretation of any
provision of this Agreement.

(c) Relationship of the Parties. Neither party to
this Agreement shall be deemed an employee, agent, partner, joint venturer, or
related entity of the other by reason of this Agreement.

(d) Governing Law. The parties intend that this
Agreement shall be governed by and construed in accordance with the laws of the
State of Oregon applicable to contracts made and wholly performed within Oregon
by persons domiciled in Oregon.

4.2 Integration; Amendment. This Agreement constitutes the
entire agreement of the parties relating to the subject matter of this
Agreement. There are no promises, terms, conditions, obligations, or warranties
other than those contained herein.

Page 3 - LOAN AGREEMENT

<PAGE>
Specifically, as of the date of this Agreement, Lender has not agreed to make
any advances and may, in its sole discretion, elect to not provide any advances.
This Agreement supersedes all prior communications, representations, or
agreements, verbal or written, among the parties relating to the subject matter
of this Agreement and may not be amended except in writing executed by the
parties.

4.3 Waiver. No provision of this Agreement shall be deemed to
have been waived unless such waiver is in writing signed by the waiving party.

4.4 Attorney Fees. If any suit or action arising out of or
related to this Agreement is brought by any party, the prevailing party or
parties shall be entitled to recover the costs and fees (including without
limitation reasonable attorneys' fees, the fees and costs of experts and
consultants, copying, courier and telecommunication costs, and deposition costs
and all other costs of discovery) incurred by such party or parties in such suit
or action, including without limitation any post-trial or appellate proceeding,
or in the collection or enforcement of any judgment or award entered or made in
such suit or action.

4.5 Jurisdiction; Service. The parties each consent to the
jurisdiction of the state or federal courts of Oregon. Each party agrees that
service of process may be made upon it wherever it can be located or by
certified mail directed to its address for notices under this Agreement.

4.6 Counterparts. This Agreement may be executed in any number
of counterparts, all of which when taken together shall constitute one agreement
binding on all parties, notwithstanding that all parties are not signatories to
the same counterpart.

4.7 Notices. Any notice required under this Agreement shall be
in writing and shall be deemed received upon delivery, if delivered in person or
by any expedited delivery service which provides proof of delivery, upon tested
telex, or on the fifth business day after mailing, if mailed by certified mail,
return receipt requested, postage prepaid mail, addressed to Lender or Borrower
at the appropriate addresses. The addresses for notices are those set forth
below or such other addresses as may be specified by written notice by the
parties:

If to Lender: Thomas D. Taylor
1905 NW 169th Place, Suite 211
Beaverton, Oregon 97006
Telephone: (503) 690-4600
Fax: (503) 690-0545

Page 4 - LOAN AGREEMENT

<PAGE>

If to Borrower: Arrow Transportation Company
Attn: Chief Financial Officer
10145 N. Portland Road
Portland, Oregon 97203
Telephone: (503) 286-3661
Fax: (503) 240-4360

4.8 Severability. If any provision of this Agreement shall be
held to be invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision never had been included in this Agreement.

4.9 Further Assurances. Each party agrees, at the request of
the other party, promptly to execute and deliver all such further documents, and
promptly to take and forbear from all such action, as may be reasonably
necessary or appropriate in order more effectively to confirm or carry out the
provisions of this Agreement.

THE PARTIES ACKNOWLEDGE HAVING READ THIS AGREEMENT IN FULL AND CONSENT
TO ALL TERMS CONTAINED IN THIS AGREEMENT.

LENDER: BORROWER:

ARROW TRANSPORTATION COMPANY

__________________________ By:
THOMAS D. TAYLOR Its: Chief Financial Officer

Page 5 - LOAN AGREEMENT

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY

Index to Financial Statements
for the years ended December 31, 1996, 1995 and 1994

PAGE

Independent Auditors' Report - - - - - - - - - - - - - - - F - 2

Consolidated Balance Sheets - - - - - - - - - - - - - - - - F - 3

Consolidated Statements of Operations - - - - - - - - - - - F - 4

Consolidated Statements of Shareholders' Equity - - - - - - F - 5

Consolidated Statements of Cash Flows - - - - - - - - - - - F - 6

Notes to Consolidated Financial Statements - - - - - - - - F - 7

F- 1

<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Arrow Transportation Co.
Portland, Oregon

We have audited the accompanying consolidated balance sheets of Arrow
Transportation Co. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period then ended. These consolidated
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Arrow Transportation Co. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period then ended in
conformity with generally accepted accounting principles.

As more fully described in Note 16 of notes to consolidated financial
statements, the Company is defending itself against allegations and claims
related to environmental violations, overtime pay violations, and breach of an
employment contract with a former Company officer.

The accompanying consolidated financial statements for the year ended December
31, 1996, have been prepared assuming that the company will continue as a going
concern. As discussed in Note 1, the Company's recurring losses from operations
resulting in an accumulated deficit and negative working capital, raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

DELOITTE & TOUCHE LLP

Portland, Oregon
April 11, 1997

F- 2

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>

December 31,
------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 64 $ 33
Accounts receivables, net 2,758 2,976
Other receivables 52 69
Repair parts and supplies 236 312
Prepaid expenses and deposits 744 736
Prepaid tires 483 630
Assets held for sale - 785
Deferred income taxes 58 367
--------- ---------
Total current assets 4,395 5,908
Equipment and property, net 11,877 14,491
Assets held for sale - 317
Other assets 60 131
Deferred income taxes 307 -
--------- ---------
Total Assets $ 16,639 $ 20,847
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit borrowings $ 1,915 $ -
Accounts payable 1,673 1,350
Accrued expenses 2,034 1,709
Current portion of long-term debt and capital leases 2,140 3,338
--------- ---------
Total current liabilities 7,762 6,397
Line of credit borrowings - 1,825
Long-term debt 4,280 4,959
Obligations under capital leases 3,534 4,480
Deferred income taxes - 627
Claims and contingencies (Note 16) - -
Shareholders' equity:
Preferred stock, $5.00 par value (authorized 500,000 shares;
issued and outstanding 50,000 shares) 250 -
Common stock, no par value (authorized 10,000,000 shares; issued
and outstanding 4,191,366 in 1996 and 4,140,859 in 1995) 4,909 4,868
Accumulated deficit (4,096) (2,309)
--------- ---------
Total shareholders' equity 1,063 2,559
--------- ---------
Total liabilities and shareholders' equity $ 16,639 $ 20,847
========= =========
</TABLE>

See notes to consolidated financial statements.

F- 3

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues:
Linehaul $ 25,157 $ 29,275 $ 30,717
Transloading 1,040 908 1,764
Intermodal 549 608 804
Tankwash 518 478 461
Equipment rentals and other 315 147 364
--------- --------- ---------
Total operating revenues 27,579 31,416 34,110
--------- --------- ---------

Operating expenses:
Compensation 15,770 17,330 18,164
Supplies and maintenance 3,302 4,002 3,806
Fuel and fuel taxes 2,496 2,557 2,776
Depreciation and amortization 2,426 2,790 2,670
Taxes and licenses 1,080 1,370 1,453
Insurance and claims 847 886 1,099
Selling and administration 1,264 1,475 1,516
Rent and purchased transportation 1,144 1,404 941
Communication and utilities 520 609 551
Restructuring charges - 535 -
Gain on disposition of revenue equipment (33) ( 32) (197)
--------- --------- ---------
Total operating expenses, net 28,816 32,926 32,779
--------- --------- ---------

Income (loss) from operations (1,237) (1,510) 1,331
Interest expense 980 1,229 1,291
Non-operating expenses (income) (48) 148 22
--------- --------- ---------
Income (loss) before income taxes and extraordinary item (2,169) (2,887) 18
Income tax expense (benefit) (532) (1,067) -
--------- --------- ---------
Net income (loss) before extraordinary item (1,637) (1,820) 18
Extraordinary item (less applicable income taxes of $93) (150) - -
--------- --------- ---------
Net income (loss) $ (1,787) $ (1,820) $ 18
========= ========= =========

Earnings (loss) per share:
Net income (loss) before extraordinary item $ (.39) $ (.43) $ .00
Extraordinary item (.04) - -
--------- --------- ---------
Net income (loss) $ (.43) $ (.43) $ .00
========= ========= =========

Shares used in per share calculation 4,166 4,189 4,153
========= ========= =========
</TABLE>

See notes to consolidated financial statements.

F- 4

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Note
Receivable Total
Preferred Common Accumulated from Shareholders'
Stock Stock Deficit Shareholder Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 500 $ 4,296 $ (507) $ (100) $ 4,189
Issuance of stock for ESPP (1) - 75 - - 75
Conversion of Preferred to Common Stock (500) 400 - 100 -
Net income - - 18 - 18
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 - 4,771 (489) 4,282
Issuance of stock for ESPP (1) - 87 - - 87
Stock options exercised - 10 - - 10
Net loss - - (1,820) - (1,820)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 - 4,868 (2,309) - 2,559
Issuance of stock for ESPP (1) - 41 - - 41
Issuance of preferred stock 250 - - - 250
Net loss - - - (1,787) (1,787)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 250 $ 4,909 $(4,096) $ - $ 1,063
=========== =========== =========== =========== ===========
</TABLE>
(1) ESPP is the Employee Stock Purchase Plan

See notes to consolidated financial statements.

F- 5

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,787) $ (1,820) $ 18
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,472 2,806 2,680
Deferred income taxes (625) (1,045) (44)
Extraordinary item 243 - -
Restructuring charges 535 -
Bad debts expense - 152 -
(Gain)loss on sale of equipment and property, net 131 (15) (198)
Changes in assets and liabilities:
Receivables 235 960 (1,149)
Repair parts and supplies 76 152 (93)
Prepaid expenses and deposits (8) 346 (39)
Prepaid tires 147 176 143
Accounts payable (17) (82) 748
Accrued expenses 325 (98) 365
Claims - (62) (31)
Other 71 14 10
--------- --------- ---------
Net cash provided by operating activities 1,263 2,019 2,410
--------- --------- ---------

Cash flows from investing activities:
Capital expenditures (102) (500) (2,418)
Proceeds from sale of property and equipment 1,190 315 1,805
Payments received on notes receivable - 317 -
--------- --------- ---------
Net cash provided by (used in) investing activities 1,088 132 (613)
--------- --------- ---------

Cash flows from financing activities:
Increase (decrease) in bank overdrafts 340 (253) 82
Net borrowing (payments) on line of credit - (1,585) 881
Line of credit borrowings 28,356 4,845 -
Line of credit repayments (28,266) (3,080) -
Proceeds from issuance of long-term debt - 3,052 1,463
Proceeds from issuance of preferred stock 250 - -
Proceeds from exercise of stock options - 10 -
Proceeds from employee stock purchase plan 41 87 75
Repayments:
Notes payable to bank - (1,149) (2,095)
Long-term debt (1,459 (2,546) (1,105)
Capital lease obligations (1,582) (1,531) (1,294)
--------- --------- ---------
Net cash used in financing activities (2,320) (2,150) (1,993)
--------- --------- ---------

Net increase (decrease) in cash 31 1 (196)
Cash at beginning of year 33 32 228
--------- --------- ---------
Cash at end of year $ 64 $ 33 $ 32
========= ========= =========

Supplemental disclosures of cash flow information:
- Cash paid during the year for interest $ 1,003 $ 1,236 $ 1,260
- Cash paid during the year for income taxes 3 6 121
Supplemental schedule of non-cash investing and financing activities:
- Increase in revenue equipment under capital lease and
capital lease obligations $ 317 $ 784 $ 2,630
- Increase in revenue equipment and long-term debt - 637 1,431
- Loan fees applied to line of credit - 60 -
- Conversion of preferred stock to common stock - - 400
</TABLE>
See notes to consolidated financial statements.

F- 6

<PAGE>
ARROW TRANSPORTATION CO.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CURRENT OPERATING ENVIRONMENT

Arrow Transportation Co. (the "Company") as a result of overly aggressive
geographic and fleet expansion in 1994 and 1995 combined with intrastate
deregulation, soft freight demand and industry overcapacity has incurred net
losses of $1,800,000 for each of the years ended December 31, 1996 and 1995. The
Company has a working capital deficiency of $3,400,000 as of December 31, 1996.

The following describes management's plans to return the Company to
profitability:

The Company made significant changes in 1996 and continues to make changes to
its operations in order to achieve reductions to its operating cost structure.
During the fourth quarter of 1996, the Company implemented phase II of its
profit improvement plan, which included additional reductions in corporate and
support staff, selected fleet downsizing, operating cost reductions,
redeployment of equipment and the restructuring of certain term debt and lease
arrangements. The changes the Company is making are meant to focus the Company
on its core competencies, to reduce waste and redundancies in its processes, and
improve cash flow. Although the changes the Company has made and continues to
make are reducing its operating cost structure, the Company's leverage position
requires business volume to improve before profitability will be achieved.

In 1996, the Company did not achieve business volume sufficient to effectively
utilize its fleet and as a result, the full benefit of the Company's profit
improvement plan has yet to be realized. In an effort to fully realize the
benefit of its profit improvement plan, the Company has recently realigned its
marketing staff and is focusing its efforts on building business volume in the
Company's core western markets where it believe it has a competitive edge.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - Arrow Transportation Co. through its wholly-owned
subsidiary, Arrow Transportation Co. of Delaware (collectively, the "Company"),
is engaged primarily in the transportation of bulk liquid chemical products in
intrastate and interstate commerce and serves a wide variety of manufacturing
and industrial users in the United States and western Canada. The consolidated
financial statements include the accounts of the Company. All material
intercompany transactions have been eliminated in consolidation.

RECOGNITION OF REVENUE - Linehaul and intermodal revenues were recognized upon
the delivery of shipments to customers through May 1995. Beginning June 1995,
revenues are allocated to reporting periods based on relative transit time in
each reporting period. This change did not materially affect the consolidated
financial statements.

ACCOUNTS RECEIVABLE consist of trade receivables net of an allowance for
doubtful accounts of $10,000 and $162,000 in 1996 and 1995 respectively, and an
allowance for freight adjustments of $85,000 in both 1996 and 1995.

F- 7

<PAGE>
OTHER RECEIVABLES include $5,000 and $21,000 due from employees in 1996 and
1995, respectively.

REPAIR PARTS AND SUPPLIES include parts and major components used in the repair
of revenue equipment, tankwash chemicals, fuel and oil which are valued at the
lower of cost (first-in, first-out method) or market. Included in repair parts
and supplies is a reserve for parts and supplies not expected to be used within
the coming year.

PREPAID TIRES include the unamortized cost of tires in the Company's fleet,
which are valued utilizing casing and recap costs less estimated tread wear.

EQUIPMENT AND PROPERTY are stated at cost, net of accumulated depreciation.
Revenue equipment under capital leases is stated at the present value of minimum
lease payments at the inception of the lease, net of accumulated amortization.
Depreciation and amortization are calculated on the straight-line method over
the estimated useful lives of the related assets. The gain or loss on the
disposition of revenue equipment is the difference between the sales proceeds
and the net book value of the revenue equipment and tires on the equipment.

ASSETS HELD FOR SALE - The Company held assets for sale (primarily revenue
equipment) at December 31, 1995. These assets were carried at the lower of cost,
net of accumulated depreciation, or net realizable value. The Company recorded a
charge of $28,000 to other expense in 1996 upon the sale of such assets.

ACCOUNTS PAYABLE include outstanding checks of $625,000 and $285,000 at December
31, 1996 and 1995, respectively.

INCOME TAXES - The Company follows Financial Accounting Standard No. 109,
Accounting for Income Taxes, which requires the provision of deferred income
taxes based upon an asset and liability approach and consideration of a
valuation allowance. The deferred tax expense or benefit represents the change
during the year in the Company's deferred tax liabilities and assets, including
the effect of enacted tax rate changes. Total income tax expense or benefit for
the year is the sum of deferred tax expense or benefit and income taxes
currently payable or refundable.

RECLASSIFICATION - Certain items have been reclassified to conform with the
current year's presentation with no effect on previously reported earnings.

EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is computed using the
weighted average number of common shares outstanding during the year. Common
stock equivalents and other potentially issuable shares have not been included
in the calculations because their inclusion would be anti-dilutive. For the
years ended December 31, 1996, 1995 and 1994, weighted average common shares
outstanding were 4,166,000, 4,189,000, and 4,153,000 respectively.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect 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. Actual results could differ from those
estimates.

CASH FLOWS - For purposes of the statements of cash flows, the Company considers
all highly-liquid investments with a maturity of three months or less to be cash
equivalents.

3. EXTRAORDINARY ITEM

During the fourth quarter of 1996, the Company restructured its debt and lease
arrangements with its major creditors to provide for temporary moratoriums on
payments and extensions of maturity dates. The $150,000 extraordinary item, net
of income tax benefit of $93,000, reported in the statement of operations
represents the net effect of extinguishing certain of the Company's long-term
debt obligations and the disposal of capital lease assets and the related
obligations with its creditors. As a result of the modifications, certain
capital leases are now accounted for as operating leases.

F- 8

<PAGE>
4. RESTRUCTURING CHARGES

During the fourth quarter of 1995, the Company's board of directors approved a
profit improvement plan for 1996 to refocus the Company's operations on those
markets where management and the board believe the Company has a competitive
edge. The implementation of the plan resulted in a downsizing of the company's
fleet, a reduction in its corporate staff and the closure of terminals in Baton
Rouge, LA, Chattanooga, TN, Tulsa, OK, and Port Neches, TX. The Company recorded
a restructuring charge of $535,000 in the fourth quarter of 1995 to reflect the
costs associated with implementing the profit improvement plan.

5. REPAIR PARTS AND SUPPLIES
1996 1995
---------- ----------
(in thousands)

Parts and major components $ 223 $ 279
Other 47 67
---------- ----------
Subtotal 270 346
Less reserve (34) (34)
---------- ----------
Total repair parts and supplies $ 236 $ 312
========== ==========

6. PREPAID EXPENSES AND OTHER
1996 1995
---------- ----------
(in thousands)

Taxes and licenses $ 302 $ 340
Insurance and deposits 371 382
Other 71 14
---------- ----------
Total prepaid expenses and deposits $ 744 $ 736
========== ==========

7. EQUIPMENT AND PROPERTY
<TABLE>
<CAPTION>
1996 1995 Useful lives
---------- ---------- -------------
(in thousands)

<S> <C> <C> <C>
Revenue equipment $ 11,100 $ 11,517 5 to 15 years
Revenue equipment under capital leases 7,211 7,757 5 to 15 years
Machinery and equipment 1,564 1,705 3 to 10 years
Furniture and fixtures 374 379 5 years
Leasehold improvements 623 611 5 to 10 years
---------- ----------
Subtotal 20,872 21,969
Less accumulated depreciation and amortization (8,995) (7,478)
---------- ----------
Total equipment and property $ 11,877 $ 14,491
========== ==========
</TABLE>
Accumulated amortization on equipment under capital leases was $3,344,000 and
$2,532,000 at December 31, 1996 and 1995, respectively.

8. LINE OF CREDIT

The Company's combined credit arrangement provides for a line of credit at an
interest rate of 1.5% over the lender's reference rate (8.25% at December 31,
1996). Maximum borrowing under the line is limited to the lesser of $4,000,000
or 85% of eligible accounts receivable which were $2,321,000 at December 31,
1996. The line of credit matures in November 1997. The unused portion of the
line of credit was $79,000 at December 31, 1996.

F- 9

<PAGE>
9. ACCRUED EXPENSES
1995 1996
---------- ----------
(in thousands)

Payroll and related expenses $ 1,414 $ 756
Taxes other than income and payroll taxes 177 280
Other accrued liabilities 443 673
---------- ----------
Total accrued expenses $ 2,034 $ 1,709
========== ==========

10. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(in thousands)
Term note, collateralized principally by revenue equipment,
monthly payments of $64,775 including interest at 9.5%
due September 1998 $ 1,606 $ 2,195

Note payables, collateralized by revenue equipment, monthly
payments of $82,267 including interest ranging from 7.99%
to 10.75% due between April 2000 and January 2002 3,876 4,548

Other long-term debt 5 32
--------- ---------
Subtotal 5,487 6,775
Less current portion (1,207) (1,816)
--------- ---------

Total long-term debt $ 4,280 $ 4,959
========= =========
</TABLE>
The combined credit arrangement includes a $2,000,000 revolving to term loan
facility to allow for the purchase of new and used revenue equipment on a
revolving basis, converting to term loans. Any outstanding balance on this
facility after six months from the initial funding will be converted to a term
note with a maturity of three years from the date of conversion. Borrowings
under the revolving to term loan will bear interest at 1.5% over the lender's
reference rate. There was no balance outstanding under the revolving to term
loan facility at December 31, 1996.

Aggregate minimum principal payments on long-term debt are as follows:

Year Ending Principal
December 31, Payments
------------ ------------
(in thousands)
1997 $ 1,207
1998 1,677
1999 763
2000 1,199
2001 589
Thereafter 52
-----------
Total $ 5,487
===========

F- 10

<PAGE>
11. SHAREHOLDERS' EQUITY

In December 1991, the Company issued 500,000 shares of non-voting, non-dividend,
non-participating, non-convertible, non-cumulative preferred shares for $500,000
to The Cutler Corporation, an entity controlled by two directors of the Company.
The Company and The Cutler Corporation entered into an agreement in July 1993 to
redeem the preferred stock, at par, on or before April 1, 1994. On March 7,
1994, the Company redeemed the preferred stock net of the $100,000 note
receivable by exchanging it for 59,260 shares of common stock. The preferred
stock and note receivable were canceled.

Employee Stock Purchase Plan - The Company has an Employee Stock Purchase Plan
(the "Plan"). Most employees are eligible to participate in the Plan. Shares are
not available to employees who already own 5% or more of the Company's stock.
Employees can withhold, by payroll deductions, up to 10% of their regular
compensation to purchase shares. There are 200,000 shares reserved for purchase
under the Plan. There were 50,507, 28,920, and 12,679 issued during the year
ended December 1996, 1995 and 1994, respectively. At December 31, 1996 there
were 107,894 available for future purchases under the plan.

Stock Options - The Company has an Incentive and Non-Statutory Stock Option Plan
(the "Plan") which provides for grants of incentive and non-statutory stock
options to employees and directors to purchase shares of common stock of the
Company. Under the Plan, the Board of Directors determines the option price at
the time the option is granted; however, the option price for incentive options
cannot be less than the fair value of the stock on the date of the grant.
Options granted under the Plan generally vest within five years and expire ten
years from the date of grant or upon termination of employment and are
exercisable over the period stated in each option. The Company has reserved
350,000 shares of common stock for issuance under the Plan. At December 31, 1996
there were 55,000 shares available for future grants under the plan.

In October 1995, the Financial Accounting Standards Board issued FAS No. 123
Accounting for Stock-Based Compensation, which encouraged (but did not require)
that stock-based compensation cost be recognized and measured by the fair value
of the equity instrument awarded. The Company did not change its method of
accounting for its stock-based compensation plan and will continue to apply
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for these plans. The effect
on the Company's net loss and net loss per share for the years ended December
31, 1996 and 1995 had the Company accounted for stock options in accordance with
FAS No. 123 is not material.

F- 11

<PAGE>
A summary of the status of the Company's stock option plan as of December 31,
1994, 1995 and 1996 and changes during the years ending on those dates is
presented below:

Outstanding Options
--------------------
Number Price
of Shares Per Share
--------- -------------
Outstanding, January 1, 1994 217,500 $1.00 - $6.00
Granted 42,500 $4.00 - $6.75
Canceled (15,000) $5.00
---------
Outstanding, December 31, 1994 245,000 $1.00 - $6.75
Granted 65,000 $2.50 - $3.25
Exercised (10,000) $1.00
Canceled (25,000) $4.00 - $6.75
---------
Outstanding, December 31, 1995 275,000 $1.00 - $6.75
Granted 260,000 $0.50 - $0.81
Exercised -
Canceled (280,000) $0.81 - $6.75
---------
Outstanding, December 31, 1996 255,000 $0.50
=========

On November 20, 1996, the Board canceled all options previously granted and
outstanding under the Plan. The Board also approved the issuance of new options
vested on the same basis as the options which were canceled. The new options
were approved on January 3, 1997 effective as of November 20, 1996 (the date the
options were approved by the Board).

Options to purchase 160,500, 146,833, and 113,500 shares of the Company's common
stock were exercisable at December 31, 1996, 1995 and 1994, respectively.

Preferred Stock - In May 1996, the Company issued 50,000 unregistered shares of
Class A convertible preferred stock with a par value of $5.00 per share under a
Preferred Stock Purchase and Option Agreement ("the Agreement"). The Agreement
includes an option to purchase an additional 50,000 shares of Class A
convertible preferred stock at an exercise price of $5.00 per share. The option
expires on June 30, 2001. Each share of preferred stock is convertible at any
time at the option of the holder, into ten shares of the Company's common stock.
The preferred stock bears a 7% annual dividend, payable each May at the
Company's option either in cash or in additional shares of preferred stock. The
preferred stock will be entitled to vote on an as-converted basis, and to a
preference on any liquidation of the Company

12. INCOME TAXES

Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(in thousands)

<S> <C> <C> <C>
Federal $ - $ (23) $ 39
State - 1 5
--------- --------- ---------
Current tax expense (benefit) - (22) 44
--------- --------- ---------

Federal (553) (925) (39)
State (72) (120) (5)
--------- --------- ---------
Deferred tax expense (benefit) (625) (1,045) (44)
--------- --------- ---------
Total income tax expense (benefit) $ (625) $ (1,067) $ -
========= ========= =========
</TABLE>

F- 12

<PAGE>
A reconciliation between the statutory federal income tax expense and the
effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory expense (benefit) $ (823) $ (982) $ 6
State income tax (107) (79) -
Valuation allowance 305 - -
Other - net - (6) (6)
--------- --------- ---------
Income tax expense (benefit) $ (625) $ (1,067) $ -
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carry forwards. Significant components of the Company's net
deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
(in thousands)

<S> <C> <C>
NOL carry forward $ 2,259 $ 1,330
Book reserves not currently deductible for tax 282 376
AMT credit carryforward 158 159
Other 97 40
---------- ----------
Gross deferred tax assets 2,796 1,905
Less valuation allowance (305) -
---------- ----------
Deferred tax assets 2,491 1,905
---------- ----------

Accumulated depreciation 1,864 1,692
Prepaid tires 185 277
Lease financing 38 176
Other 39 20
---------- ----------
Deferred tax liabilities 2,126 2,165
---------- ----------
Net deferred tax asset (liability) $ 365 $ (260)
========== ==========
</TABLE>
FAS No. 109 requires that a valuation allowance be recorded when it is more
likely than not that some portion of the deferred tax assets will not be
realized. The Company has recorded a valuation allowance for a portion of the
NOL. The Company has $5,900,000 of NOL carry forwards which, if not used, will
expire between 2006 and 2011.

F- 13

<PAGE>
13. LEASES

The leases for the Company's terminal locations and certain revenue equipment
are classified as operating leases. The Company is also obligated under various
equipment capital leases which expire at various dates during the next four
years.

Minimum future payments required under operating leases having noncancelable
terms in excess of one year and the present value of future minimum capital
lease payments as of December 31, 1996 are summarized as follows:

Year ending Operating Capital
December 31, Leases Leases
------------ --------- ---------
(in thousands)

1997 $ 1,252 $ 1,196
1998 1,442 1,250
1999 1,224 1,552
2000 868 1,095
2001 814 -
Thereafter 737 -
--------- ---------
Total $ 6,337 $ 5,093
=========

Less amounts representing interest (626)
Less current portion (933)
---------
Obligations under capital leases $ 3,534
=========

In addition to minimum lease payments, some of the leases provide for the
payment of real property taxes and insurance premiums. Rental expense was
$1,247,000, $1,404,000 and $926,000 for the years ended December 31, 1996, 1995
and 1994, respectively. The Company rents various revenue equipment to
third-party users. Rental income was $252,000 , $116,000, and $298,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.

14. RELATED-PARTY TRANSACTIONS

The accompanying financial statements include certain transactions with
shareholders and entities controlled by certain principal shareholders of the
Company.

Expenses consisting of operating lease payments on revenue equipment and company
vehicles, interest expense on capital leases, and fees for debt guarantees and
consulting services incurred as a result of transactions with shareholders and
other related parties totaled $2,000, $34,000, and $121,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. In addition a $100,000
non-interest bearing, demand note receivable from shareholder was cancelled
during 1994.

F- 14

<PAGE>
15. PENSION PLANS

The Company is obligated under collective bargaining agreements to contribute to
multi-employer pension trusts based on the hours worked by bargaining-unit
employees. The total payments were $828,000, $1,128,000, and $1,076,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The actuarial value
of vested and non-vested accumulated plan benefits and of plan net assets for
these plans are not separately calculated for the Company as the Company is not
liable for any unfunded plan obligations.

The Company also maintains a defined contribution profit sharing plan for the
non-union employees. No Company contribution is required under the terms of this
plan; contributions are at the discretion of the Board. Employer contributions
were $26,000, $18,000, and $38,000 for the years ended December 31, 1996, 1995
and 1994, respectively.

16. CLAIMS AND CONTINGENCIES

The Company is party to four potentially material actual or pending proceedings:

(a) The Washington Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and served an administrative enforcement order on
the Company and 16 other companies associated with the Yakima Railroad Area
("YRRA") in Yakima, Washington. Ecology alleges in the order that all 17 of the
companies have some connection with the presence of the chemical
Perchloroethylene ("PCE") in the ground water underlying the YRRA.
The Company used carbon filtration to treat wash water from its trucks.

The spent carbon was taken by an independent transporter to the Cameron Yakima
facility located within the YRRA. This transporter directly contracted with the
Cameron-Yakima recycling facility. Ecology claims that Cameron- Yakima is a
source of PCE contamination, along with other facilities located within the
YRRA. The principal parties with respect to the enforcement order are Ecology,
the Company and the 16 other companies that were served with the order. There
are many other parties, not named on the order, who used Cameron-Yakima and are
potentially liable for contamination at the site. The order directs the
respondent parties to develop and implement a remedial investigation/feasibility
study ("RI/FS") of the YRRA to identify the nature and extent of PCE
contamination in the ground water. The order further directs the respondents to
provide bottled drinking water to certain households within the YRRA, if PCE is
detected in sampled domestic tap water. It is possible that, upon completion of
the RI/FS, Ecology could order the Company and other parties to take further
action, including remediation. Ecology has settled claims with a number of other
potentially responsible parties at this site, but thus far the Company has not
been able to settle this claim on a basis acceptable to the Company. If the
Company is unable to reach a separate settlement, the Company may be potentially
liable for remediation costs that are not recovered from the settling parties
and for contribution. Given the current status and inherent uncertainties in
this matter the Company is unable to determine or quantify in any meaningful way
its potential liability, and therefore, cannot determine whether it will have a
material effect on the Company's financial condition, results of operations, or
cash flows. The settlements thus far proposed by Ecology would have had material
adverse effects on the Company's financial condition and cash flows.

(b) In 1991 the Company was added as a defendant to a case entitled Department
of Labor & Industries vs. Puget Sound Trucklines, et al., in King County,
Washington Superior Court, that alleges the Company, among others, has violated
the overtime pay provisions of Washington state law. Puget Sound Truck Lines
reached an out of court settlement with the Department of Labor and Industries
in 1995. In May 1996 the case was restyled Rex W. Allen et al vs. Arrow
Transportation Company. The action, as to the Company, now involves 30 current
and former Company employees. Eight plaintiffs reached a settlement with the
Company in 1996. The remaining plaintiffs seek unspecified overtime pay,
interest and attorney's fees.

F- 15

<PAGE>
The plaintiff has indicated that it intends to amend its claim against the
Company to include the Company's payment practices since 1991. If permitted and
proven, this expansion would have the effect of increasing the Company's
potential liability to the plaintiffs, and might affect the Company's future
employment practices in the State of Washington. The Company is unable at this
time, however, to determine what effect, if any, this litigation will have on
the Company's financial condition, results of operations, or cash flows.

(d) An action was filed against the Company on May 7, 1996, by Sal N. Cincotta
in the United States District Court for the District of Oregon alleging breach
of contract and unpaid wages. Mr. Cincotta was previously employed by the
Company as its President and Chief Executive Officer, and was a director of the
Company prior to his resignation on May 3, 1996. On October 18, 1996, Mr.
Cincotta filed a motion for summary judgement in this action, seeking $458,139
in total damages. On February 11, 1997, a Magistrate Judge entered a Proposed
Findings and Recommendation in favor of Mr. Cincotta, including an award of
pre-judgement interest. The Company strongly objected to the Proposed Findings
and Recommendation and appealed the issue to a District Court Judge. The Company
continues to vigorously defend the matter. The Company cannot determine whether
costs of defense or the probable result of this litigation will have a material
effect on the Company's financial condition, results of operations, or cash
flows. A ruling by the District Court Judge in favor of Mr. Cincotta, unless
stayed and reversed on appeal would have a material adverse effect on the
Company's financial condition and cash flows.

The Company is a defendant in various other claims and legal proceedings arising
in the ordinary course of business. While resolution of these matters cannot be
predicted with certainty, management believes that the ultimate outcome of such
litigation will not have a materially adverse effect on the Company's financial
position, results of operations or cash flows. In addition to legal
contingencies, management estimates the Company's liability for property,
freight and workers' compensation claims based upon prior claim experience and
records such liabilities in its financial statements.

17. NEW ACCOUNTING PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board issued FAS No. 128,
Earnings per Share , which simplifies EPS determination and brings U.S. practice
for earnings per share (EPS) in closer conformity with international practices
by replacing primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is based on outstanding stock, without regard to common stock
equivalents (which currently must be considered in the calculation of primary
EPS). Diluted EPS is similar to fully diluted EPS as currently computed. The
effective date is for financial statements ending after December 15, 1997. The
adoption of this standard is not expected to have a material effect on the
Company's 1997 financial statements as the Company's common stock equivalents
are expected to have an anti-dilutive effect on EPS.

* * * * * *

F- 16

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATMENTS FOUND TIN THE COMPANY'S FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 64
<SECURITIES> 0
<RECEIVABLES> 2,853
<ALLOWANCES> 95
<INVENTORY> 236
<CURRENT-ASSETS> 4,395
<PP&E> 20,872
<DEPRECIATION> 8,995
<TOTAL-ASSETS> 16,639
<CURRENT-LIABILITIES> 7,762
<BONDS> 0
0
250
<COMMON> 4,909
<OTHER-SE> (4,096)
<TOTAL-LIABILITY-AND-EQUITY> 16,639
<SALES> 0
<TOTAL-REVENUES> 27,579
<CGS> 0
<TOTAL-COSTS> 28,816
<OTHER-EXPENSES> (48)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 980
<INCOME-PRETAX> (2,169)
<INCOME-TAX> (532)
<INCOME-CONTINUING> (1,637)
<DISCONTINUED> 0
<EXTRAORDINARY> (150)
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