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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-85041
PACER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0935669
- ---------------------------------- ----------
(State or other jurisdiction (I.R.S. employer
of organization) identification no.)
2300 Clayton Road, Suite 1200
Concord, CA 94520
Telephone Number (887) 917-2237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
As of March 15, 2002, none of the Registrant's Common Stock was held by
non-affiliates.
On March 15, 2002, the Registrant had 11,544,747 outstanding shares of Common
Stock, par value $.01 per share.
TABLE OF CONTENTS
Page
------------
Part I.
Items 1 and 2 Business and Properties................................................. 3
Overview................................................................ 3
Information Technology.................................................. 7
Customers............................................................... 8
Sales and Marketing..................................................... 8
Development of Our Company.............................................. 8
Facilities/Equipment.................................................... 9
Suppliers............................................................... 11
Relationship with APL Limited........................................... 12
Business Cycle.......................................................... 12
Competition............................................................. 12
Employees............................................................... 13
Government Regulation................................................... 13
Environmental........................................................... 14
Risks Related to the Business........................................... 14
Item 3. Legal Proceedings....................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................... 22
Part II.
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters..................................................... 23
Item 6. Selected Financial Data................................................. 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............. 40
Item 8. Financial Statements and Supplementary Data............................. 41
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 41
Part III.
Item 10. Directors and Executive Officers of the Registrant...................... 42
Item 11. Executive Compensation.................................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................................. 49
Item 13. Certain Relationships and Related Transactions.......................... 52
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................................ 58
Index to Financial Statements and Financial Statement
Schedules............................................................... F-1
2
Part I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Forward-Looking Statements
This annual report on Form 10-K contains forward looking statements, in
accordance with Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that reflect our current estimates,
expectations and projections about our future results, performance, prospects
and opportunities. Forward-looking statements include, among other things, the
information concerning our possible future results of operations, business and
growth strategies, financing plans, our competitive position and the effects of
competition, the projected growth of the markets in which we operate, and the
benefits and synergies to be obtained from our completed and any future
acquisitions. Forward-looking statements include all statements that are not
historical facts. In some cases, you can identify these statements by
forward-looking words such as "anticipate", "believe", "could", "estimate",
"expect", "intend", "plan", "may", "should", "will", "would" and similar
expressions. These forward-looking statements are based on information currently
available to us and are subject to a number of risks, uncertainties and other
factors that could cause our actual results, performance, prospects or
opportunities to differ materially from those expressed in, or implied by, the
forward-looking statements we make in this annual report. Important factors that
could cause our actual results to differ materially from the results referred to
in the forward-looking statements we make in this annual report are discussed
under "Risks Related to the Business" and elsewhere in this annual report.
All forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the cautionary
statements included in this annual report.
Overview
We are a leading non-asset based North American third-party logistics
company. We offer a broad array of logistics and other services to facilitate
the movement of freight from origin to destination for our customers including
numerous Fortune 500 customers such as Ford (6% of our 2001 revenues), General
Electric (4% of our 2001 revenues), and Walmart Stores (2% of our 2001 revenues)
and large global customers such as Sony (1% of our 2001 revenues). Our package
of value-added logistics services involve the management and transportation of
material, inventory and finished goods throughout the supply chains of our
customers and include wholesale stacktrain services and retail trucking
services, intermodal marketing, freight consolidation and handling,
international freight forwarding and supply chain management services. Through
these services, we optimize the flow of freight using multiple types of
transportation and meet our customers' specific transportation and logistics
needs. We combine these services with our proprietary advanced information
systems to provide integrated, customized solutions which add value to our
customers' operations by improving efficiency, reliability and control
throughout our customers' supply chains and reducing their handling, delivery
and inventory costs. We utilize a non-asset based strategy in which we seek to
limit our investment in equipment, facilities and working capital through
contracts and arrangements with various transportation providers. Through this
strategy we generally control, without owning, our transportation and related
equipment.
As a non-asset based third-party logistics provider, we have
capitalized on strong industry trends, including increasing outsourcing by
businesses to companies like us that can manage their multiple transportation
requirements. We have also achieved significant growth by acquiring and
integrating businesses which enhance our service portfolio and geographic
presence. Since our recapitalization and acquisition of Pacer Logistics in May
1999, we have acquired four companies. These acquisitions have enhanced our
truck brokerage and freight handling services, added international freight
forwarding to our portfolio of services and expanded the geographic coverage of
our intermodal marketing services.
3
Our Service Offerings
We have two reportable segments, the wholesale segment and the
retail segment, which have separate management teams and offer different but
related products and services (see Note 10 to the Consolidated Financial
Statements for the financial results by segment).
Wholesale Services
- ------------------
Intermodal transportation is the movement of freight via trailer or
container using two or more modes of transportation which nearly always include
a rail and truck segment. Our use of the stacktrain method, consisting of the
movement of cargo containers stacked two high on special railcars, significantly
improves the efficiency of our service by increasing capacity at low incremental
cost without sacrificing quality of service. We are the largest provider of
container intermodal rail service in North America that is not affiliated with
an individual railroad company. We sell intermodal service primarily to
intermodal marketing companies, large automotive intermediaries, international
ocean carriers as well as to our own internal intermodal marketing company. We
compete primarily with rail carriers offering intermodal service and indirectly
with over-the-road full truckload carriers.
Given our significant intermodal rail market share, we have
developed close working relationships with the railroads. Through long-term
contracts and other operating arrangements with railroads, including Union
Pacific Railroad, CSX and Canadian National Railroad and two railroads in
Mexico, we have access to a 50,000-mile North American rail network serving most
major population and commercial centers in the United States, Canada and Mexico.
These contracts provide for, among other things, favorable rates, minimum
service standards, capacity assurances, priority handling and the utilization of
nationwide terminal facilities.
We maintain an extensive fleet of doublestack railcars, containers
and chassis, substantially all of which are leased. As of December 28, 2001, our
equipment consisted of 1,855 doublestack railcars, 22,333 containers and 27,420
chassis, which are steel frames with rubber tires used to transport containers
over the highway. We also have access to APL Limited's fleet of containers,
which we use to support the eastbound domestic transport of international
freight for international shipping companies. In addition, we provide APL
Limited and other shipping companies with equipment repositioning services
through which we transport empty containers from destinations within North
America to their West Coast points of origin. To the extent we are able to fill
these empty containers with the westbound freight of other wholesale customers,
we receive compensation from the shipping companies for our repositioning
service and from the other customers for shipment of their freight. In 2001,
2000 and 1999 we filled 81,376, 68,579 and 73,741 repositioned containers,
respectively, with freight for shipment via our rail network on behalf of our
domestic customers. Because of increased volumes in our retail business due
primarily to our acquisitions in 2000, we have been be able to increase the
percentage of repositioned containers that are filled and transported on behalf
of our customers and thereby increase the profitability of our repositioning
business.
The size of our leased and owned equipment fleet, the frequent
departures available to us through our rail contracts and the scope of the
geographic coverage of our rail network provide our customers with
single-company control over their transportation requirements and gives us a
significant advantage in attaining the responsiveness and reliability required
by our customers at a competitive price. In addition, our access to
sophisticated information technology enables us to continuously track cargo
containers, chassis and railcars throughout our transportation network. Through
our equipment fleet and long-term arrangements with rail carriers, we can
control the transportation equipment used in our wholesale operations and are
able to employ full-time personnel on-site at the terminals, which allow us to
ensure close coordination of the services provided at these facilities.
4
Retail Services
- ---------------
Intermodal Marketing
--------------------
In our role as an intermodal marketing company, we arrange for the
movement of freight in containers and trailers throughout North America for
global, national and regional manufacturers and retailers. Typically, we arrange
for a full container or trailer load shipment to be picked up at origin by truck
and transported a distance of less than 100 miles to a site for loading onto a
train. The shipment is then transported via railroad (using either our wholesale
services or rail carriers directly) several hundred miles to a site for
unloading from the train in the vicinity of the final destination. After the
shipment has been unloaded from the train and is available for pick-up, we
arrange for the shipment to be picked up and transported by truck to the final
destination. In addition, we provide customized electronic tracking and analysis
of charges, negotiate rail, truck and intermodal rates, determine the optimal
routes, track and monitor shipments in transit, consolidate billing, handle
claims of freight loss or damage on behalf of our customers and manage the
handling, consolidation and storage of freight throughout the process. We
provide the majority of these services through a network of agents and
independent trucking contractors, as well as through our own trucking services.
An agent typically procures business for and manages a group of trucking
contractors. Our intermodal marketing operations are based in Los Angeles and
Livermore (California), East Rutherford (New Jersey), Memphis (Tennessee),
Chicago (Illinois) and Columbus (Ohio). Our experienced transportation personnel
are responsible for operations, customer service, marketing, management
information systems and our relationships with the rail carriers.
Through our intermodal marketing operations we assist the railroads and
our wholesale operation in balancing freight originating in or destined to
particular service areas, resulting in improved asset utilization. In addition,
we serve our customers by passing on economies of scale that we achieve as a
volume buyer from railroads, stacktrain operators, trucking companies and other
third party transportation providers, providing access to large equipment pools
and streamlining the paperwork and logistics of an intermodal move. We believe
that the combination of our wholesale operations with our intermodal marketing
services will enable us to provide enhanced service to our customers and the
opportunity for increased profitability and growth.
Trucking Services
-----------------
We offer a number of trucking services. We believe that our ability
to provide a range of trucking services provides a competitive advantage as
companies increasingly seek to outsource their transportation and logistics
needs to companies that can manage multiple transportation requirements.
We provide truck brokerage services throughout North America
through our customer service centers in Los Angeles (California), Dallas
(Texas), Chicago (Illinois), East Rutherford (New Jersey) and Columbus (Ohio).
Truck brokerage involves the procurement of trucking services of a licensed
independent trucking contractor on behalf of a shipper. We rely extensively on
the services of agents and independent contractors to provide our truck
brokerage services. We rely on a fleet of vehicles which are owned and operated
by independent trucking contractors and on agents representing groups of
trucking contractors to transport customers' goods by truck and have over 5,000
approved agents and independent contractors in our truck brokerage network. We
manage all aspects of these and related services for our customers, including
selecting qualified carriers, negotiating rates, organizing or reconsolidating
shipments into optimal truckloads, storing goods at our customer service centers
until pickup, tracking shipments, resolving difficulties and billing. Our
nationwide network of approved independent trucking contractors provides service
to virtually any North American destination.
Our truckload operations consist of flatbed and specialized heavy-haul
trucking services, as well as full-load, regional and local trucking services.
Our capital investment in truckload operations is limited. We contract with
independent trucking contractors that own and operate a fleet of 600 vehicles
equipped with flatbed and specialized trailers.
5
We maintain local trucking operations in Los Angeles, Oakland and San
Diego (California), Houston and Dallas (Texas), Jacksonville (Florida), Chicago
(Illinois), Memphis (Tennessee), Kansas City (Kansas), Baltimore (Maryland),
Seattle (Washington) and Atlanta (Georgia). We contract with independent
trucking contractors who control more than 700 trucks. We maintain interchange
agreements with all of the major steamship lines, railroads and stacktrain
operators. This network allows us to supply the local transportation
requirements of shippers, ocean carriers and freight forwarders across the
country.
Freight Consolidation and Handling
----------------------------------
We offer a variety of freight handling services, including
consolidation/deconsolidation and warehousing of our customers' shipped goods.
Because of the complexity of freight patterns and the need to use multiple types
of transportation, the handling and storage of freight on behalf of the shipper
is often required during the transportation process. Our retail operation
focuses on providing customers with specially designed transportation packages
which fit their specific shipment patterns and transportation and inventory
needs. Additionally, we have designed service packages intended to reduce our
customers' handling requirements and improve inventory efficiency. These
services are primarily offered on the West Coast.
International Freight Forwarding Services
-----------------------------------------
As an international freight forwarder, we typically provide freight
forwarding services which involve transportation of freight into or out of the
United States. As an indirect ocean carrier or non-vessel operating common
carrier and a customs broker, we manage international shipping for our customers
and provide or connect them with the range of services necessary to run a global
business. To a lesser extent we also provide air freight forwarding services as
an indirect air carrier. Our international product offerings serve more than
1,000 clients internationally through 17 offices and over 100 agents worldwide.
As an indirect ocean carrier or non-vessel operating common carrier, we
arrange for the transportation of our customers' freight by contracting with the
actual vessel operator to obtain transportation for a fixed number of containers
between various points during a specified time period at an agreed wholesale
discounted volume rate. We then are able to charge our customers rates lower
than the rates they could obtain from actual vessel operators for similar type
shipments. We consolidate the freight bound for a particular destination from a
common shipping point, prepare all required shipping documents, arrange for any
inland transportation, deliver the freight to the vessel operator and provide
shipment to the final destination. At the destination port, we or our agent
effect delivery of the freight to the receivers of the goods, which may include
custom clearance and inland freight transportation to the final destination.
As a customs broker, we are licensed by the U.S. Customs Service to act
on behalf of importers in handling custom formalities and other details critical
to exporting and importing of goods. We prepare and file formal documentation
required for clearance through customs agencies, obtain customs bonds,
facilitate the payment of import duties on behalf of the importer, arrange for
the payment of collect freight charges, assist with determining and obtaining
the best commodity classifications for shipments and assist with qualifying for
duty drawback refunds. We provide customs brokerage services in connection with
many of the shipments which we handle as an ocean freight forwarder or
non-vessel operating common carrier, as well as shipments arranged by other
freight forwarders, non-vessel operating common carriers or vessel operating
common carriers.
Supply Chain Management
------------------------
We leverage the information from our advanced information system to
provide consulting and supply chain management services to our customers. These
specialized services allow our customers to realize cost savings and concentrate
on their core competencies by outsourcing to us the management and
transportation of their raw materials and inventory throughout their
6
supply chains and the distribution of finished goods to the end user. We provide
infrastructure and equipment, integrated with our customers' existing systems,
to handle distribution planning, just-in-time delivery and automated ordering
throughout their operations, and additionally will provide and manage
warehouses, distribution centers and other facilities for them. We can manage
all aspects of the supply chain from inbound sourcing and delivery logistics
through outbound shipment, handling, consolidation, deconsolidation,
distribution, and just-in-time delivery of end products to our customers'
customers. We also consult on identifying bottlenecks and inefficiencies and
eliminating them by analyzing freight patterns and costs, optimizing
distribution and warehouse locations, and analyzing/developing internal policies
and procedures.
Information Technology
Our information technology systems have an expandable network
architecture that provides for the exchange of data electronically between us
and our customers and an internet-based platform that allows our customers to
easily customize the use and integration of our system to meet their needs. This
interconnection allows us to easily communicate with our customers and
transportation providers. Our systems monitor and track shipments at every stage
in the cycle and across varying transportation modes, providing accurate,
real-time visibility on shipment status, location and estimated delivery times.
Our exception notification system informs us of any potential delays so we can
proactively alert our customer and other supply chain participants to minimize
the impact of any problems. Our systems also continually measure transit times,
rates, availability and logistics activity of our transportation providers to
enable us to plan and execute transactions and freight movements most reliably,
efficiently and cost effectively. By monitoring and tracking all containers,
chassis and railcars throughout our network, we can identify their location and
availability and provide increased equipment utilization and balanced freight
flows.
Our systems also analyze each customer's usage patterns and needs
to resolve performance bottlenecks, determine optimal distribution locations and
identify areas for cost savings throughout their supply chain. We can also
prepare and distribute customized reports detailing shipping patterns, volumes,
reliability, timeliness and overall transportation costs, and can generate
management reports to meet federal highway authority requirements and perform
accounting and billing functions. Currently, our technological efforts are
primarily focused on reducing customer service response time, enhancing the
customer service profile database and expanding the number of customers and
service providers with which we share data using EDI applications.
We manage our wholesale services with highly sophisticated
computer systems that enable continuous tracking of cargo containers, chassis
and railcars throughout the intermodal system. These systems also provide us
with performance, utilization and profitability indicators in all aspects of the
wholesale business. These information systems create a competitive advantage for
us as they increase the efficiency of our intermodal operations and enable us to
provide shippers with the level of information which they increasingly demand as
part of their freight management operations.
Our acquisition of Rail Van in December 2000 and its proprietary
information technology systems has allowed us to further upgrade our information
technology platform by integrating all of our retail operations onto the Rail
Van information technology platform. This integration, which began in 2001, is
anticipated to be completed in 2002. In addition, for an annual fee of $10.0
million, APL Limited, pursuant to a long-term information technology agreement,
provides us with the computers, software and other information technology
necessary for the operation of our wholesale business. We are in the process of
replacing the technology provided by APL Limited with information technology
systems currently available in the marketplace from unrelated third parties
which will cost approximately $10.0 million, and thereafter at on-going annual
costs which will be significantly below the $10.0 million annual fee currently
paid to APL Limited. We anticipate that this replacement will be completed by
the end of 2003.
7
Customers
We currently provide retail services on a nationwide basis to retailers
and manufacturers, including a number of Fortune 500 companies such as General
Electric, Ford and Wal-Mart Stores and large global customers such as Sony. We
have served many of our customers for over 15 years and believe that the
strength of our customer base is attributable to our customer-focused marketing
and service philosophy. A significant portion of our retail sales are with
customers that utilize more than one of our services.
Our sales and customer service organizations, supported by our centralized
pricing and logistics management systems, market our wholesale services
primarily to intermodal marketing companies, who sell intermodal service to
shippers while buying space on intermodal rail trains. We also market our
wholesale services to the automotive industry and ocean carriers. Through our
sales network, and the sales networks of the intermodal marketing companies to
which we sell wholesale services, we provide wholesale services to more than
4,700 shippers.
For the year ended December 28, 2001 there were no customers that
contributed more than 10% of our total gross revenues.
For the year ended December 29, 2000, we had one customer that contributed
more than 10% of our total gross revenues. Total gross revenues of $146.9
million were generated from Union Pacific (generated by both reporting
segments).
For the year ended December 31, 1999, we had two customers that
contributed more than 10% of our total gross revenues. Total gross revenues of
$128.2 million were generated by the wholesale segment from Hub Group and total
gross revenues of $100.8 million were generated from Union Pacific (generated by
both reporting segments).
Sales and Marketing
As of December 28, 2001, our retail marketing operations included 100
sales persons, over 60 of whom are independent sales agents. All of our sales
people are supported by regional sales offices in 17 cities, including Los
Angeles and Livermore (California), Chicago (Illinois), Columbus (Ohio), Memphis
(Tennessee) and Rutherford (New Jersey). Our 40 salaried sales representatives
are deployed in major business centers throughout the country and target
mid-size and large customers. Our national network of commissioned sales agents
provides additional geographic coverage and contributes additional business that
enables us to achieve volume discounts and balance traffic flows. Both our
salaried and commissioned sales forces are compensated by overall net revenue
margin contribution to the company and therefore are strongly incentivized to
cross-sell additional services to their customers. With our growing portfolio of
services, the capability for our nationwide salesforce to cross-sell into other
products provides a significant opportunity to expand our business with current
customers.
As of December 28, 2001, our wholesale services were marketed by over
40 sales and customer service representatives. These representatives operate
through seven regional and district sales offices and three regional service
centers which are situated in the major shipping locations across North America.
The sales representatives are directly responsible for managing the business
relationship with shippers and railroads, supporting and influencing the selling
activities and achieving the mutually agreed upon volume and revenue goals of
our intermodal marketing company. This sales force assists our intermodal
marketing channel through joint selling efforts directed at the owner of the
freight who is the customer of our intermodal marketing company. The customer
service representatives are responsible for supporting existing customers and
sales representatives by providing cargo tracking services, acquiring new
customers, proactively resolving problems, and processing customer inquiries. In
addition, third party intermodal marketing companies that sell intermodal
service to shippers while buying space on intermodal rail trains through our
wholesale services, enable us to market our wholesale services through their
sales networks and indirectly access shippers in more than 100 major
metropolitan areas.
In addition to our domestic sales force, we also have an international
network of over 180 sales and customer service representatives. These
representatives are located in 5 offices and 75 agencies in over 70 countries.
Development of Our Company
We have operated as an independent, stand-alone company only since our
recapitalization in May 1999. From 1984 until our recapitalization, our
wholesale business was conducted by various entities owned directly or
indirectly by APL Limited.
In May 1999, we were recapitalized through the purchase of shares of
our common stock by affiliates of Apollo Management, L.P. and two other
investors from APL Limited and our redemption of a portion of the shares of
common stock held by APL Limited. After the
8
recapitalization, we formed a transitory subsidiary that was merged with and
into Pacer Logistics, which was run by Mr. Orris and several other of our senior
executives, making Pacer Logistics our wholly-owned subsidiary. In connection
with these transactions, our name was changed from APL Land Transport Services,
Inc. to Pacer International, Inc.
Pacer Logistics, Inc. was incorporated on March 5, 1997 and is the
successor to a company formed in 1974. Between the time of its formation and our
acquisition of Pacer Logistics in May, 1999, Pacer Logistics acquired and
integrated six logistics services companies.
In 2000, we acquired four companies in the retail segment that have
complemented our core retail business operations and expanded our geographic
reach and service offerings for intermodal marketing, local trucking,
international freight forwarding and other logistics services.
. On January 13, 2000, we acquired substantially all of the assets of Conex
Global Logistics Services Inc. and its subsidiaries, MSL Transportation
Group Inc. and Jupiter Freight, Inc. The Conex companies provide intermodal
freight transportation, trucking, transloading and warehousing services at
three locations in California and one location in each of Atlanta and
Seattle. This acquisition expanded our presence in these services and
furthered our vertical integration.
. On August 31, 2000, we acquired all of the capital stock of GTS
Transportation Services, Inc. GTS provides logistics and truck brokerage
services in North America. This acquisition expanded our service offerings.
. On October 31, 2000, we acquired all of the capital stock of RFI Group,
Inc. RFI provides international freight forwarding, customs-brokerage and
ocean transportation services. This acquisition expanded our portfolio of
services to include international freight forwarding and related activities
and gave us a strong international presence.
. On December 22, 2000, we acquired all of the capital stock of Rail Van,
Inc. Rail Van provides rail and truck brokerage, intermodal marketing and
logistics services. This acquisition expanded our customer base and product
offerings and provided us with advanced information systems, which we are
now in the process of integrating into all of our retail segment
operations, as well as a highly focused sales force.
Facilities/Equipment
Our wholesale transportation network operates out of 54 railroad
terminals across North America. Our integrated rail network, combined with our
leased equipment fleet, enables us to provide our customers with single-company
control over rail transportation to locations throughout North America.
Substantially all of the terminals we use are owned and managed by rail
or highway carriers. However, we employ full-time personnel on-site at major
locations to ensure close coordination of the services provided at the
facilities. In addition to these terminals, other locations throughout the
eastern United States serve as stand-alone container depots, where empty
containers can be picked up or dropped off, or supply points, where empty
containers can be picked up only. In connection with our trucking services,
agents provide marketing and sales, terminal facilities and driver recruiting,
while an operations center provides, among other services, insurance, claims
handling, safety compliance, credit, billing and collection and operating
advances and payments to drivers and agents.
Our wholesale equipment fleet consists of a large number of double
stack railcars, containers and chassis which are owned or subject to short and
long-term leases. We lease almost all of our containers, approximately 80% of
our chassis and approximately 90% of our doublestack railcars. As of December
28, 2001, our wholesale equipment fleet consisted of the following:
9
Owned Leased Total
----------------------------------------
Containers
48' Containers.................. 144 12,970 13,144
53' Containers.................. - 9,219 9,219
----------------------------------------
Total........................ 144 22,189 22,333
========================================
Chassis
48' Chassis..................... 5,813 7,238 13,051
53' Chassis..................... 50 10,059 10,109
----------------------------------------
Subtotal..................... 5,863 17,297 23,160
20', 40' and 45' (1) ........... - 4,260 4,260
----------------------------------------
Total........................ 5,863 21,557 27,420
========================================
Doublestack Railcars............... 210 1,645 1,855
========================================
______
(1) Represents the current allocation of chassis sublet to us pursuant to our
agreement with APL Limited.
During 2001, we received 1,100 leased containers and 80 leased chassis and
returned 2,278, primarily 48-ft, leased containers and 1,629 leased chassis as
part of a program to downsize our equipment fleet. Leased railcars increased
1,015 in 2001 reflecting the receipt of all equipment ordered during 2000 and
2001. No new railcar leases are anticipated during 2002.
Supplementing the equipment listed above we have access to an extensive
inventory of 20-, 40- and 45-foot containers from APL Limited's international
network in addition to the empty containers which we reposition on behalf of APL
Limited.
We also own a limited amount of equipment to support our trucking
operations. The majority of our trucking operations are conducted through
contracts with independent trucking contractors who own and operate their own
equipment. We lease two warehouses in Kansas City (Kansas) and five facilities
in Los Angeles (California) for dockspace, warehousing and parking for tractors
and trailers.
Our wholesale equipment operating lease expense and rental income for
containers, chassis and railcars is shown below ($ in millions):
Equipment Rental
2001 2000 1999
-------------------------------------
Operating Lease Expense ........ $ 72.0 $ 59.9 $ 51.3
=====================================
Rental Income Revenue .......... $ 52.5 $ 30.1 $ 16.9
=====================================
The large increase in rental income in 2001 compared to 2000 and for 2000
compared to 1999 was due primarily to the increase in railcar rental income due
to the additional railcars leased during the latter half of 2000 and 2001.
Rental income for railcars exceeds the related operating lease expense. In
addition, we have improved our billing and collection process for per diem on
containers and chassis over the last two years.
10
The following table shows our expense for on-going maintenance and
repairs for containers, chassis and railcars ($ in millions):
Maintenance Expenditures
2001 2000 1999
----------------------------------------
Containers ........................ $ 4.9 $ 5.9 $ 4.1
Chassis ........................... 15.8 17.1 13.9
Doublestack Railcars .............. 4.7 3.7 3.0
----------------------------------------
Total Expenditures ............ $ 25.4 $ 26.7 $ 21.0
========================================
Suppliers
Railroads
- ---------
We have long-term contracts with five railroads, Union Pacific, CSX,
Canadian National Railroad and two railroads in Mexico, regarding the movement
of our stacktrains. These contracts generally provide for access to terminals
controlled by the railroads as well as support services related to our wholesale
operations. Through these contracts, our wholesale business has established a
North American transportation network. Our retail business also maintains
contracts with the railroads which govern the transportation services and
payment terms pursuant to which the railroads handle intermodal shipments. These
contracts are typically of short duration, usually twelve month terms, and
subject to renewal or extension. We maintain close working relationships with
all of the major railroads in the United States and view each relationship as a
partnership. We will continue to focus our efforts on strengthening these
relationships.
Through our contracts with these rail carriers, we have access to a
50,000 mile rail network throughout North America. Our rail contracts, which
generally provide that the rail carriers will perform point to point, commonly
referred to as linehaul, and terminal services for us, are typically long-term
agreements, with major contracts having a remaining term of 10 to 13 years.
Pursuant to the service provisions, the rail carriers provide transportation of
our stacktrains across their rail networks and terminal services related to
loading and unloading of containers, equipment movement and general
administration. Our rail contracts generally establish per container rates for
stacktrain shipments made on rail carriers' transportation networks and
typically provide that we are obligated to transport a specified percentage of
our total stacktrain shipments with each of the rail carriers. The terms of our
rail contracts, including rates, are generally subject to adjustment or
renegotiation throughout the term of the contract, based on factors such as the
continuing fairness of the contract terms, prevailing market conditions and
changes in the rail carriers' costs to provide rail service. Generally, we
benefit from advantageous rate provisions in our rail contracts. Based upon
these provisions, and the volume of freight which we ship with each of the rail
carriers, we believe that we enjoy favorable transportation rates for our
stacktrain shipments.
Agents and Independent Contractors
- ----------------------------------
We rely on the services of agents, who procure business for and manage
a group of trucking contractors, and independent trucking contractors in long
haul and local trucking services. Although we own a small number of tractors and
trailers, the majority of our truck equipment and drivers are provided by agents
and independent contractors. Our relationships with agents and independent
contractors allow us to provide customers with a broad range of trucking
services without the need to commit capital to acquire and maintain a large
trucking fleet. Although our agreements with agents and independent contractors
are typically long-term in practice, they are generally terminable by either
party on short notice.
11
Agents and independent trucking contractors are compensated on the
basis of mileage rates and a fixed percentage of the revenue generated from the
shipments they haul. Under the terms of our typical lease contracts, agents and
independent contractors must pay all the expenses of operating their equipment,
including driver wages and benefits, fuel, physical damage insurance,
maintenance and debt service.
Local Trucking Companies
- ------------------------
We have established a good working relationship with a large network of
local truckers in many major urban centers throughout the United States. The
quality of these relationships helps ensure reliable pickups and deliveries,
which is a major differentiating factor among intermodal marketing companies.
Our strategy has been to concentrate business with a select group of local
truckers in a particular urban area, which increases our economic value to the
local truckers and in turn raises the quality of service that we receive.
Relationship with APL Limited
We have entered into a long-term agreement with APL Limited involving
domestic transportation of APL Limited's international freight. The majority of
APL Limited's imports to the United States are transported on stacktrains from
ports on the West Coast to population centers in the Midwest and Northeast
regions. However, domestic stacktrain freight which originates in the United
States moves predominantly westbound from eastern and midwestern production
centers to consumption centers on the West Coast. Because of our agreement with
APL Limited, we are able to achieve high utilization and steady revenue
production from our intermodal equipment due to our high volume of both
eastbound and westbound shipments. The APL Limited freight also significantly
increases the associated stacktrain volume, thereby improving our bargaining
position with the railroads regarding contract terms. In addition, we provide
APL Limited with equipment repositioning services through which we transport APL
Limited's empty containers from destinations within North America to their West
Coast points of origin. To the extent we are able to fill these empty containers
with the westbound freight of other wholesale customers, we receive compensation
from both APL Limited for our repositioning service and from the other customers
for shipment of their freight.
Business Cycle
The transportation industry has historically performed cyclically as a
result of economic recession, customers' business cycles, increases in prices
charged by third-party carriers, interest rate fluctuations and other economic
factors, many of which are beyond our control. We believe we have generally been
successful in passing on cost increases to our wholesale customers without
substantial decreases in shipping volumes. Because we offer a variety of
transportation modes, we generally retain shipping volumes and benefit from
increased use of our stacktrain services at the expense of long-haul trucking
competitors.
Competition
The transportation services industry is highly competitive. Our retail
business competes primarily against other domestic non-asset-based
transportation and logistics companies, asset-based transportation and logistics
companies, third-party freight brokers, private shipping departments and freight
forwarders. Competition is based primarily on freight rates, quality of service,
such as damage free shipments, on-time delivery and consistent transit times,
reliable pickup and delivery and scope of operations. We also compete with
transportation services companies for the services of independent commission
agents, and with trucklines for the services of independent contractors and
drivers. Our major competitors in the retail business include C.H. Robinson,
Exel, Hub Group, Alliance Shippers, Menlo Logistics, EGL Eagle Global Logistics,
Fritz Companies and Ryder System.
Our wholesale business competes primarily with over-the-road full
truckload carriers, conventional intermodal movement of trailers-on-flatcars,
and containerized intermodal rail
12
services offered directly by railroads. Competition between our wholesale
business and truckload carriers is particularly intense for shipments of freight
over shorter distances. This is primarily because intermodal transportation's
competitive advantage of low variable labor and fuel requirements per ton/mile
is diminished for shorter distance shipments. The major competitors of our
wholesale business include Burlington Northern Santa Fe, Union Pacific, CSX
Intermodal and J.B. Hunt Transport.
Employees
As of December 28, 2001, we had a total of 1,484 employees. None of our
employees are represented by unions and we generally consider our relationships
with our employees to be satisfactory.
Government Regulation
Regulation of Our Trucking and Wholesale Operations
---------------------------------------------------
The transportation industry has been subject to legislative and regulatory
changes that have affected the economics of the industry by requiring changes in
operating practices or influencing the demand for, and cost of, providing
transportation services. We cannot predict the effect, if any, that future
legislative and regulatory changes may have on our business or results of
operations.
Our trucking operations are subject to licensing and regulation as a
transportation provider. We are licensed by the U.S. Department of
Transportation as a national freight broker in arranging for the transportation
of general commodities by motor vehicle and operate pursuant to a 48-state,
irregular route common and contract carrier authority. The Department of
Transportation prescribes qualifications for acting in our capacity as a
national freight broker, including surety bonding requirements. We provide motor
carrier transportation services that require registration with the Department of
Transportation and compliance with economic regulations administered by the
Department of Transportation, including a requirement to maintain insurance
coverage in minimum prescribed amounts. Other sourcing and distribution
activities may be subject to various federal and state food and drug statutes
and regulations. Although Congress enacted legislation in 1994 that
substantially preempts the authority of states to exercise economic regulation
of motor carriers and brokers of freight, we continue to be subject to a variety
of vehicle registration and licensing requirements. We and the carriers that we
rely on in arranging transportation services for our customers are also subject
to a variety of federal and state safety and environmental regulations. Although
compliance with regulations governing licenses in these areas has not had a
materially adverse effect on our operations or financial condition in the past,
there can be no assurance that these regulations or changes in these regulations
will not adversely affect our operations in the future. Violations of these
regulations could also subject us to fines or, in the event of serious
violations, suspension or revocation of operating authority as well as increased
claims liability.
Intermodal operations, like ours, were exempted from virtually all active
regulatory supervision by the U.S. Interstate Commerce Commission, predecessor
to the regulatory responsibilities now held by the U.S. Surface Transportation
Board. Such exemption is revocable by the Surface Transportation Board, but the
standards for revocation of regulatory exemptions issued by the Interstate
Commerce Commission or Surface Transportation Board are high.
Regulation of Our International Freight Forwarding Operations
-------------------------------------------------------------
We maintain licenses issued by the U.S. Federal Maritime Commission as an
ocean transportation intermediary. Our licenses govern both our operations as an
ocean freight forwarder and as a non-vessel operating common carrier. The
Federal Maritime Commission has established qualifications for shipping agents,
including suety bond requirements. The Federal Maritime Commission also is
responsible for the regulation and oversight of non-vessel operating common
carriers that contract for space with vessel operating carriers and sell that
space to
13
commercial shippers and other non-vessel operating common carriers for freight
originating and/or terminating in the United States. Non-vessel operating common
carriers are required to publish and maintain tariffs that establish the rates
to be charged for the movement of specified commodities into and out of the
United States. The Federal Maritime Commission has the power to enforce these
regulations by commencing enforcement proceedings seeking the assessment of
penalties for violation of these regulations. For ocean shipments not
originating or terminating in the United States, the applicable regulations and
licensing requirements typically are less stringent than in the United States.
We believe that we are in substantial compliance with all applicable regulations
and licensing requirements in all countries in which we transact business.
We are also licensed as a customs broker by the Customs Service of the
Department of Treasury in each United States custom district in which we do
business. All United States customs brokers are required to maintain prescribed
records and are subject to periodic audits by the Customs Service. In other
jurisdictions in which we perform customs brokerage services, we are licensed,
where necessary, by the appropriate governmental authority. We believe we are in
substantial compliance with these requirements.
Environmental
Our facilities and operations are subject to federal, state and local
environmental, hazardous materials transportation and occupational health and
safety requirements, including those relating to the handling, labeling,
shipping and transportation of hazardous materials, discharges of substances to
the air, water and land, the handling, storage and disposal of wastes and the
cleanup of properties affected by pollutants. In particular, a number of our
facilities have underground and above ground tanks for the storage of diesel
fuel and other petroleum products. These facilities are subject to requirements
regarding the storage of such products and the clean-up of any leaks or spills.
We could also have liability as a responsible party for costs to clean-up
contamination at off-site locations where we have sent, or arranged for the
transport of, wastes. We have not received any notices that we are potentially
responsible for material clean-up costs at any off-site waste disposal location.
We do not currently anticipate any material adverse effect on our business or
financial condition as a result of our efforts to comply with environmental
requirements nor do we believe that we have any material environmental
liabilities. We also do not expect to incur material capital expenditures for
environmental controls in 2002 or the next fiscal year. However, there is no
guarantee that changes in environmental requirements or liabilities from
newly-discovered environmental conditions will not have a material effect on our
business.
Risks Related to Our Business
We are dependent upon third parties for equipment and services essential to
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operate our business and if we fail to secure sufficient equipment or services,
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we could lose customers and revenues.
- -------------------------------------
We are dependent upon transportation equipment such as chassis and
containers and rail, truck and ocean services provided by independent third
parties. We, along with competitors in our industry, have experienced equipment
shortages in the past, particularly during peak shipping season in October and
November. If we cannot secure sufficient transportation equipment or
transportation services from these third parties to meet our customers' needs,
customers could seek to have their transportation and logistics needs met by
other third parties on a temporary or permanent basis, and as a result, our
business results of operations and financial position could be materially
adversely affected.
14
If we have difficulty attracting and retaining agents and independent trucking
- ------------------------------------------------------------------------------
contractors, our results of operations could be adversely affected.
- -------------------------------------------------------------------
We rely extensively on the services of agents and independent contractors
to provide our trucking services. We rely on a fleet of vehicles which are owned
and operated by independent trucking contractors and on agents representing
groups of trucking contractors to transport customers' goods by truck and have
over 5,000 approved agents and independent contractors in our truck brokerage
network. Although we believe our relationships with our agents and independent
contractors are good, we may not be able to maintain our relationships with
them. Contracts with agents and independent contractors are, in most cases,
terminable upon short notice by either party. If an agent terminates its
relationship with us, some customers and independent contractors with whom such
agent has a direct relationship may also terminate their relationship with us.
We may have trouble replacing our agents and independent contractors with
equally qualified persons. We compete with transportation service companies and
trucking companies for the services of agents and with trucking companies for
the services of independent contractors and drivers. The pool of agents,
contractors and drivers from which we draw is limited, and therefore competition
from other transportation service companies and trucking companies has the
effect of increasing the price we must pay to obtain their services. The
industry is currently experiencing a shortage of independent contractors
resulting in increased compensation expenses to us and our competitors who also
rely on them. In addition, because independent contractors are not employees,
they may not be as loyal to our company, requiring us to pay more to retain
their services. If we are unable to attract or retain agents and independent
contractors or had to increase the amount paid for their services, our results
of operations could be adversely affected and we could experience difficulty
increasing our business volume.
A determination by regulators that our independent contractors are employees
- ----------------------------------------------------------------------------
could expose us to various liabilities and additional costs.
- ------------------------------------------------------------
From time to time, tax and other regulatory authorities have sought to
assert that independent contractors in the trucking industry are employees,
rather than independent contractors. There can be no assurance that these
authorities will not successfully assert this position, or that these
interpretations and tax laws that consider these persons independent contractors
will not change. If our independent contractors are determined to be our
employees, that determination could materially increase our exposure under a
variety of federal and state tax, worker's compensation, unemployment benefits,
labor, employment and tort laws, as well as our potential liability for employee
benefits. Our business model relies on the fact that our independent contractors
are not deemed to be our employees, and exposure to any of the above increased
costs would impair our competitiveness in the industry.
If we are unable to successfully integrate acquisitions our profitability could
- -------------------------------------------------------------------------------
be adversely affected.
- ----------------------
Identifying, acquiring and integrating businesses requires substantial
management, financial and other resources and may pose risks with respect to
customer service and market share. Further, acquisitions involve a number of
special risks, some or all of which could have a material adverse effect on our
business, financial condition and results of operation. These risks include:
. unforeseen operating difficulties and expenditures;
. difficulties in assimilation of acquired personnel, operations and
technologies;
. the need to manage a significantly larger and more geographically dispersed
business;
. amortization of goodwill and other intangible assets;
15
. diversion of management's attention from ongoing development of our
business or other business concerns;
. potential loss of customers;
. failure to retain key personnel of the acquired businesses; and
. the use of substantial amounts of our available cash.
We have acquired a number of businesses in the past and may consider
acquiring businesses in the future that provide complementary services to those
we currently provide or expand our geographic presence. There can be no
assurance that the businesses that we have acquired in the past or any
businesses that we may acquire in the future can be successfully integrated.
While we believe that we have sufficient financial and management resources and
experience to successfully conduct our acquisition activities and integrate the
acquired businesses into our operations, there can be no assurance in this
regard or that we will not experience difficulties with customers, personnel or
others. Our acquisition activities involve more difficult integration issues
than those of many other companies because the value of the companies we acquire
comes mostly from their business relationships, rather than their assets. The
integration of business relationships poses more of a risk than the integration
of tangible assets because relationships may suddenly weaken or terminate.
Further, logistics businesses we have acquired and may acquire in the future
compete with many customers of our wholesale operations and these customers may
shift their business elsewhere if they believe our retail operations receive
favorable treatment from our wholesale operations. In addition, although we
believe that our acquisitions will enhance our competitive position, business
and financial prospects, there can be no assurances that such benefits will be
realized or that any combination will be successful.
Competition in our industry causes downward pressure on freight rates which
- ---------------------------------------------------------------------------
could adversely affect our business.
- ------------------------------------
The transportation services industry is highly competitive. Our retail
businesses compete primarily against other domestic non-asset based
transportation and logistics companies, asset-based transportation and logistics
companies, third-party freight brokers, internal shipping departments and other
freight forwarders. Our wholesale business competes primarily with over-the-road
full truckload carriers, conventional intermodal movement of trailers on flat
cars, and containerized intermodal rail services offered directly by railroads.
Some of our competitors have substantially greater financial, marketing and
other resources than we do, which may allow them to better withstand an economic
downturn, reduce their prices more easily than us or expand or enhance the
marketing of their products. There are a number of large companies competing in
one or more segments of our industry, although the number of companies with a
global network that offer a full complement of logistics services is more
limited. Depending on the location of the customer and the scope of services
requested, we must compete against both the niche players and larger entities.
In addition, customers are increasingly turning to competitive bidding
situations involving bids from a number of competitors, including competitors
that are larger than us. We also face competition from Internet-based freight
exchanges which attempt to provide an online marketplace for buying and selling
supply chain services. Historically, competition has created downward pressure
on freight rates. In particular, we have experienced downward pressure in the
pricing of our wholesale and retail services which has reduced our revenues and
operating results. Continuation of this rate pressure may materially adversely
affect our revenues and income from operations.
16
Our customers who are also competitors could transfer their business to
- -----------------------------------------------------------------------
non-competitors which would decrease our profitability.
- -------------------------------------------------------
We buy and sell transportation services from and to many companies with
which we compete. This trend is primarily the result of our company operating in
two distinct, but related, segments. It is possible that these customers could
transfer their business away from us to other companies with which they do not
compete. For example, Hub Group, GST Corp and Alliance Shippers, three of the 10
largest customers of our wholesale operations, who accounted for 21% of the 2001
revenues of our wholesale operations, are also competitors of our retail
operations. The loss of one or more of these customers could have a material
adverse effect on the profitability of our wholesale operations. In addition,
rather than outsourcing their transportation logistics requirements to us, some
of our customers could decide to provide these services internally which could
further adversely affect our business volumes and revenues.
Our revenues could be reduced by the loss of major customers.
- -------------------------------------------------------------
We have derived, and believe we will continue to derive, a significant
portion of our revenues from our largest customers. In 2001, Union Pacific
Railroad Company and Ford Motor Company accounted for approximately 8% and 6%,
respectively, of our gross revenues and our 10 largest customers accounted for
approximately 40% of our gross revenues. The loss of one or more of our major
customers could have a material adverse effect on our revenues, business and
prospects.
Work stoppages at sea ports could adversely affect our operating results.
- -------------------------------------------------------------------------
The longshoremen labor contracts expire on June 30, 2002. Any work stoppage
or slowdown could adversely affect our operating income and cash flows in both
our wholesale and retail segments.
Service instability in the railroad industry could increase costs and decrease
- ------------------------------------------------------------------------------
demand for our intermodal services.
- -----------------------------------
We depend on the major railroads in the United States for substantially all
of the intermodal transportation services we provide. In many markets, rail
service is limited to a few railroads or even a single railroad. Any reduction
in service by the railroads with whom we have relationships is likely to
increase the cost of the rail-based services we provide and reduce the
reliability, timeliness and overall attractiveness of our rail-based services.
For example, from 1997 to 1999, service disruptions related to consolidation and
restructuring in the railroad industry interrupted intermodal service throughout
the United States. Service problems arising from prior mergers in the railroad
industry appear to be largely resolved. However, consolidation and restructuring
may continue to occur in the railroad industry and it is possible that future
service disruptions could result, which would decrease the efficiency of our
wholesale business. Although we were not substantially adversely affected by
past service disruptions, we could be substantially affected by service
disruptions in the future. In addition, because the railroads' workforce is
generally subject to collective bargaining agreements, our business could be
adversely affected by labor disputes between the railroads and their union
employees. Our business could also be adversely affected by a work stoppage at
one or more railroads or by adverse weather conditions that hinder the
railroads' ability to provide transportation services. In addition, the
railroads are relatively free to adjust shipping rates up or down as market
conditions permit. Although the application of rate increases to our wholesale
business is limited by our long-term contracts with the railroads, such
increases could result in higher costs to our customers and decreased demand for
our services.
17
Concentration of Retail Business on Intermodal Marketing
- --------------------------------------------------------
Significant portions of our retail segment revenue are derived from
intermodal marketing. As a result, a decrease in demand for intermodal
transportation services relative to other transportation services could have a
material adverse affect on our results of operations.
As we expand our services internationally, we may become subject to
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international economic and political risks.
- -------------------------------------------
An increasing portion of our business is providing services between
continents, particularly between North America and Asia. International revenues
accounted for 10% of our gross revenues in 2001 up from 6% in 2000. Doing
business outside the United States subjects us to various risks, including
changing economic and political conditions, major work stoppages, exchange
controls, currency fluctuations, armed conflicts and unexpected changes in
United States and foreign laws relating to tariffs, trade restrictions,
transportation regulations, foreign investments and taxation. Significant
expansion in foreign countries will expose us to increased risk of loss from
foreign currency fluctuations and exchange controls as well as longer accounts
receivable payment cycles. We have no control over most of these risks and may
be unable to anticipate changes in international economic and political.
conditions and, therefore, unable to alter our business practices in time to
avoid the adverse effect of any of these changes.
We have an extensive relationship with our former parent, APL Limited, and we
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depend on APL Limited for essential services. Our business and results of
- -------------------------------------------------------------------------
operations could be adversely affected if APL Limited failed or refused to
- --------------------------------------------------------------------------
provide such services or terminated the relationship.
- -----------------------------------------------------
Pursuant to long-term contracts, APL Limited, the former owner of our
wholesale services business and one of our current stockholders, supplies us
with chassis from its equipment fleet for the transport of international freight
on behalf of other international shippers. In addition, we transport APL
Limited's international cargo on our stacktrain network to locations in the
United States using the chassis and equipment supplied by APL Limited. The
additional wholesale volume attributable to the transport of APL Limited's
international cargo contributes to our ability to obtain favorable provisions in
our rail contracts, although we do not profit from APL Limited's cargo revenue
as we provide these services at cost. APL Limited pays us a fee for
repositioning its empty containers within North America so that the containers
can be reused in trans-Pacific shipping operations. In addition, APL Limited is
currently providing us with computers, software and other information technology
necessary for the operation of our wholesale business. We are in the process of
replacing the technology provided by APL Limited with information technology
systems currently available in the marketplace. We anticipate this to be
completed by the end of 2003. If any of our contracts with APL Limited were
terminated or if APL Limited were unwilling or unable to fulfill its obligations
to us under the terms of these contracts, our business, results of operations
and financial position could be materially adversely affected.
If we fail to develop, integrate, upgrade or replace our information technology
- -------------------------------------------------------------------------------
systems, we may lose orders and customers or incur costs beyond our
- -------------------------------------------------------------------
expectations.
- -------------
Increasingly, we compete for customers based upon the flexibility and
sophistication of our technologies supporting our services. The failure of the
hardware or software that supports our information technology systems, the loss
of data contained in the systems, or the inability to access or interact with
our website, could significantly disrupt our operations, prevent customers from
making orders, or cause us to lose orders or customers. If our information
technology systems are unable to handle additional volume for our operations as
our business and scope of services grow, our service levels, operating
efficiency and future freight volumes will decline. In addition, we expect
customers to continue to demand more sophisticated, fully integrated information
systems from their supply chain management service providers. If we fail to hire
qualified personnel to implement and maintain our information technology systems
or we fail to
18
upgrade or replace our information technology systems to handle increased
volumes, meet the demands of our customers and protect against disruptions of
our operations, we may lose orders and customers which could seriously harm our
business.
We are in the process of integrating all of our retail operations onto the
information technology platform we acquired through the acquisition of Rail Van.
We believe the integration of our information technology systems, training of
our employees to use the new system and expanding the capacity of the Rail Van
system will be completed in 2002. If we encounter delays or problems in this
integration and/or training or the capital expenditures necessary to increase
the capacity of the Rail Van system are greater than expected, our retail
operations could be adversely affected. We are also in the process of replacing
the technology provided by APL Limited for our wholesale operations with
information technology systems currently available in the marketplace. We
anticipate this project to be completed by the end of 2003. If we experience
delays or problems in integrating the new technology and/or training our
employees to use the new system, our wholesale operations could be adversely
affected or the cost of the project could exceed our expectations.
If we lose key personnel and qualified technical staff, our ability to manage
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the day-to-day aspects of our business will be weakened.
- --------------------------------------------------------
We believe that the attraction and retention of qualified personnel is
critical to our success. If we lose key personnel or are unable to recruit
qualified personnel, our ability to manage the day-to-day aspects of our
business will be weakened. Our operations and prospects depend in large part on
the performance of our senior management team. The loss of the services of one
or more members of our senior management team, particularly Donald C. Orris, our
chairman, president and chief executive officer, could have a material adverse
effect on our business, financial condition and results of operation. You should
be aware that we face significant competition in the attraction and retention of
personnel who possess the skill sets that we seek. Because our senior management
team, particularly Mr. Orris, has unique experience with our company and within
the transportation industry, it would be difficult to replace them without
adversely affecting our business operations. In addition to their unique
experience, our management team has fostered key relationships with our
suppliers. Such relationships are especially important in a non-asset based
company such as ours. Loss of these relationships could have a material adverse
effect on our profitability. We have obtained key person life insurance on Mr.
Orris.
If we fail to comply with or lose any required licenses, governmental regulators
- --------------------------------------------------------------------------------
could assess penalties against us or issue a cease and desist order against our
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operations which are not in compliance.
- ---------------------------------------
We are licensed by the U.S. Department of Transportation as a broker in
arranging for the transportation of general commodities by motor vehicle. The
Department of Transportation has established requirements for acting in this
capacity, including insurance and surety bond requirements. In addition, we are
licensed as an ocean transportation intermediary by the U.S. Federal Maritime
Commission. The Federal Maritime Commission regulates ocean freight forwarders
and non-vessel operating common carriers like us that contract for space with
the actual vessel operator and sell that space to commercial shippers and other
non-vessel operating common carriers for freight originating and/or terminating
in the United States. Non-vessel operating common carriers must publish and
maintain tariffs for the movement of specified commodities into and out of the
United States. The Federal Maritime Commission may enforce these regulations by
instituting proceedings seeking the assessment of penalties for violations of
these regulations. For ocean shipments not originating or terminating in the
United States, the applicable regulations and licensing requirements typically
are less stringent than in the United States. We are also licensed, regulated
and subject to periodic audit as a customs broker by the Customs Service of the
Department of Treasury in each United States custom district in which we do
business. In other jurisdictions in which we perform customs brokerage services,
we are licensed, where necessary, by the appropriate governmental authority. Our
failure to comply with
19
the laws and regulations of any of these governmental regulators, and any
resultant suspension or loss of our licenses, could result in penalties or a
cease and desist order against any operations that are not in compliance. Such
an occurrence would have an adverse effect on our results of operations,
financial condition and liquidity.
We, our suppliers and our customers are subject to changes in government
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regulation which could result in additional costs and thereby affect our results
- --------------------------------------------------------------------------------
of operations.
- --------------
The transportation industry is subject to legislative or regulatory changes
that can affect its economics. Although we operate in the intermodal segment of
the transportation industry, which has been essentially deregulated, changes in
the levels of regulatory activity in the intermodal segment could potentially
affect us and our suppliers and customers. Future laws and regulations may be
more stringent and require changes in operating practices, influence the demand
for transportation services or require the outlay of significant additional
costs. Additional expenditures incurred by us, or by our suppliers, who would
pass the costs onto us through higher prices, would adversely affect our results
of operation. In addition, we have a substantial number of wholesale customers
who provide ocean carriage of intermodal shipments. The regulatory regime
applicable to ocean shipping was revised by the Ocean Shipping Reform Act of
1998, which took effect on May 1, 1999. Although the implementation of the Ocean
Shipping Reform Act has not to date had any material impact on the
competitiveness and/or efficiency of operations of our various ocean carrier
customers, we cannot assure you that it will not adversely impact these
customers in the future which could adversely affect our business.
Our operating results are subject to cyclical fluctuations and our quarterly
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revenues may also fluctuate.
- ----------------------------
Historically, sectors of the transportation industry have been cyclical as
a result of economic recession, customers' business cycles, increases in prices
charged by third-party carriers, interest rate fluctuations and other economic
factors over which we have no control. Increased operating expenses incurred by
third-party carriers can be expected to result in higher costs to us, and our
net revenues and income from operations could be materially adversely affected
if we were unable to pass through to our customers the full amount of increased
transportation costs. We have a large number of customers in the automotive and
consumer goods industries. If these customers experience cyclical movements in
their business activity, due to an economic downturn, work stoppages or other
factors over which we have no control, the volume of freight shipped by those
customers may decrease and our operating results could be adversely affected.
Our significant debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business opportunities.
As of December 28, 2001 our long-term debt was $397.9 million. We have the
ability to incur new debt, subject to limitations in our credit agreement and
the indenture governing our senior subordinated notes.
Our level of indebtedness could have important consequences to us,
including the following:
. Our ability to obtain additional financing, if necessary, for working
capital, capital expenditures, acquisitions or other purposes may be
impaired or such financing may not be available on favorable terms;
. We will need a substantial portion of our cash flow to pay the principal
and interest on our indebtedness, including indebtedness that we may incur
in the future;
20
. Although we have minimum required debt repayments for the next two years,
payments on our indebtedness will reduce the funds that would otherwise be
available for our operations and future business opportunities;
. A substantial decrease in our net operating cash flows could make it
difficult for us to meet our debt service requirements and force us to
modify our operations;
. We may be more highly leveraged than our competitors, which may place us at
a competitive disadvantage;
. Our debt level may make us more vulnerable than our competitors to a
downturn in our business or the economy generally;
. Our debt level reduces our flexibility in responding to changing business
and economic conditions;
. Some of our debt has a variable rate of interest, which increases our
vulnerability to interest rate fluctuations; and
. There would be a material adverse effect on our business and financial
condition if we are unable to obtain additional financing, as needed.
We may not have sufficient cash to service our indebtedness.
- ------------------------------------------------------------
Our ability to service our indebtedness will depend upon, among other
things:
. Our future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business, regulatory and
other factors, some of which are beyond our control; and
. The future availability of borrowings under our credit agreement or any
successor facility, the availability of which may depend on, among other
things, our complying with certain covenants.
If our operating results and borrowings under our credit agreement are not
sufficient to service our current or future indebtedness, we will be forced to
take actions such as reducing or delaying acquisitions, investments, strategic
alliances and/or capital expenditures, selling assets, restructuring or
refinancing our indebtedness, or seeking additional equity capital or bankruptcy
protection. There is no assurance that we can effect any of these remedies on
satisfactory terms, or at all.
Our debt agreements contain operating and financial restrictions which may
- --------------------------------------------------------------------------
restrict our business and financing activities.
- -----------------------------------------------
The operating and financial restrictions and covenants in our credit
agreement, the indenture governing our senior subordinated notes and any future
financing agreements may adversely affect our ability to finance future
operations or capital needs or to engage in other business activities. In
addition, our debt agreements restrict our ability to:
. declare dividends, redeem or repurchase capital stock;
. prepay, redeem or purchase debt;
. incur liens and engage in sale and leaseback transactions;
. make loans and investments;
21
. incur additional indebtedness;
. amend or otherwise change debt and other material agreements;
. make capital expenditures;
. engage in mergers, acquisitions and asset sales;
. enter into transactions with affiliates; and
. change our primary business.
Our credit agreement also requires us to satisfy interest coverage and leverage
ratios.
A breach of any of the restrictions, covenants, ratios or tests in our debt
agreements could result in defaults under these agreements. A significant
portion of our indebtedness then may become immediately due and payable. We
might not have, or be able to obtain, sufficient funds to make these accelerated
payments. In addition, our obligations under our credit agreement are secured by
substantially all of our assets.
ITEM 3. LEGAL PROCEEDINGS
Two subsidiaries of Pacer Logistics, Interstate Consolidation, Inc. and
Intermodal Container Service, Inc., were named defendants in a class action
filed in July 1997 in the State of California, Los Angeles Superior Court,
Central District, alleging, among other things, breach of fiduciary duty, unfair
business practices, conversion and money had and received in connection with
monies allegedly wrongfully deducted from truck drivers' earnings. The
defendants entered into a Judge Pro Tempore Submission Agreement dated as of
October 9, 1998, pursuant to which the plaintiffs and defendants have waived
their rights to a jury trial, stipulated to a certified class, and agreed to a
minimum judgement of $250,000 and a maximum judgement of $1.75 million. On
August 11, 2000, the court issued its Statement of Decision, in which Interstate
Consolidation, Inc. and Intermodal Container Service, Inc. prevailed on all
issues except one. The only adverse ruling was a court finding that Interstate
failed to issue certificates of insurance to the owner-operators and therefore
failed to disclose that in 1998, Interstate's retention on its liability policy
was $250,000. The court has ordered that restitution of $488,978 be paid for
this omission. The court entered judgment on the August 11, 2000 decision on
January 23, 2002. Plaintiffs' counsel has indicated that he intends to appeal
the entire ruling and we intend to appeal the restitution issue. Based upon
information presently available and in light of legal and other defenses and
insurance coverage, management does not expect these legal proceedings, claims
and assessments, individually or in the aggregate, to have a material adverse
impact on our consolidated financial position, results of operations or
liquidity.
We are currently not otherwise subject to any other pending or threatened
litigation other than routine litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on our
business, financial condition or results of operations. Most of the lawsuits to
which we are a party are covered by insurance and are being defended by our
insurance carriers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no established public trading market for the Company's
outstanding equity securities.
During 2001, 279,000 options were granted under the 1999 Stock Option Plan
to management personnel to purchase Pacer International, Inc. common stock at
$25.00 per share. Certain members of management exercised 182,874 options to
purchase Pacer International Inc. common stock at an average exercise price of
$0.22 per share, and 500 options were exercised by management at $10.00 per
share. In addition, certain members of management exercised 27,498 Pacer
International, Inc. preferred stock options with an exercise price of $9.00 per
share. The Company elected, at its discretion, to repurchase the preferred stock
that arose from the exercise of the options.
These shares of common stock were issued in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933 as
transactions by an issuer not involving any public offering and Rule 701
promulgated under the Securities Act. The purchasers represented their
intentions to acquire the shares for investment only and not with a view to
resale or distribution, and appropriate legends were affixed to the share
certificates issued.
23
ITEM 6. SELECTED FINANCIAL DATA
The following table presents, as of the dates and for the periods
indicated, selected historical financial information for the Company.
The Company
--------------------------------------------------------------- The Pre-
For the For the For the For the decessor
Fiscal Fiscal Fiscal Fiscal --------
Year Year Year Year For the For the
Ended Ended Ended Ended Period Period
---------- ----------- ----------- ----------- ---------- -----------
Nov. 13 Dec. 28
1997 to 1996 to
Dec. 28 Dec. 29 Dec. 31 Dec. 25 Dec. 26 Nov. 12
2001 2000 1/ 1999 2/ 1998 3/ 1997 3/ 1997 3/
---------- ----------- ----------- ----------- ---------- -----------
(in millions, except per share amounts)
Statement of Operations
Data:
Gross revenues.............. $ 1,670.9 $ 1,281.3 $ 927.7 $ 598.9 $ 60.7 $ 523.8
Cost of purchased
transportation and services 1,339.6 1,005.6 735.4 466.3 47.4 407.5
Net revenues................ 331.3 275.7 192.3 132.6 13.3 116.3
Direct operating expenses .. 101.7 90.4 76.8 64.5 7.4 53.1
Selling, general and
Administrative expenses... 155.9 102.6 58.9 28.3 3.2 21.4
Depreciation and
Amortization.............. 18.3 11.6 8.6 6.6 0.7 3.0
Merger and severance....... 0.4 7.7 - - - -
Other....................... 4.0 - - - - -
Income from operations...... 51.0 63.4 48.0 33.2 2.0 38.8
Net income.................. 7.0 14.8 16.6 20.6 1.0 22.9
Earnings per share: 4/
Basic................... $ 0.61 $ 1.35 $ 0.78 4/ 5/ 5/ 5/
Diluted................. $ 0.55 $ 1.19 $ 0.68 4/ 5/ 5/ 5/
Balance Sheet Data
(at period end):
Total assets................ $ 632.9 $ 658.4 $ 455.0 $ 156.1 $ 111.9 $ -
Total debt including capital
Leases.................... 397.9 405.4 284.4 - - -
Minority interest -
Exchangeable preferred
stock of subsidiary....... 25.7 25.0 23.4 - - -
Cash Flow Data:
Cash provided by operating
Activities............... $ 21.8 $ 1.2 $ 20.8 $ 31.8 $ 12.7 $ 18.2
Cash provided by (used in)
investing activities..... (14.4) (130.7) (74.0) (38.5) - 3.6
Cash provided by (used in)
financing activities..... (7.4) 117.3 65.4 6.7 (12.7) (21.8)
- -------
1/ Includes the results of Conex Global Logistics Services, Inc., GTS
Transportation Services, Inc., RFI Group, Inc. and Rail Van Inc. since their
dates of acquisition on January, 13, 2000, August 31, 2000, October 31, 2000 and
December 22, 2000, respectively.
2/ Includes the results of Pacer Logistics, Inc. since acquisition on May 28,
1999.
3/ The historical financial statements subsequent to November 13, 1997 include
the push down effect of the purchase price allocation resulting from the
purchase of APL Limited by Neptune
24
Orient Lines Limited. The results of operations of the predecessor period are
not comparable to the successor period as a result of the acquisition of APL
Limited by Neptune Orient Lines Limited. Prior to November 1998, Pacer
International operated as the Stacktrain Services division of APL Land Transport
Services, Inc., a wholly-owned subsidiary of APL Limited. In November 1998, APL
Land Transport Services, Inc. transferred all of its non-stacktrain assets to
its parent, APL Limited. In connection with our recapitalization and acquisition
of Pacer Logistics, Inc., APL Land Transport Services, Inc. was renamed Pacer
International.
4/ Net income of $8.5 million for the period from January 1, 1999 through May
28, 1999 has been excluded as prior to the recapitalization and acquisition of
Pacer Logistics on May 28, 1999 our wholesale operations were a division of APL
Limited and did not have common stock.
5/ Earnings per share data is not applicable as prior to the recapitalization
and acquisition of Pacer Logistics our wholesale operations were a division of
APL Limited and did not have common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading non-asset based North American third-party logistics
provider offering a broad array of services to facilitate the movement of
freight from origin to destination. We operate in two segments, the wholesale
segment and the retail segment (see Note 10 to the Consolidated Financial
Statements for segment information). The wholesale segment provides intermodal
rail service in North America by selling intermodal service to shippers pursuant
to agreements with railroads. The retail segment provides trucking services,
intermodal marketing, freight consolidation and handling, international freight
forwarding and supply chain management services.
Operating History
-----------------
We have operated as an independent, stand-alone company only since our
recapitalization in May 1999. From 1984 until our recapitalization, our
wholesale business was conducted by various entities owned directly or
indirectly by APL Limited. While owned by APL Limited, our wholesale business
used some of the financial and administrative resources and infrastructure of
APL Limited in such areas as treasury, legal, information systems and benefits
administration. Since our recapitalization, we have provided the infrastructure,
resources and services necessary to operate our wholesale business
independently, although we still utilize computers, software and other
information technology which APL Limited provides to us under an agreement with
a remaining term of 17 years that is terminable by us upon 120 days' notice and
by APL Limited if we fail to make required payments or are acquired by a
competitor of APL Limited. We are in the process of replacing the technology
provided by APL Limited with information technology systems currently available
in the marketplace from unrelated third parties. This project is anticipated to
be complete by year-end 2003. In addition, our historical financial information
prior to our recapitalization may not necessarily reflect the results of
operations, financial condition and cash flows in the future or what our results
of operations, financial condition and cash flows would have been had we been a
separate, independent entity during the periods presented.
Gross Revenues
--------------
The wholesale segment's gross revenues are generated through fees
charged to customers for the transportation of freight. The growth of these
revenues is primarily driven by increases in volume of freight shipped, as
overall rates have historically remained relatively constant. The average rate
is impacted by product mix, rail routes utilized, fuel surcharge and market
conditions. Also included in gross revenues are railcar rental income, container
per diem
25
and incentives paid by APL Limited and others for the repositioning of
empty containers with domestic westbound loads. Gross revenues are reported net
of volume rebates provided to customers.
The retail segment's gross revenues are generated through fees charged
for a broad portfolio of freight transportation services, including trucking
services, intermodal marketing, freight consolidation and handling,
international freight forwarding and supply chain management services. Overall
gross revenues for the retail segment are driven by expanding our service
offering and marketing our broad array of transportation services to our
existing customer base and to new customers. Trucking services include truck
brokerage, flatbed and specialized heavy-haul operations, and local trucking
services. Gross revenues from truck brokerage are driven primarily through
increased volume and outsourcing by companies of their transportation and
logistics needs. Gross revenues from other trucking services, which primarily
support intermodal marketing and provide specialized and local transportation
services to customers through independent operators, are driven primarily by
increased volume as well as length of haul and the rate per mile charged to the
customer. Intermodal marketing involves arranging the movement of freight in
containers and trailers utilizing truck and rail transportation. Increases in
gross revenues from intermodal marketing are generated primarily from increased
volumes, as rates are dependent upon product mix and route, which tend to remain
relatively constant as customers' shipments tend to remain in similar routes.
Gross revenues for freight consolidation and handling, which includes the
handling, consolidation/deconsolidation and storage of freight on behalf of the
shipper, are driven by increased outsourcing and import volumes and by shipping
lines on the West Coast who are increasingly using third-party containers,
rather than their own, to move freight inland. Through our supply chain
management services, we manage all aspects of the supply chain from inbound
sourcing and delivery logistics through outbound shipment, handling,
consolidation, deconsolidation, distribution, and just-in-time delivery of end
products to our customers' customers. Revenues for supply chain management
services are recognized on a net basis and are driven by increased outsourcing.
We also provide international freight forwarding services, which involves
arranging transportation and other services necessary to move our customers'
freight to and from a foreign country. Gross revenues for international freight
forwarding are driven by the globalization of trade.
Cost of Purchased Transportation and Services/Net Revenues
----------------------------------------------------------
The wholesale segment's net revenues are the gross revenues earned from
transportation rates charged to customers less the costs of purchased
transportation and services. The cost of purchased transportation and services
consists primarily of the amounts charged by railroads and local trucking
companies. In addition, terminal and cargo handling services represent the
variable expenses directly associated with handling freight at a terminal
location. The cost of these services is variable in nature and is based on the
volume of freight shipped.
The retail segment's net revenues consist of the gross revenues earned
from its third-party transportation services, less the cost of purchased
transportation and services. Net revenues are driven by the mix of services
provided with net revenues as a percentage of gross revenues varying
significantly based on this mix. Purchased transportation and services consists
of amounts paid to third parties to provide services, such as railroads,
independent contractor truck drivers, freight terminal operators and dock
workers. Third-party rail costs are charged through contracts with the railroads
and are dependent upon product mix and traffic lanes. Sub-contracted or
independent operators are paid on a percentage of revenues, mileage or a fixed
fee.
Direct Operating Expenses
-------------------------
Direct operating expenses are both fixed and variable expenses directly
relating to the wholesale operations and consist of equipment lease expense,
equipment maintenance and repair, fixed terminal and cargo handling expenses and
other direct variable expenses. Our fleet of leased equipment is financed
through a variety of short- and long-term leases. Increases to our
26
equipment fleet will primarily be through additional leases as the growth of our
business dictates. Equipment maintenance and repair consist of the costs related
to the upkeep of the equipment fleet, which can be considered semi-variable in
nature, as a certain amount relates to the annual preventative maintenance costs
in addition to amounts driven by fleet usage. Fixed terminal and cargo handling
costs primarily relate to the fixed rent and storage expense charged to us by
terminal operators and is expected to remain relatively fixed.
Selling, General and Administrative Expenses
--------------------------------------------
The wholesale segment's selling, general and administrative expenses
prior to our 1999 recapitalization consisted of allocated APL Limited corporate
and information technology expenses and direct administrative expenses, which
primarily include payroll and fringe benefits and other overhead expenses. After
May 28, 1999, the corporate administrative services previously provided by APL
Limited are incurred directly by the wholesale segment.
The retail segment's selling, general and administrative expenses
relate to the costs of customer acquisition, billing, customer service and
salaries and related expenses of marketing, as well as the executive and
administrative staff's compensation, office expenses and professional fees. The
retail segment anticipates that it will incur increased overall selling related
costs as it grows its operations, but that such costs will remain relatively
consistent as a percentage of net revenues. The costs related to the retail
segment's corporate functions, such as administration, finance, legal, human
resources and facilities will likely increase as the business grows, but will
likely decrease as a percentage of net revenues as the business grows.
Critical Accounting Policies
Management believes the following critical accounting policies, among
others, affect its more significant judgements and estimates used in the
preparation of its consolidated financial statements.
. Recognition of Revenue
Our wholesale segment recognizes revenue for loads that are in transit
at the end of an accounting period on a percentage of completion basis.
Revenue is recorded for the portion of the transit that has been
completed because reasonably dependable estimates of the transit status
of loads is available in our computer systems. In addition, our
wholesale segment offers volume discounts based on annual volume
thresholds. We estimate our customer's annual shipments throughout the
year and record a reduction to revenue accordingly. Should our
customer's annual volume vary significantly from our estimates, a
revision to revenue for volume discounts would be required. Our retail
segment recognizes revenue after services have been completed.
. Recognition of Cost of Purchased Transportation and Services
Both our wholesale and retail segments estimate the cost of purchased
transportation and services and accrue an amount on a load by load
basis in a manner that is consistent with revenue recognition.
Historically, upon completion of the payment cycle (receipt and payment
of transportation bills), the actual aggregate transportation costs
have been less than the accrual and therefore we have established an
allowance to reduce the payable amounts. Should actual payments differ
from our estimate, revisions to the cost of purchased transportation
and services would be required. In addition, our retail segment earns
discounts to the cost of purchased transportation and services that are
primarily based on annual volume of loads transported over major
railroads. We estimate our annual volume throughout the year and record
a reduction to cost of purchased transportation accordingly. Should our
annual volume vary significantly from our estimates, a revision to the
cost of purchased transportation would be required.
27
. Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. Estimates are used in determining this allowance based on our
historical collection experience, current trends, credit policy and a
percentage of our accounts receivable by aging category. If the
financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
may be required.
. Deferred Tax Assets
We have recorded net deferred tax assets of $63.1 million and have not
recorded a valuation reserve as we believe that future earnings will
more likely than not be sufficient to fully utilize the assets. The
minimum amount of future taxable income required to realize this asset
is $205.5 million. Should we not be able to generate this future
income, we would be required to record valuation allowances against the
deferred tax assets resulting in additional income tax expense in our
Statement of Operations.
. Goodwill
At December 28, 2001, we had recorded $281.5 million of net goodwill.
We evaluate the carrying value of goodwill and recoverability should
events or circumstances occur that bring into question the realizable
value or impairment of goodwill. Our principal considerations in
determining impairment include the strategic benefit to us of the
business related to the goodwill as measured by undiscounted current
and expected future operating income levels of the business and
expected undiscounted future cash flows. When goodwill is determined to
not be recoverable, an impairment is recognized as a charge to
operations to the extent the carrying value of related assets
(including goodwill) exceeds fair value. We adopted the Financial
Accounting Standards Board Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective
December 29, 2001 and will no longer amortize goodwill in the 2002
fiscal year. We have completed a preliminary evaluation of our
goodwill, using the new goodwill impairment testing criteria set forth
in SFAS 142, and have determined that we will not be required to take
an initial goodwill impairment charge as a result of adoption. Future
evaluations of goodwill to be completed on a quarterly basis may,
however, require an impairment charge.
Results of Operations
Fiscal Year Ended December 28, 2001 Compared to Fiscal Year Ended December 29,
2000
The following table sets forth our historical financial data for the fiscal
years ended December 28, 2001 and December 29, 2000. The year 2000 data includes
the results of operations of our four acquisitions since their respective dates
of acquisition. Conex was acquired on January 13, 2000 and is included fully in
both periods, GTS was acquired on August 31, 2000, RFI was acquired on October
31, 2000 and Rail Van was acquired on December 22, 2000. An asterix indicates
that retail segment data is not comparable because the 2000 amounts include the
results of operations of the GTS, RFI and Rail Van acquisitions only since
acquisition.
28
Financial Data Comparison by Reportable Segment
Fiscal Years Ended December 28, 2001 and December 29, 2000
(in millions)
2001 2000 Change % Change
----------- ---------- ---------- ------------
Gross revenues
Wholesale......................................... $ 808.8 $ 814.7 (5.9) (0.7)%
Retail........................................... 952.8 503.9 448.9 *
Inter-segment elimination........................ (90.7) (37.3) (53.4) *
----------- ---------- ---------- ------------
Total......................................... 1,670.9 1,281.3 389.6 30.4
Cost of purchased transportation and services
Wholesale......................................... 620.9 631.5 (10.6) (1.7)
Retail........................................... 809.4 411.4 398.0 *
Inter-segment elimination........................ (90.7) (37.3) (53.4) *
----------- ---------- ---------- ------------
Total......................................... 1,339.6 1,005.6 334.0 33.2
Net revenues
Wholesale......................................... 187.9 183.2 4.7 2.6
Retail........................................... 143.4 92.5 50.9 *
----------- ---------- ---------- ------------
Total......................................... 331.3 275.7 55.6 20.2
Direct operating expenses
Wholesale......................................... 101.7 90.4 11.3 12.5
Retail........................................... - - - -
----------- ---------- ---------- ------------
Total......................................... 101.7 90.4 11.3 12.5
Selling, general & administrative expenses
Wholesale......................................... 43.0 37.7 5.3 14.1
Retail........................................... 112.9 64.9 48.0 *
----------- ---------- ---------- ------------
Total......................................... 155.9 102.6 53.3 51.9
Depreciation and amortization
Wholesale......................................... 5.6 5.4 0.2 3.7
Retail........................................... 12.7 6.2 6.5 *
----------- ---------- ---------- ------------
Total......................................... 18.3 11.6 6.7 57.8
Merger and severance
Wholesale......................................... - - - *
Retail........................................... 0.4 7.7 (7.3) *
----------- ---------- ---------- ------------
Total......................................... 0.4 7.7 (7.3) *
Other
Wholesale......................................... 0.5 - 0.5 *
Retail........................................... 1.9 - 1.9 *
Write-off of IPO costs............................ 1.6 - 1.6 *
----------- ---------- ---------- ------------
Total......................................... 4.0 - 4.0 *
Income from operations
Wholesale......................................... 37.1 49.7 (12.6) (25.4)
Retail........................................... 15.5 13.7 1.8 *
Write-off of IPO costs............................ (1.6) - (1.6) *
----------- ---------- ---------- ------------
Total......................................... 51.0 63.4 (12.4) (19.6)
Interest expense, net................................ 39.6 34.1 5.5 16.1
Income tax expense................................... 3.6 12.9 (9.3) (72.1)
Minority interest expense............................ 0.8 1.6 (0.8) (50.0)
----------- ---------- ---------- ------------
Net income........................................... $ 7.0 $ 14.8 $ (7.8) (52.7)%
=========== ========== ========== ============
- --------------------------------------------------
* Not comparable
29
Gross Revenues. Gross revenues increased $389.6 million, or 30.4%, for
the fiscal year ended December 28, 2001 compared to the fiscal year ended
December 29, 2000. The 2000 acquisitions of GTS, RFI and Rail Van accounted for
an increase in gross revenues of approximately $484.5 million. Excluding these
three acquisitions, gross revenues for the retail segment decreased by
approximately $35.6 million, reflecting a $49.2 million reduction in intermodal
marketing, truck brokerage and freight handling operations partially offset by a
$13.6 million increase in revenues in local and specialized trucking operations.
The local and specialized trucking increase was due primarily to additional
J.C.Penney business in Los Angeles as well as the addition of two agents in our
specialized trucking operations. The wholesale segment decrease of $5.9 million
was due to a $31.9 million, or 4.2%, decrease in freight revenues partially
offset by a $22.4 million increase in railcar rental and container per diem
revenue associated with the increase in equipment for 2001, and a $3.6 million
increase in repositioning revenues. The freight revenue decrease was due to
declines in both the average freight revenue per container and container
volumes. The 1.6% reduction in the average freight revenue per container
resulted from volume reductions in the higher rated automotive business and
volume increases in the lower rated domestic traffic coupled with the
elimination of the 3% fuel surcharge during 2001. Container volumes decreased by
19,151 containers, or 2.7%, due primarily to the reduction in automotive
traffic. Inter-segment revenues increased by $53.4 million primarily as the
result of our 2000 acquisitions of GTS, RFI and Rail Van and our strategy to
increase the use of intercompany services.
Our results for 2001 were negatively impacted by the continuation of
the general economic downturn. The downturn produced overcapacity in selected
markets which increases competitive pressures to reduce transportation rates.
Our intermodal marketing, truck brokerage and freight handling operations
experienced reduced shipments from major retailers and other customers including
Ford, Kmart and Bridgestone, while the wholesale operations have been affected
by reduced automotive shipments. Ford and Bridgestone were two key customers of
our 2000 acquisitions. Reduced shipments have caused our actual results to be
less than the pro forma results as presented in Note 3 to the Consolidated
Financial Statements. This trend, primarily in our retail segment, has continued
into the first quarter of 2002 as United States year 2002 intermodal volumes
have shown declines over comparable 2001 time periods.
Net Revenues. Net revenues increased $55.6 million, or 20.2%, for 2001
compared to 2000. The 2000 acquisitions accounted for a $63.3 million increase
in net revenues, while the remaining retail segment operations decreased $12.4
million due to the economic downturn discussed above. The wholesale segment's
cost of purchased transportation decreased $10.6 million on container volume
decreases of 2.7% as discussed above. Since the decrease in the cost of
purchased transportation was greater than the decrease in segment gross
revenues, the wholesale segment net revenues increased $4.7 million in 2001
compared to 2000. The gross margin increased to 23.2% in 2001 from 22.5% in 2000
due primarily to the increase in railcar rental and container per diem revenue
partially offset by reduced margins on freight transportation associated with
competitive market pressures related to excess capacity. The retail segment
gross margin decreased to 15.1% in 2001 from 18.4% in 2000 due primarily to the
lower margins associated with business of the 2000 acquisitions.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the wholesale segment, increased $11.3 million, or 12.5%, in 2001
compared to 2000 due to increased equipment lease expenses as a result of the
expansion of the fleet of railcars partially offset by a reduction in
maintenance expenses. In addition during 2001, $1.4 million was charged for
container and chassis return costs required in order to return 2,700 containers
and 1,300 chassis as part of a program to downsize the container and chassis
fleet.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $53.3 million, or 51.9%, in 2001 compared to
2000. The 2000 acquisitions of GTS, RFI and Rail Van accounted for $46.9 million
of the retail segment increase. An additional $0.8 million of the increase was
due to costs associated primarily with the consolidation of retail segment
operations in Columbus, Ohio and legal fees of $0.3 million related to a lawsuit
filed by us against a former owner of an acquired business accounted for the
remaining retail segment increase. The wholesale segment accounted for $5.3
million of the increase due primarily to an increase in headcount during 2001
30
associated with completing the organizational changeover from APL Limited to
Pacer since May 1999. In addition, during March 2001, we terminated a container
and chassis maintenance agreement and brought that function in-house, which
while increasing administrative labor costs, reduced repair and maintenance
costs and provided for more control of the maintenance function.
Depreciation and Amortization. Depreciation and amortization expenses
increased $6.7 million, or 57.8%, for 2001 compared to 2000. The retail segment
including the 2000 acquisitions of GTS, RFI and Rail Van accounted for $6.5
million of the increase and the wholesale segment accounted for the remaining
$0.2 million. Depreciation expense was $10.8 million and $6.9 million and
amortization expense was $7.5 million and $4.7 million for 2001 and 2000,
respectively. We adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" on December 29, 2001. We will cease
goodwill amortization beginning December 29, 2001 (see Recently Issued
Accounting Pronouncements in Note 1 to the Consolidated Financial Statements).
Merger and Severance. In December 2000, we recorded a charge of $7.7
million relating to the consolidation of retail segment operations resulting
from the December 22, 2000 acquisition of Rail Van. The charge included $5.0
million for the severance of 99 employees from the Chicago, Memphis, Los Angeles
and Walnut Creek offices and the termination of agency agreements. An additional
$2.0 million covered lease costs through lease termination in 2006 for
facilities no longer required, primarily in Walnut Creek and Memphis. The
remaining $0.7 million of this charge was for the write-off of computer software
under development. Through December 28, 2001, $2.8 million had been charged to
the reserve for the severance of 80 employees and $1.8 million had been charged
related to facilities and other. The severance plan will be completed by the end
of 2003 as payments for senior management severance are spread over two years.
We estimate that the costs savings associated with the plan was approximately
$2.8 million in 2001 and will be approximately $6.0 million annually thereafter.
Payments for this charge have been funded from cash from operations and
borrowings under our revolving credit facility.
During 2001, we recorded an additional charge of $1.6 million including
$0.8 million for the severance of employees in the wholesale segment, $0.5
million for additional lease costs due to the worsening of the real estate
market and the difficulty in subletting facilities no longer required and $0.3
million for the write-off of retail segment assets that have been abandoned. The
2001 charge was partially offset by the release of $1.2 million of remaining
unused liability from the 2000 charge related to planned workforce reductions
(employee and agencies) that are no longer needed due to employees/agents
leaving prior to being terminated. We estimate that the costs savings associated
with the 2001 additions to the plan was approximately $0.1 million in 2001 and
will be approximately $0.2 million annually thereafter. Payments for this charge
will be funded from cash from operations and, if necessary, borrowing under our
revolving credit facility.
Other. Other expenses in 2001 included $1.9 million in the retail segment
for the write-off of agent balances due to an agent bankruptcy, $1.6 million for
the write-off of IPO costs and $0.5 million in the wholesale segment for early
termination costs associated with the termination of a chassis and container
maintenance agreement.
Income From Operations. Income from operations decreased $12.4 million,or
19.6%, from $63.4 million in 2000 to $51.0 million in 2001. The wholesale
segment accounted for a $12.6 million decrease due primarily to the reduction in
automotive shipments, the $1.4 million charge for container and chassis return
costs required to downsize the container and chassis fleet, the increase in
equipment costs associated with the expansion of the railcar fleet and the
merger and severance charge. Retail segment income from operations increased by
$1.8 million for 2001 compared to 2000. Income from operations for the 2000
acquisitions was approximately $7.5 million while the remaining retail
operations decreased $5.7 million reflecting the economic downturn discussed
above, the write-off of agent balances and the merger and severance charge. The
write-off of IPO costs accounted for an additional $1.6 million of the decline
in income from operations.
31
Interest Expense. Interest expense increased by $5.5 million, or 16.1%, for
2001 compared to 2000 due to the higher level of outstanding debt during 2001
partially offset by lower interest rates in 2001. We borrowed $68.2 million
under the revolving credit facility and issued $40.0 million in new term loans
to fund the acquisitions of GTS, RFI and Rail Van during 2000. Also during 2000,
we borrowed $15.0 million from the revolving credit facility to fund the
acquisition of Conex. Interest expense related to this borrowing is comparable
in both periods.
Income Tax Expense. Income tax expense decreased $9.3 million in the 2001
period compared to the 2000 period due to lower pre-tax income in the 2001
period. The effective tax rate also declined from 44.0% in 2000 to 31.6% in 2001
due primarily to the effects of revisions to prior years' estimated liabilities.
Minority Interest Expense. Minority interest expense, which represents 7.5%
paid-in-kind dividends on the Series B Exchangeable Preferred Stock of Pacer
Logistics, decreased by $0.8 million because the dividends ceased to accrue as
of May 28, 2001.
Net Income. Net income decreased $7.8 million from $14.8 million in 2000 to
$7.0 million in 2001. The decrease was due to the decreased income from
operations associated with the economic downturn discussed above and increased
interest expense associated with a higher level of outstanding debt in 2001.
Partially offsetting the decrease were reduced income tax expense and minority
interest charges.
Fiscal Year Ended December 29, 2000 Compared to Fiscal Year Ended December 31,
1999
The following table sets forth our historical financial data for the fiscal
years ended December 29, 2000 and December 31, 1999. An asterix indicates that
retail segment data is not comparable because the 1999 amounts include only
seven months of retail segment data (since acquisition on May 28, 1999) and do
not include Conex data acquired January 13, 2000, GTS data acquired August 31,
2000, RFI data acquired October 31, 2000 or Rail Van data acquired December 22,
2000.
32
Financial Data Comparison by Reportable Segment
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in millions)
2000 1999 Change % Change
---------- ---------- --------- ---------
Gross revenues
Wholesale.................................. $ 814.7 $ 713.2 $ 101.5 14.2%
Retail.................................... 503.9 233.2 270.7 *
Inter-segment elimination................. (37.3) (18.7) (18.6) *
---------- ---------- --------- ---------
Total.................................. 1,281.3 927.7 353.6 38.1
Cost of purchased transportation and services
Wholesale.................................. 631.5 559.1 72.4 12.9
Retail.................................... 411.4 195.0 216.4 *
Inter-segment elimination................. (37.3) (18.7) (18.6) *
---------- ---------- --------- ---------
Total.................................. 1,005.6 735.4 270.2 36.7
Net revenues
Wholesale.................................. 183.2 154.1 29.1 18.9
Retail.................................... 92.5 38.2 54.3 *
---------- ---------- --------- ---------
Total.................................. 275.7 192.3 83.4 43.4
Direct operating expenses
Wholesale.................................. 90.4 76.8 13.6 17.7
Retail.................................... - - - -
---------- ---------- --------- ---------
Total.................................. 90.4 76.8 13.6 17.7
Selling, general & administrative expenses
Wholesale.................................. 37.7 32.4 5.3 16.4
Retail.................................... 64.9 26.5 38.4 *
---------- ---------- --------- --------
Total.................................. 102.6 58.9 43.7 74.2
Depreciation and amortization
Wholesale.................................. 5.4 6.0 (0.6) (10.0)
Retail.................................... 6.2 2.6 3.6 *
---------- ---------- --------- --------
Total.................................. 11.6 8.6 3.0 34.9
Merger and severance
Wholesale.................................. - - - -
Retail.................................... 7.7 - 7.7 *
---------- ---------- ---------- --------
Total.................................. 7.7 - 7.7 *
Income from operations
Wholesale.................................. 49.7 38.9 10.8 27.8
Retail.................................... 13.7 9.1 4.6 *
---------- ---------- --------- --------
Total.................................. 63.4 48.0 15.4 32.1
Interest expense, net......................... 34.1 18.6 15.5 *
Income tax expense............................ 12.9 11.7 1.2 10.3
Minority interest expense..................... 1.6 1.1 0.5 *
---------- ---------- --------- ---------
Net income.................................... $ 14.8 $ 16.6 $ (1.8) (10.8)%
========== ========== ========= =========
___________________________
* Not comparable
Gross Revenues. Gross revenues increased $353.6 million, or 38.1%, for
the fiscal year ended December 29, 2000 compared to the fiscal year ended
December 29, 1999. Approximately $168.9 million, or 47.8%, of the increase was
due to the acquisition of Pacer Logistics (excluding the four 2000 acquisitions)
and $101.8 million, or 28.8%, of the increase was due to the four 2000
acquisitions. The wholesale segment increase of $101.5 million was due primarily
to an $87.1 million, or 13.0%, increase in freight revenues driven by an overall
container volume increase of 83,071 containers or 13.1%. The volume increase was
due to increased customer
33
demand coupled with the addition of 1,500 53-foot containers during the fourth
quarter of 1999 and 3,125 containers during 2000. This volume increase was
partially offset by a 0.1% reduction in the average freight revenue per
container resulting primarily from mix changes. A 3% fuel surcharge implemented
on domestic traffic during the second quarter of 2000 to defray rail fuel cost
increases mitigated the revenue per container reduction. Automotive and
international volumes continued strong for 2000 exceeding 1999 volumes by 40%
and 28%, respectively. Other wholesale segment revenues increased approximately
$16.0 million due primarily to increased railcar rental income, increased
container per diem revenue and the management fees associated with the 1999
Stacktrain Services Agreement with APL Limited entered into effective May 28,
1999. The railcar rental increase in 2000 resulted from the registration and
marking of our rail cars for participation in the Association of American
Railroad interchange rules and income collection procedures which allowed us to
collect rail car rental income without entering into separate agreements with
each user. The increased container per diem revenue was generated by the
additional containers received in the fourth quarter of 1999 and during 2000
coupled with higher traffic volumes. The overall revenue increase was partially
offset by a $1.6 million reduction in repositioning revenues due to shippers
reloading containers in the westbound direction rather than paying us to move
empty containers westbound.
Net Revenues. Net revenues increased $83.4 million, or 43.4%, for 2000
compared to 1999. The acquisition of Pacer Logistics (excluding the four 2000
acquisitions) accounted for $33.4 million, or 40.0%, of the increase, the four
2000 acquisitions accounted for $20.9 million, or 25.1%, of the increase and the
wholesale segment accounted for the remaining $29.1 million of the increase. The
wholesale segment's cost of purchased transportation increased $72.4 million, or
12.9%, on container volume increases of 13.1% discussed above. The wholesale
segment gross margin increased to 22.5% in 2000 from 21.6% in 1999 due primarily
to increased railcar rental income, increased rail volume incentives and
improved train blocking and loading procedures implemented as a result of the
Intermodal Transportation Agreement with CSX Intermodal, Inc. entered into
effective January 1, 2000, which reduced costs. These gross margin improvements
were partially offset by the significant traffic increase in the lower yielding
international business line.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the wholesale segment, increased $13.6 million, or 17.7%, in 2000
compared to 1999. The increase was due to increased equipment lease and
maintenance expenses of approximately $14.3 million as a result of the expansion
of the fleet of containers and chassis including a fourth quarter charge of $4.4
million related to a formerly outsourced equipment repair function that failed
to perform and has subsequently been brought in-house.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $43.7 million, or 74.2%, in 2000 compared to
1999. The retail segment (excluding the four 2000 acquisitions) accounted for
$25.7 million, or 58.8%, of the increase, the four 2000 acquisitions accounted
for an additional $12.7 million, or 29.1%, of the increase and the wholesale
segment accounted for $5.3 million, or 12.1%, of the increase. The increase in
wholesale segment costs was due primarily to higher information technology costs
provided under contract with APL Limited as well as increased headcount since
1999 associated with completing the organizational changeover from APL Limited
since May 1999.
Depreciation and amortization. Depreciation and amortization expenses
increased $3.0 million, or 34.9%, for 2000 compared to 1999. The retail segment,
including $1.5 million related to the four 2000 acquisitions, accounted for $3.6
million of the increase in this category. The wholesale segment decrease of $0.6
million was due primarily to reduced depreciation expense associated with the
sale and leaseback of 199 railcars on May 28, 1999. Depreciation expense was
$6.9 million and $6.2 million and amortization expense was $4.7 million and $2.4
million for 2000 and 1999, respectively. The increase in amortization was due to
the amortization of goodwill associated with the acquisition of Pacer Logistics
on May 28, 1999 as well as the 2000 acquisitions.
34
Merger and Severance. In December 2000, we recorded a charge of $7.7
million relating to the consolidation of retail segment operations resulting
from the December 22, 2000 acquisition of Rail Van. The charge included $5.0
million for the severance of 99 employees from the Chicago, Memphis, Los Angeles
and Walnut Creek offices and the termination of agency agreements. An additional
$2.0 million covered lease costs through lease termination in 2006 for
facilities no longer required, primarily in Walnut Creek and Memphis. Employee
terminations and agency closures will be phased-in and completed during 2002.
The remaining $0.7 million of this charge was for the write-off of computer
software under development. Payments for this charge were funded from cash from
operations and, if necessary, borrowings under our revolving credit facility.
Income From Operations. Income from operations increased $15.4 million,
or 32.1%, from $48.0 million in 1999 to $63.4 million in 2000. The retail
segment (excluding the four 2000 acquisitions and the merger and severance
charge) accounted for $5.6 million, or 36.4%, of the increase and the four 2000
acquisitions accounted for $6.7 million, or 43.5%, of the increase. The retail
segment merger and severance charge of $7.7 million partially offset the retail
segment increase over 1999. The wholesale segment accounted for $10.8 million,
or 70.1%, of the increase due primarily to the 13.1% increase in traffic volume
coupled with higher rail car rental income as discussed above.
Interest Expense, Net. Interest expense, net increased by $15.5 million
from $18.6 million in 1999 to $34.1 million in 2000. Interest expense, net in
1999 reflects only seven months of interest on our $150.0 million of senior
subordinated notes and borrowings of $135.0 million under the term loan portion
of the credit agreement on May 28, 1999 to fund our recapitalization and the
acquisition of Pacer Logistics. In addition, during 2000 we borrowed $83.2
million under the revolving credit facility to fund the acquisitions of Rail
Van, RFI, GTS and Conex. We also issued $40.0 million in new term loans to fund
the Rail Van acquisition and issued a $5.0 million 8% subordinated note to Conex
shareholders to fund the acquisition of Conex assets. Amounts for 1999 were
restated to reflect an adjustment to the inter-segment interest calculation
between the wholesale and retail segments which favorably impacted the wholesale
segment and adversely impacted the retail segment but had no impact on
consolidated results.
Income Tax Expense. Income tax expense increased by $1.2 million from
$11.7 million in 1999 to $12.9 million in 2000. The effective tax rate for 2000
was 44.0% compared to 39.8% for 1999 due primarily to the non-deductibility for
tax purposes of goodwill amortization associated with the acquisitions of Pacer
Logistics on May 28, 1999, GTS on August 31, 2000 and RFI on October 31, 2000.
Net Income. Net income decreased $1.8 million, or 10.8%, from $16.6
million in 1999 to $14.8 million in 2000. The merger and severance charge
accounted for an estimated $4.3 million of the after-tax decrease. The retail
segment, including the four 2000 acquisitions but excluding the merger and
severance charge, accounted for a $5.1 million increase in net income while the
wholesale segment accounted for a decrease of $2.1 million and minority interest
costs (accrued paid-in-kind dividends on the exchangeable preferred stock of the
retail segment) accounted for the remaining $0.5 million decrease in net income.
The wholesale segment decrease was due primarily to increased interest expense
on the financing for the recapitalization and acquisition of Pacer Logistics
partially offset by improved operating income for 2000 as a result of increased
container volumes.
Liquidity and Capital Resources
Cash generated by operating activities was $21.8 million, $1.2 million
and $20.8 million for the years ended December 28, 2001, December 29, 2000 and
December 31, 1999, respectively. The increase in cash provided by operating
activities in 2001 was due primarily to the $11.1 million decrease in accounts
receivable in 2001 compared to a $14.3 million increase in 2000. The 2001
accounts receivable reduction resulted primarily from improved collection
efforts coupled with decreased revenue levels excluding the revenues associated
with the 2000
35
acquisitions. In addition, we made merger and severance cash payments of $4.0
million in 2001 and paid acquisition fees and expenses of $2.8 million primarily
for the acquisition of Rail Van. The decrease in cash provided by operating
activities in 2000 compared to 1999 was due primarily to an increase in interest
payments from $15.4 million in 1999 to $32.3 million in 2000 due to borrowings
to finance the 2000 acquisitions. In April 2000 we transferred the processing of
APL Limited's international traffic receivables and payables to APL Limited,
which had previously been included in our balance sheet, resulting in a decrease
in both accounts receivable and accounts payable of approximately $33.4 million.
The transfer to APL Limited was facilitated by changes in computer software
which were not previously available. We continue to handle APL Limited's
international traffic under contract for a management fee. Cash generated from
operating activities is typically used for working capital purposes, to fund
capital expenditures and for acquisitions. We had working capital of $20.1
million and $12.6 million at December 28, 2001 and December 29, 2000,
respectively.
Our operating cash flows are also the primary source for funding our
contractual obligations. The table below summarizes as of December 28, 2001 our
major commitments consisting of long-term debt, capital lease and operating
lease requirements.
Debt and Lease Obligation Payment Requirements
($ in millions)
Total Less than 1 Yr 2-3 Years 4-5 Years After 5 Yrs
------------ ----------------- --------------- -------------- -------------
Long-term debt $ 397.5 $ 1.7 $ 79.3 $ 166.5 $ 150.0
Operating leases 381.0 60.0 92.9 69.9 158.2
Capital leases 0.4 0.3 0.1 - -
------------ ----------------- --------------- -------------- -------------
Total $ 778.9 $ 62.0 $ 172.3 $ 236.4 $ 308.2
============ ================= =============== ============== =============
Our total long-term debt was incurred to finance our recapitalization,
the acquisition of Pacer Logistics and the four 2000 acquisitions. There were no
acquisitions in 2001. The majority of the operating lease requirements relate to
our wholesale segment's lease of railcars, containers and chassis. We do not
anticipate additional equipment leases during 2002 and have downsized our
container and chassis fleet. In addition, each year a portion of the operating
leases require renewal or can be terminated based upon equipment requirements.
Partially offsetting these lease payment requirements are railcar and container
per diem revenues which were $52.5 million in 2001, $30.1 million in 2000 and
$16.9 million in 1999.
Based upon the current level of operations including the integration of
the 2000 acquisitions and the anticipated future growth in both operating
segments, management believes that operating cash flow and availability under
the revolving credit facility will be adequate to meet our working capital,
capital expenditure and other cash needs for at least the next two years,
although no assurance can be given in this regard. Our largest customer
generated $128.1 million, or 7.7%, of our gross revenues in 2001. Loss of this
customer, or others, could have an adverse impact on our results of operations
and operating cash flows. In addition, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, our results of operations and operating cash flows could be
adversely impacted.
During 2001, we charged a total of $6.9 million to operating expense as
described below. The charges included $1.9 million for the write-off of agent
balances due to agent bankruptcy; $1.6 million for the write-off of IPO costs;
$1.4 million for container and chassis return costs required as part of a
program to downsize the container and chassis fleet; $0.4 million for additional
merger and severance costs; $0.5 million for early termination costs associated
with the termination of a container and chassis maintenance agreement; $0.8
million for costs associated primarily with the consolidation of retail segment
operations in Columbus, Ohio; and $0.3 million for legal fees related to a civil
lawsuit filed against the former owner of an acquired business.
36
Cash flows used in investing activities were $14.4 million, $130.7
million and $74.0 million for 2001, 2000 and 1999, respectively. The use of cash
in 2001 was due to capital expenditures of $7.3 million, of a planned total of
approximately $10.0 million, for the conversion from APL Limited's computer
systems to a stand-alone capability for our wholesale segment and $3.8 million
for the expansion of the Rail Van computer systems to handle our retail segment
operating requirements. An additional $3.5 million of capital expenditures was
for computer replacement, furniture and fixtures and leasehold improvements.
These amounts were partially offset by net proceeds of $0.2 million for the sale
of property. The use of cash in 2000 was due primarily to purchase price and
fees paid for acquiring Conex assets for $26.1 million, GTS for $15.3 million,
RFI for $16.8 million and Rail Van for $67.4 million, partially offset by net
proceeds of $0.4 million for the sale of retired wholesale and retail segment
property. The use of cash in 1999 was due to the acquisition of the retail
segment for $112.0 million, partially offset by the net proceeds of $39.6
million from the sale and leaseback of 199 railcars originally purchased in 1998
and by the net proceeds of $0.4 million from the sale of retail segment
property. Capital expenditures of $5.5 million in 2000 and $2.0 million in 1999
were primarily for computer hardware and leasehold improvements to office space
and warehouse facilities.
Capital expenditures for 2002 are budgeted at $5.4 million primarily
for completion of the wholesale segment computer conversion and the expansion of
the Rail Van computer systems to handle the retail segment requirements.
Cash flows (used in) provided by financing activities were $(7.4)
million, $117.3 million and $65.4 million for 2001, 2000 and 1999, respectively.
The use of cash during 2001 was due to debt repayment. During 2001, we repaid
$6.0 million under the revolving credit facility, $1.3 million of term loans and
$0.2 million of capital lease obligations. Also during 2001, certain members of
senior management exercised options to purchase 183,374 shares of Pacer
International, Inc. common stock for total proceeds of $0.1 million. The
proceeds were used to repay the remaining portion of the notes payable to
management that were part of the purchase price for Pacer Logistics acquired on
May 28, 1999 and for general corporate purposes. In addition, certain members of
senior management exercised options to purchase 27,498 shares of Pacer
International, Inc. preferred stock for total proceeds of $0.2 million. We
repurchased and retired the preferred stock that arose from the exercise of the
options.
During 2000, we borrowed $83.2 million under the revolving credit
facility and issued $39.4 million in new term loans (net of $0.6 million in loan
fees) to acquire Conex assets, GTS, RFI and Rail Van. In connection with the
January 13, 2000 acquisition of Conex assets, we also issued Conex shareholders
an 8.0% subordinated note in the aggregate principal amount of $5.0 million due
January 13, 2003 and issued 300,000 shares (valued at $6.0 million) of our
common stock. In connection with the December 22, 2000 acquisition of Rail Van,
we issued Rail Van shareholders 280,000 shares (valued in the aggregate at $7.0
million) of our common stock. Our management exercised options to purchase
341,373 shares of common stock for total proceeds of $0.9 million during the
2000. The proceeds were used to repay notes payable to management which were
part of the purchase price for the May 28, 1999 acquisition of Pacer Logistics
and for general corporate purposes. We repaid $8.9 million of Rail Van debt
assumed at acquisition, $6.4 million of the revolving credit facility, $1.3
million of term loans, $0.4 million of notes payable to management and $0.1
million of capital lease obligations during 2000.
On May 28, 1999, in connection with our recapitalization and
acquisition of the retail segment, proceeds of $104.4 million were received from
the issuance of our common stock. We also borrowed $135.0 million under a term
loan facility, issued $150.0 million of senior subordinated notes, borrowed $2.0
million under the $100.0 million revolving credit facility and issued $24.3
million of Pacer Logistics' exchangeable preferred stock. We paid $9.5 million
of financing costs associated with these borrowings which are amortized over the
life of the debt. The $2.0 million borrowed under the revolving credit facility
was repaid in July 1999. These borrowings were partially offset by a
distribution to APL Limited of $300.0 million and by fees paid in connection
with the recapitalization of $11.7 million. In addition, $0.7 million of the
term loan was repaid and $0.1 million was paid on capital lease obligations
during 1999. In July 1999, we
37
also redeemed $2.0 million of Pacer Logistics' exchangeable preferred stock.
Prior to our recapitalization on May 28, 1999, any excess cash generated from or
used for operating or investing activities was remitted to or received from APL
Limited, the former parent, through participation in the cash management plan.
The $150.0 million of senior subordinated notes, due in 2007, bear
interest at 11.75% with interest due semi-annually at June 1 and December 1. The
$135.0 million term loan due in 2006, and the $100.0 million revolving credit
facility expiring in 2004, each bear interest at a variable rate based on, at
our option, the Eurodollar rate or a base rate determined based on the federal
funds rate, prime rate or certificate of deposit rate, plus in either case a
margin ranging from 1.5% to 3% based on our leverage ratio. The margin increases
or decreases by 0.25% for each change in our leverage ratio between 3.25 and
4.0, between 4.0 and 5.0, and greater than 5.0. At December 28, 2001, the
interest rate on the revolving credit facility was 5.1% and the interest rate on
the term loans was 5.5%. Voluntary prepayments and commitment reductions will
generally be permitted without premium or penalty. The credit facilities are
generally guaranteed by all of our existing and future direct and indirect
wholly-owned subsidiaries and are collateralized by liens on our and our
subsidiaries' properties and assets. At December 28, 2001, $171.7 million of
term loans were outstanding and we had $23.4 million available under the
revolving credit facility. The credit agreement contains restrictions and
financial covenants such as an adjusted total leverage ratio and a consolidated
interest coverage ratio. At December 28, 2001, we were in compliance with these
covenants. On August 9, 1999, we entered into a first amendment to the credit
agreement to increase the maximum amount that can be drawn under the revolving
credit facility on the day of notification of borrowing to $10.0 million from
$2.5 million. On January 7, 2000, we entered into a second amendment to the
credit agreement to modify the definition of excess cash flow to allow for the
acquisition of the Conex assets. On December 22, 2000, we entered into a third
amendment to the credit agreement to provide for an additional term loan in the
amount of $40.0 million which was borrowed to finance the acquisition of Rail
Van as described below.
The wholesale segment took delivery of 1,500 new 53-foot containers and
chassis financed through an operating lease in the fourth quarter of 1999.
During 2000, to help meet current and projected growth, we received 4,156 leased
containers and 3,425 leased chassis and returned 1,470 primarily 48-ft leased
containers and 506 leased chassis. In addition, we retired 593 owned 48-ft
containers. During 2001, we received 1,100 leased containers and 80 leased
chassis and returned 2,278 primarily 48-ft leased containers and 1,629 leased
chassis.
We entered into operating lease agreements for 1,300 railcars during
2000 and 2001 as described below. The long-term lease obligations associated
with this equipment is reflected in the Debt and Lease Obligation Payment
Requirements table above. All of the railcars have been received and we do not
anticipate ordering any additional railcars during 2002.
Lease Lease No. Received Received
Date Term Ordered In 2000 In 2001
- --------------- ------------ ----------- ------------ ------------
9/1/2000 Monthly 200 200
10/4/2000 15 Yrs 250 85 165
1/2/01 5 Yrs 250 250
2/14/01 15 Yrs 100 100
6/19/01 15 Yrs 250 250
9/25/01 5 Yrs 250 250
----------- ------------ ------------
Total 1,300 285 1,015
=========== ============ ============
The two five-year term lease contracts have two additional five-year
renewal options. All leases include change of control provisions, however these
only apply if the new entity does not assume all of the obligations and when
certain financial requirements are not met, such as, for example, the new entity
maintaining a minimum net worth of $17.4 million or a Standard & Poor's
38
credit rating of at least B+. If these requirements were not met, the lessor
would have the right to retake the railcars and/or collect damages after
disposal of the equipment, if necessary, to recover costs associated with the
lease of the equipment.
On December 22, 2000, pursuant to a stock purchase agreement, we
acquired all of the capital stock of Rail Van, Inc. Rail Van provides truck
brokerage, intermodal marketing and logistics services. The purchase price of
$76.0 million included $4.0 million of acquisition costs, a cash payment to
owners of $67.0 million, the issuance to Rail Van stockholders of 280,000 shares
of our common stock (valued in the aggregate at $7.0 million) and a post-closing
adjustment of $2.0 million refunded by the sellers based on Rail Van's results
for 2000 through December 22. The acquisition was funded with a borrowing of
$40.2 million under our revolving credit facility, $40.0 million in new term
loans and the issuance of our common stock. Operating results of the acquisition
are included in our retail segment from the date of acquisition. The acquisition
resulted in $75.2 million of goodwill.
On October 31, 2000, pursuant to a stock purchase agreement, we
acquired all of the capital stock of RFI Group. Inc. RFI provides international
freight forwarding and freight transportation services. The purchase price was
$18.5 million including acquisition fees of $0.5 million, a net cash payment to
owners of $16.4 million and a working capital adjustment of $1.6 million. A
portion of the net cash payment was used to repay $5.2 million of indebtedness.
The acquisition was funded by $18.0 million of borrowings under our revolving
credit facility. In connection with the acquisition, former owners of RFI that
continued as employees were granted 125,000 options to purchase our common
stock. Operating results of the acquisition are included in our retail segment
from the date of acquisition. The acquisition resulted in $17.4 million of
goodwill. During 2001, we reviewed and increased the gross goodwill recorded for
this acquisition by $0.3 million.
On August 31, 2000, we acquired all of the capital stock of GTS
Transportation Services, Inc. for $17.8 million including acquisition fees and
expenses and a maximum earn-out amount of $2.2 million. The acquisition was
funded by $10.0 million of borrowings under our revolving credit facility. GTS
is a provider of transportation services, including logistics and truck
brokerage in North America. In connection with the acquisition, former owners of
GTS that continued as employees were granted 30,000 options to purchase our
common stock. Operating results of the acquisition are included in our retail
segment from the date of acquisition. The acquisition resulted in $21.2 million
of goodwill. During 2001, we reviewed and decreased the gross goodwill recorded
for this acquisition by $1.1 million as a result of the finalization of certain
pre-acquisition contingencies.
On January 13, 2000, pursuant to the terms of an asset purchase
agreement, we acquired substantially all of the assets and assumed specified
liabilities of Conex Global Logistics Services, Inc., MSL Transportation Group,
Inc., and Jupiter Freight, Inc. (collectively "Conex"), a multipurpose provider
of transportation services including intermodal marketing, local trucking and
freight consolidation and handling. The purchase price of $37.4 million included
acquisition fees of approximately $1.3 million, a cash payment to owners of
$25.1 million, the issuance to Conex shareholders an 8.0% subordinated note in
the aggregate principal amount of $5.0 million and the issuance to Conex
shareholders of 300,000 shares (valued in the aggregate at $6.0 million) of
common stock of Pacer International, Inc. We borrowed $15.0 million under the
revolving credit facility to fund the acquisition. Operating results of the
acquisition were included in our retail segment beginning January 1, 2000. The
acquisition resulted in $32.0 million of goodwill. In 2001, we reviewed and
increased the gross goodwill recorded for this acquisition by $0.1 million.
On May 28, 1999, we acquired the common stock of Pacer Logistics, Inc.,
a privately-held third party logistics provider. We paid $137.5 million in the
acquisition which included acquisition fees of $2.9 million and assumed
indebtedness of $62.6 million. We financed the acquisition with a portion of the
proceeds from the senior subordinated notes and with funds under the credit
facility. The acquisition resulted in goodwill of $123.1 million. During 2000,
we reviewed and increased the gross goodwill recorded for the acquisition of
Pacer Logistics by $2.9 million. In December 2000, we determined the deferred
tax asset arising as a result of our four 2000 acquisitions. This entry
increased gross goodwill by $2.8 million.
39
In December 2000, we filed a registration statement with the SEC with
respect to an initial public offering of our common stock. In 2001, we postponed
the IPO due to market conditions. We expect that our IPO will be completed in
2002, subject to market conditions.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations," in July, 2001 and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" in October, 2001. SFAS No. 143, which is
effective for fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We will
adopt SFAS No. 143 in the 2003 fiscal year. SFAS No. 144, which is effective for
fiscal years beginning after December 15, 2001, addresses financial accounting
and reporting for the impairment of long-lived assets, excluding goodwill and
intangible assets, to be held and used or disposed of. We have not yet completed
our analysis of the effects that these new standards will have on the results of
operations; although we do not expect the implementation of these standards to
have a significant effect on the results of operations or financial condition.
The Financial Accounting Standards Board also issued SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets."
These statements prohibit pooling-of-interests accounting for transactions
initiated after June 30, 2001, require the use of the purchase method of
accounting for all combinations after June 30, 2001 and establish a new
accounting standard for goodwill acquired in a business combination. SFAS 141
and SFAS 142 continue to require recognition of goodwill as an asset, but do not
permit amortization of goodwill as previously required by APB Opinion No. 17
"Intangible Assets." SFAS 142 was effective for us on December 29, 2001. SFAS
142 will result in significant modifications relative to our accounting for
goodwill. Specifically, we will cease goodwill amortization, which was $7.5
million in 2001, beginning December 29, 2001. Furthermore, certain intangible
assets that are not separable from goodwill will not be amortized. However,
goodwill and other intangible assets will be subject to periodic (at least
annual) tests for impairment and recognition of impairment losses in the future
could be required based on a new methodology for measuring impairments described
below. The revised standards include transition rules and requirements for
identification, valuation and recognition of a much broader list of intangibles
as part of business combinations than prior practice, most of which will
continue to be amortized. SFAS 142 requires a two-step method for determining
goodwill impairments where step 1 is to compare the fair value of the reporting
unit with the unit's carrying amount, including goodwill. If this test suggests
that it is impaired, then step 2 is required to compare the implied fair value
of the reporting unit's goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of the reporting unit's goodwill is
greater than the implied fair value of its goodwill, an impairment loss must be
recognized for the excess. Also under SFAS 141, a one-step method is used to
determine the impairment for indefinite-lived intangible assets where the fair
value of the intangible asset is compared with its carrying amount. We have
completed a preliminary evaluation of goodwill using the new goodwill impairment
testing criteria set forth in SFAS 142, and have determined that we will not be
required to take an initial goodwill impairment charge as a result of adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk is affected primarily by changes in interest rates.
Under our policies, we may use hedging techniques and derivative financial
instruments to reduce the impact of adverse changes in market prices. The
quantitative information presented below and the additional qualitative
information presented in the Management's Discussion and Analysis and Notes 1, 4
and 5 of the Consolidated Financial Statements included in this filing describe
significant aspects of our financial instrument programs which have a material
market risk.
We have market risk in interest rate exposure, primarily in the United
States. We manage interest exposure through our mix of fixed and floating rate
debt. Interest rate swaps may be
40
used to adjust interest rate exposure when appropriate based on market
conditions. For qualifying hedges, the interest differential of swaps is
included in interest expense.
Based upon the average variable interest rate debt outstanding during
2001, a 1% change in our variable interest rates would have affected our 2001
pre-tax earnings by approximately $2.5 million. For 2000, a 1% change would have
affected 2000 pre-tax earnings by approximately $1.9 million.
As our foreign business expand, we will be subjected to greater foreign
currency risk.
Inflation
---------
We contract with railroads and independent truck operators for our
transportation requirements. These third parties are responsible for providing
their own diesel fuel. To the extent that increased fuel prices are passed along
to us, we have historically passed these increases along to our customers.
However, there is no guarantee that this will be possible in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, including supplementary data and
accompanying reports of independent accountants are listed in the Index to
Consolidated Financial Statements and Financial Statement Schedules on page F-1
filed as part of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and executive
officers.
Name Age Position with Pacer International
---- --- ---------------------------------
Donald C. Orris 60 Chairman, President and Chief Executive Officer
Gerry Angeli 55 Executive Vice President
Lawrence C. Yarberry 59 Executive Vice President, Chief Financial Officer
Joseph P. Atturio 44 Vice President, Controller and Secretary
Joseph B. Doherty 43 Treasurer
Carl K. Kooyoomjian 55 Chairman, Logistics Division - Retail Segment
Charles T. Shurstad 55 President, Pacer Stacktrain - Wholesale Segment
Michael F. Killea 40 Executive Vice President and General Counsel
Mitchel Robbins 45 President, International Freight Forwarding
Alan Baer 46 Vice President
Denis M. Bruncak 47 Chief Commercial Officer, Logistics Division - Retail Segment
Jeffrey R. Brashares 49 President, Transportation Services - Retail Segment
Joshua J. Harris 36 Director
Thomas L. Finkbiner 48 Director
Michael S. Gross 40 Director
Bruce H. Spector 59 Director
Marc E. Becker 29 Director
Timothy J. Rhein 60 Director
Donald C. Orris has served as our Chairman, President and Chief
Executive Officer since May 1999. Mr. Orris serves as Chief Executive Officer
pursuant to the terms of a shareholder agreement. From Pacer Logistics'
inception in March 1997 until May 1999, Mr. Orris served as Chairman, President
and Chief Executive Officer of Pacer Logistics. From March 1997 until May 1998,
Mr. Orris served as President and Chief Executive Officer of an affiliate of
Pacer Logistics. He also has served as Chairman of Pacer Logistics' other
subsidiaries since their formation or acquisition by Pacer Logistics. Mr. Orris
has been the President of Pacer International Consulting LLC, a wholly owned
subsidiary of Pacer Logistics, since September 1996. From January 1995 to
September 1996, Mr. Orris served as President and Chief Operating Officer, and
from 1990 until January 1995, he served as an Executive Vice President, of
Southern Pacific Transportation Company. Mr. Orris was the President and Chief
Operating Officer of American President Domestic Company and American President
Intermodal Company from 1982 until 1990. Mr. Orris is also a director of Quality
Distribution, Inc.
Gerry Angeli has served as an Executive Vice President of our company
since May 1999. From Pacer Logistics' inception in March 1997 until May 1999,
Mr. Angeli served as an Executive Vice President and Assistant Secretary of
Pacer Logistics and as a Director of Pacer Logistics from April 1998 until May
1999. He also served as a Director of each of Pacer Logistics' subsidiaries.
Since May 1998, Mr. Angeli has served as President and Chief Executive Officer
and Vice President of subsidiaries of Pacer Logistics. Mr. Angeli also served as
a Vice President and Assistant Secretary of Pacific Motor Transport Company
("PMTC"), a subsidiary of Pacer Logistics, from March 1997 until May 1998. Since
1982, Mr. Angeli has served as President and Chief Executive Officer of the
Pacer division of PMTC and, concurrent therewith, from 1987 until December 1993,
Mr. Angeli served as President and Chief Executive Officer of Southern Pacific
Motor Trucking, a wholly owned subsidiary of the Southern Pacific Railroad.
Lawrence C. Yarberry has served as an Executive Vice President, Chief
Financial Officer of our company since May 1999. Mr. Yarberry served as an
Executive Vice President, Chief Financial Officer and Treasurer of Pacer
Logistics from May 1998 until May 1999. Mr. Yarberry served as a consultant to
Pacer Logistics from February 1998 until April 1998. From April 1990
42
until December 1997, Mr. Yarberry served as a Vice President of Finance of
Southern Pacific Transportation Company and was Vice President of Finance and
Chief Financial Officer of Southern Pacific Rail Corporation.
Joseph P. Atturio has served as a Vice President, Controller and
Secretary of our company since May 1999. Mr. Atturio served as Vice President
and Secretary of Pacer Logistics since its inception in March 1997 until May
1999. Prior to joining Pacer Logistics, Mr. Atturio served as Comptroller of
Southern Pacific Motor Transport ("SPMT") from August 1988 until December 1993
and as a Vice President of SPMT from July 1992 until December 1993. From January
1994 until March 1997, he served as Vice President and Comptroller of PMTC and
served as a Regional Director of PMT Auto Transport, a division of PMTC, from
January 1986 until 1988.
Joseph B. Doherty has served as Treasurer of our Company since July
2000. Prior to joining our company, Mr. Doherty served as Vice President and
Treasurer for Rail America, Inc. from August 1998 to July 2000. From 1981 to
1998, Mr. Doherty held various positions at Southern Pacific Transportation
Company, including Assistant Vice President - Finance and Assistant Treasurer.
Carl K. Kooyoomjian has served as Chairman of Pacer Logistics since
July 2001. Prior to joining our company, Mr. Kooyoomjian served as Corporate
Vice President & Officer for The Coca-Cola Company from 1996. From 1972 to 1995,
Mr. Kooyoomjian held various positions with Digital Equipment Corporation,
including distribution planning, manufacturing, and logistics services
eventually attaining the position of Vice President, Acquisition and Purchasing.
Charles T. Shurstad has served as President of Pacer Stacktrain since
January 2002. Prior to joining our company, Mr. Shurstad was the President of
The Belt Railway Company of Chicago from 1998. From 1997 to 1998, Mr. Shurstad
was the Chief Operating Officer of the Malayan Railway and from 1995 to 1997 the
President of the Terminal Railroad of St. Louis. Prior to 1995, Mr. Shurstad
held a number of positions with Southern Pacific Transportation Company, the
last of which was Vice President and General Manager Operations for the Western
Region.
Michael F. Killea has served as Executive Vice President and General
Counsel of our company since August 2001. From October 1999 through July 2001 he
was a partner at the law firm of Holland & Knight LLP in New York City and
Jacksonville, Florida, and from September 1987 through September 1999 he was a
partner and an associate at the law firm of O'Sullivan LLP in New York City.
Mitchel Robbins has served as President of International Freight
Forwarding of our company since October 2000. Mr. Robbins served as Chief
Executive Officer of RFI Group, Inc. from January 1993 until it was acquired by
Pacer Logistics in October 2000. Mr. Robbins served as Vice President of RFI
Group, Inc. from 1984 to 1993 and as a Manager from 1977 to 1984.
Alan Baer has served as a Vice President of our company since October
2000 and as Chief Operating Officer of RFI Group, Inc. since January 1, 1998.
Mr. Baer served as President of Ocean World Lines, a subsidiary of the RFI
Group, from 1989 to 1998. Prior to joining Ocean World Lines, Mr. Baer served as
Line Manager for United States Navigation since 1982.
Denis M. Bruncak has served as Chief Commercial Officer of the
Logistics division of the retail segment of our company since December 2000.
Prior to joining our company, Mr. Bruncak was an owner and served as Chief
Executive Officer of Rail Van Global Logistics since 1984. Rail Van Global
Logistics became a subsidiary of Pacer Logistics in December 2000. Mr. Bruncak
joined Rail Van Global Logistics as General Manager in 1979.
Jeffrey R. Brashares has served as President of Transportation Services
of the retail segment of our company since December 2000. Prior to joining our
company, Mr. Brashares was an owner and served as President of Rail Van Global
Logistics since 1984. Rail Van Global
43
Logistics became a subsidiary of Pacer Logistics in December 2000. Mr. Brashares
joined Rail Van Global Logistics as Regional Sales Manager in 1976.
Joshua J. Harris has served as a director of our company since May 1999.
Mr. Harris is a partner in Apollo Management and has served as an officer of
certain affiliates of Apollo Management since 1990. Prior to that time, Mr.
Harris was a member of the Mergers and Acquisitions Department of Drexel Burnham
Lambert Incorporated. Mr. Harris is also a director of Florsheim Group Inc.,
NRT, Incorporated, Clark Retail Enterprises, Inc., Breuners Home Furnishings
Corporation, Quality Distribution, Inc., Converse Inc. and Resolution
Performance Products Inc.
Thomas L. Finkbiner has served as a director of our company since April 1,
2000. Mr. Finkbiner is currently a director and Chief Executive Officer of
Quality Distribution, Inc. Prior to joining Quality Distribution, Mr. Finkbiner
served as Vice President of Intermodal for Norfolk Southern Corporation since
1987. From 1981 to 1987, he was Vice President of Marketing & Administration for
North American Van Lines.
Michael S. Gross has served as a director of our company since April 1,
2000. Mr. Gross is a founding partner of Apollo Management. Prior to that time,
Mr. Gross was a member of the Mergers and Acquisitions Department of Drexel
Burnham Lambert Incorporated. Mr. Gross is also a Director of Allied Waste
Industries, Inc., Breuners Home Furnishings Corporation, Clark Enterprises,
Inc., Converse, Inc., Encompass Services Corporation, Florsheim Group, Inc.,
Rare Medium, Inc., Saks, Inc. and United Rentals.
Bruce H. Spector has served as a director of our company since May 1999.
Mr. Spector has been a consultant to Apollo Advisors since 1992 and has been a
principal in Apollo Advisors since 1995. Prior to October 1992, Mr. Spector, a
reorganization attorney, was a member of the Los Angeles law firm of Stutman
Triester and Glatt. Mr. Spector is also a Director of Nexthealth, Inc., Vail
Resorts, Inc. and Metropolis Realty Trust, Inc.
Marc E. Becker has served as a director of our company since May 1999. Mr.
Becker has been associated with Apollo Management since 1996. Prior to that
time, Mr. Becker was employed by Smith Barney Inc. in the Financial
Entrepreneurs group within its Investment Banking division. Mr. Becker also
serves as a Director of National Financial Partners Corporation and Quality
Distribution, Inc.
Timothy J. Rhein has served as a director of our company since May 1999.
Mr. Rhein has been Chairman of APL Limited since October 1995. Mr. Rhein served
as APL Limited's President and Chief Executive Officer from October 1995 to
October 1999, President and Chief Operating Officer from July 1995 to October
1999. Prior to that, Mr. Rhein served as President and Chief Executive Officer
of APL Land Transport Services, Inc. from May 1990 to October 1995 and President
and Chief Operating Officer of American President Lines, Ltd. from January 1987
to May 1990. Mr. Rhein has served as a Director of APL Limited since July 1990.
Committees of the Board of Directors
- ------------------------------------
The board of directors has an executive committee, a compensation committee
and an audit committee. The executive committee may exercise all the powers of
the board of directors in the management of our business and affairs except for
those powers expressly reserved to the board under Tennessee law. The members of
the executive committee are Messrs. Orris, Harris and Spector. The compensation
committee reviews and makes recommendations regarding our compensation policies
and forms of compensation provided to our directors and officers. The
compensation committee also reviews and determines bonuses for our officers and
other employees. In addition, the compensation committee reviews and determines
stock-based compensation for our directors, officers, employees and consultants
and administers our option plan. The members of the compensation committee are
Messrs. Orris, Harris and Spector. The audit committee provides assistance to
the board in fulfilling its legal and fiduciary obligations in matters involving
our accounting, auditing, financial reporting internal control and legal
44
compliance functions. The audit committee also oversees the audit efforts of our
independent accountants and take those actions as it deems necessary to satisfy
itself that the auditors are independent of management. The members of the audit
committee are Messrs. Harris, Rhein and Becker.
Director Compensation
- ---------------------
The members of our board of directors who are employees do not receive
compensation for their service on our board of directors or any committee of our
board but are reimbursed for their out-of-pocket expenses. Our non-employee
directors receive a monthly $1,500 retainer plus a $1,500 fee for each board
meeting that they attend. In addition, each non-employee director has received
options to purchase 6,000 shares of our common stock under our stock option
plan.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Mr. Orris serves as a director of Quality Distribution, Inc., of which Mr.
Finkbiner, one of our directors, is Chief Executive Officer and a director. No
other member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as members of our board of directors or compensation committee.
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table sets forth information concerning the
compensation paid by us for services rendered in the years indicated to our
Chief Executive Officer and our four other most highly paid executive officers
whose salary and bonus exceeded $100,000 in 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
- --------------------------------------------------------------------------- -----------------------------------------------------
Awards Payout
----------- --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Annual Restricted Securities All
Principal Comp- Stock Underlying LTIP Other
Position Year Salary Bonus ensation 1/ Award(s) 2/ Options Payout Comp. 3/
- ------------------ ------- ---------- ---------- -------------- ------------- ----------- -------- ---------
Donald C. Orris 2001 $300,000 $124,200 - - - - $4,442
(CEO) 2000 $300,000 $161,880 - - - - $5,250
1999 $300,000 $161,880 - - 100,000 - $5,688
Gerry Angeli 2001 $270,000 $130,950 - - - - $4,846
2000 $270,000 $121,410 - - - - $5,250
1999 $270,000 $121,410 - - 100,000 - $3,025
Robert L. Cross 2001 $235,000 $ 63,450 - - - - $5,250
4/ 2000 $235,000 $121,410 - - - - $4,038
1999 $235,000 $121,410 - - 100,000 - $5,604
Jeffrey R. 2001 $572,000 - - - - - $2,625
Brashares 2000 - - - - - - -
1999 - - - - - - -
Denis M. 2001 $572,000 - - - - - $2,625
Bruncak 2000 - - - - - - -
1999 - - - - - - -
___________
(1) The value of perquisites and other personal benefits is not included in
the amounts disclosed because it did not exceed for any officer in the
table above the lesser of either $50,000, or 10% of the total annual
salary and bonus reported for the officer.
(2) In connection with the recapitalization, Messrs. Orris, Angeli and Cross
received 2,329, 2,264 and 2,264 shares of Pacer Logistics 7.5%
Exchangeable Preferred Stock, respectively,
45
with a fiscal year end 2001 fair market value of $6.9 million (based
on a fiscal year end 2001 fair market value of $1,000 per share of
such preferred stock, plus accrued dividends).
(3) Consists of company matching contributions to 401(k) plan.
(4) Mr. Cross resigned as Executive Vice President effective December 31,
2001.
Option Grants in Last Fiscal Year
There were no stock options granted to the named executive officers
during the fiscal year 2001.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning the options held
by the officers named in the Summary Compensation Table as of December 28, 2001.
Number of Securities
Underlying Value of Unexercised In-the-
Shares Unexercised Options at Money Options at
Acquired Fiscal year end Fiscal year end (1)
----------------------------- --------------------------------
On Value
Exercis-
Name Exercise Realized able Unexercisable Exercisable Unexercisable
- --------------------- ----------- ------------ ---------- --------------- -------------- --------------
Donald C. Orris
Common 60,958 $ 1,510,539 26,667 73,333 $ 400,005 $ 1,099,995
Preferred 9,166 (2) - - - -
Gerry Angeli
Common 60,958 $ 1,510,539 26,667 73,333 $ 400,005 $ 1,099,995
Preferred 9,166 (2) - - - -
Robert L. Cross 3/
Common 60,958 $ 1,510,539 26,667 73,333 $ 400,005 $ 1,099,995
Preferred 9,166 (2) - - - -
Jeffrey R.
Brashares
Common - - - - - -
Denis M.
Bruncak
Common - - - - - -
__________________
(1) Based upon end of year fair market value of $25.00 per share of Pacer
International common stock.
(2) Subsequent to the exercise of preferred stock options, the shares were
repurchased by the Company at the option exercise price.
(3) Mr. Cross resigned effective December 31, 2001.
Stock Option Plan
Our Board of Directors adopted the Pacer International, Inc. 1999 Stock
Option Plan in May 1999. The purpose of this plan is to further our growth and
success by permitting our employees, as well as employees of Pacer Logistics, to
acquire shares of our common stock and the preferred stock of Pacer Logistics,
in the case of employees of Pacer Logistics, thereby increasing their personal
interest in our growth and success and to provide a means of rewarding
outstanding contribution by these employees. All of our employees and
non-employee directors are eligible for option grants under this plan. This plan
is administered by a committee of our Board of Directors and, except with
respect to initial grants described below, such committee has the power and
authority to approve the persons to whom options are granted, the time or times
at
46
which options are granted, the number of shares subject to each option, the
exercise price of each option and the vesting and exercisability provisions of
each option and has all powers with respect to the administration and
interpretation of this plan. In the event of specified corporate
reorganizations, recapitalizations, or other specified corporate transactions
affecting our stock, the plan permits proportionate adjustments to the number
and kinds of shares subject to options and/or the exercise price of those
shares. This plan has a term of ten years, subject to earlier termination by our
Board of Directors, who may modify or amend this plan in any respect, provided
that no amendment or modification affects an option already granted without the
consent of the option holder. With the exception of the 562,861 incentive stock
options which were rolled into this plan from the 1997 and 1998 Pacer Logistics
stock option plans, options subject to this plan do not qualify as incentive
stock options under the provisions of section 422 of the Internal Revenue Code.
No more than 1,793,747 shares of common stock have been authorized to
be issued pursuant to all option grants under this plan. Forfeitures under the
plan are available for future grants. At December 28, 2001, options to purchase
1,202,114 shares of our common stock were outstanding under the plan and 66,886
options were available for future grant.
Under the plan, in connection with the recapitalization, an initial
grant of 985,500 options was made with an exercise price of $10.00 per share, to
specified employees. The options under this initial grant are divided into three
tranches, Tranche A, Tranche B and Tranche C. Tranche A options vest in five
equal installments on the date of the grant's first five anniversary dates,
provided the employee is employed by the Company on each anniversary date.
Tranche B options generally vest on the date of grant's seventh anniversary date
if the employee is employed by us on that date. However, if on any of the
grant's first five anniversary dates specified per share target values are
attained and the employee is employed by us on that date, then 20% of the
Tranche B options will vest. Accelerated vesting of the Tranche B options is
possible if a sale of the company occurs prior to the date of grant's fifth
anniversary and the fair market value of the per share consideration to be
received by the shareholder equals or exceeds an amount calculated in accordance
with this plan. Tranche C options vest in substantially the same manner as
Tranche B options, including acceleration upon a sale of the company, except
that the per share target values as of a given anniversary date are increased.
Options granted to non-employee directors vest in four equal installments on the
date of grant's first four anniversary dates. A vested option that has not yet
been exercised will automatically terminate on the first to occur of the grant's
tenth anniversary, ninety days following the employee's termination of
employment for any reason other than death or disability, twelve months
following the employee's termination of employment due to death or disability,
or as otherwise determined by the committee.
Additionally, 470,247 and 92,614 options which were part of the 1997
and 1998 Pacer Logistics, Inc. Stock Option Plan, respectively, were rolled over
as part of the acquisition of Pacer Logistics.
During 1999, subsequent to the initial grant discussed above, we
granted an additional 80,000 options and 24,000 were forfeited. During 2000, we
granted an additional 296,500 options and 316,000 options were forfeited. During
2001, we granted an additional 279,000 options and 137,000 options were
forfeited.
Each option that is vested as of the date of the sale of our company
remains exercisable until the sale's closing, after which time such option is
unenforceable. Non-vested Tranche A, Tranche B and Tranche C options will vest
in accordance with the vesting schedules described above, however, an option
that vests after our company is sold will remain exercisable for 10 days before
such portion of the option terminates and is of no further force or effect. All
options granted under this plan are nontransferable except upon death, by such
employee's will or the laws of descent and distribution, or transfers to family
members of the employee that are approved by the committee.
47
In addition, under the 1999 Stock Option Plan, options to purchase
44,997 shares of our preferred stock were granted which were rolled over from
the 1997 Pacer Logistics Stock Option Plan. These options were granted to
certain members of our management and had an exercise price of $9.00 per share.
All of these options were exercised in 2000 and 2001. We elected, at our
discretion, to repurchase and retire the preferred stock that arose from the
exercise of the options.
Employment and Related Agreements
We have entered into employment agreements dated as of March 31, 1997,
and amended as of April 7, 2000, with each of Donald C. Orris, Gerry Angeli and
Robert L. Cross. Each of these employment agreements, as amended, has a term of
two years commencing May 28, 1999, with automatic one year renewals on each
anniversary of their commencement date. The minimum base salary under these
employment agreements is $225,000, $225,000 and $200,000 per year for Messrs.
Orris, Angeli and Cross, respectively, subject to increase by our board of
directors, except in the case of Mr. Orris, in which case the base salary is
subject to increase as agreed to by Mr. Orris and our Board of Directors. Mr.
Cross resigned effective December 31, 2001 as discussed below. We have also
entered into employment agreements dated as of December 22, 2000 with each of
Denis M. Bruncak and Jeffrey R. Brashares. Each of these agreements has a term
of one year commencing December 22, 2000, with automatic two year renewals on
each anniversary of their commencement date. The minimum base salary under these
employment agreements is $572,000 for each of Messrs. Bruncak and Brashares,
subject to increase by our board of directors.
Under the employment agreements Messrs. Orris, Angeli and Cross may
receive annual bonuses of up to $180,000, $135,000 and $135,000, respectively,
based on the attainment of operating income targets. Further, an additional
bonus of up to 25% of the annual bonus may be awarded to each of Messrs. Orris,
Angeli and Cross based upon acquisitions made during the year. The employment
agreements of Messrs. Bruncak and Brashares do not provide for the grant of
annual bonuses. The bonus amounts may be changed from time to time by the Board
of Directors.
All of the employment agreements provide that if the employment of
these employees is terminated for any reason, they would be entitled to receive
any unpaid portion of their base salary, reimbursement for any expenses incurred
prior to the date of termination and any unpaid amounts earned prior to the
effective date of termination pursuant to the terms of any bonus or benefit
program in which they participated at the time of termination. In addition, the
employment agreements provide that if the employment of these employees is
terminated without "cause", as defined in the employment agreements, they would
be entitled to receive 100% of their base salary for a period equal to the
greater of the number of months remaining in the employment term or one year, in
the case of Messrs. Orris, Angeli and Cross, and for a period of two years
following termination, in the case of Messrs. Bruncak and Brashares.
We have entered into a separation and release agreement as of December
31, 2001 with Robert L. Cross. Mr. Cross is entitled to receive $235,000 per
year for a period of two years commencing January 1, 2002.
All of the employment agreements and the separation and release
agreement include restrictive covenants for our benefit relating to the
non-disclosure by these employees of our confidential business information and
trade secrets, the disclosure grant and assignment of inventions and
non-competition with regards to any business in competition with us.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of shares of the common stock as of December 28, 2001, for:
. Each person or entity known by us to beneficially own more that 5% of
the common stock;
. Each executive officer named in the summary compensation table;
. Each of our directors; and
. All executive officers and directors as a group.
The amounts and percentage of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the determination of
beneficial ownership of securities. Under the rules of the SEC, a person is
deemed to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose of or to
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one person may
be deemed a beneficial owner of the same securities and a person may be deemed a
beneficial owner of securities as to which he has no economic interest. The
number of shares of common stock outstanding used in calculating the percentage
for each listed person includes the shares of common stock underlying options
held by such person that are exercisable within 60 days of December 28, 2001,
but excludes shares of common stock underlying options held by any other person.
Except in cases where community property laws apply or as indicated by
footnote, the persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them.
Percentage of beneficial ownership is based on 11,544,747 shares of
common stock outstanding as of December 28, 2001 and 22,348.44 shares of Pacer
Logistics exchangeable preferred stock outstanding as of December 28, 2001. The
Pacer Logistics exchangeable preferred stock is exchangeable for shares of our
common stock on the basis of 100 shares of common stock for each share of
preferred stock.
49
Common Stock
Underlying Options
and Exchangeable
Securities
Common Exercisable/
Stock Exchangeable
Outstanding Within 60 Days Total Percent
----------------- --------------------- --------------- --------------
Apollo Management IV, L.P. (1).......... 9,390,000 - 9,390,000 81.3%
c/o Apollo Management, L.P.
1301 Avenue of the Americas
New York, NY 10019
APL Limited............................. 750,000 - 750,000 6.5
1111 Broadway
Oakland, CA 94607
Donald C. Orris (2)..................... 156,749 259,592 (3) 416,341 3.5
Gerry Angeli (2)........................ 156,749 253,083 (4) 409,832 3.5
Robert L. Cross (2)..................... 156,749 253,083 (4) 409,832 3.5
Jeffrey R. Brashares (2)................ 80,000 - 80,000 0.7
Denis M. Bruncak (2).................... 80,000 - 80,000 0.7
Joshua J. Harris (5).................... 9,690,000 (6) 3,000 (7) 9,693,000 83.9
Thomas L. Finkbiner (8)................. - 1,500 (7) 1,500 *
Michael S. Gross (5).................... 9,390,000 (6) 1,500 (7) 9,391,500 81.3
Bruce M. Spector (5).................... 9,390,000 (6) 3,000 (7) 9,393,000 81.3
Marc E. Becker (5)...................... 9,390,000 (6) 3,000 (7) 9,393,000 81.3
Timothy J. Rhein (9).................... 750,000 3,000 (7) 753,000 6.5
All directors and executive officers as
a group (18 persons) (10)............... 11,370,247 843,122 (11) 12,213,369 98.6%
* Less than 0.1%.
_______
(1) Beneficial ownership of common stock includes 8,912,000 shares, or
77.2%, owned by Coyote Acquisition LLC ("Coyote I") and 478,000
shares, or 4.1%, owned by Coyote Acquisition II LLC ("Coyote II").
Coyote I is a Delaware limited liability company, the sole member of
which is Apollo Investment Fund IV, L.P. ("AIF") and Coyote II is a
Delaware limited liability company, the sole member of which is Apollo
Overseas Partners IV, L.P. ("AOP"). Each of AIF and AOP is a private
investment fund, the general partner of which is Apollo Advisors IV,
L.P. ("Advisors") which is an affiliate of Apollo Management IV, L.P.
("Management"), the manager of AIF and AOP. Each of Advisors and
Management may be deemed the beneficial owner of the shares owned by
Coyote I and Coyote II.
(2) The business address for Messrs. Orris, Angeli, Cross and Yarberry is
c/o Pacer International, Inc., 2300 Clayton Rd Suite 1200, Concord CA
94520. The business address for Messrs. Brashares and Bruncak is c/o
Pacer Global Logistics, Inc., 6805 Perimeter Drive, Dublin, Ohio
43016. Mr. Cross resigned effective December 31, 2001.
(3) Represents 26,667 shares of common stock underlying options
exercisable within 60 days and 232,925 shares of common stock issuable
upon exchange of the Pacer Logistics 7.5% Exchangeable Preferred
Stock. Does not include an additional 73,333 options which vest in the
future.
50
(4) Represents 26,667 shares of common stock underlying options exercisable
within 60 days and 226,416 shares of common stock issuable upon exchange of
the Pacer Logistics 7.5% Exchangeable Preferred Stock. Does not include an
additional 73,333 options which vest in the future.
(5) The business address for Messrs. Harris, Gross and Becker is c/o Apollo
Management L.P., 1301 Avenue of the Americas, New York, NY 10019. The
business address for Mr. Spector is c/o Apollo Management L.P., 1999 Avenue
of the Stars, Suite 1900, Los Angeles, CA 90067.
(6) Messrs. Harris, Gross, Spector and Becker are each principals and/or
employees of certain affiliates of Apollo Management IV, L.P. Accordingly,
each such person may be deemed to beneficially own shares of common stock
held by Apollo Management IV, L.P. Each such person disclaims beneficial
ownership of any such shares in which he does not have a pecuniary
interest. With respect to Mr. Harris, also includes 200,000 shares owned by
BT Capital Investors L.P., an affiliate of Deutsche Bank Securities Inc.,
one of the representatives of the underwriters, and 100,000 shares owned by
Pacer International Equity Investors, LLC, an affiliate of Credit Suisse
First Boston Corporation, one of the representatives of the underwriters,
with respect to which Mr. Harris has been granted a voting proxy.
(7) Represents shares underlying options exercisable within 60 days. Does not
include 3,000, 4,500, 3,000, 3,000 and 3,000 options which vest in the
future granted to each of Messrs. Harris, Gross, Spector, Becker and Rhein,
respectively.
(8) The business address for Mr. Finkbiner is 3802 Corporex Park Drive, Tampa,
Florida 33619. Does not include 4,500 options which vest in the future.
(9) The business address for Mr. Rhein is c/o APL Limited, 1111 Broadway,
Oakland, CA 94607. Mr. Rhein is President, Chief Executive Officer and a
director of APL Limited. Accordingly, he may be deemed to beneficially own
shares of common stock held by APL Limited. Mr. Rhein disclaims beneficial
ownership of any such shares in which he does not have a pecuniary
interest.
(10) Includes all shares held by entities affiliated with specific directors as
described in notes (6) and (9) above.
(11) Represents 157,365 shares underlying options exercisable within 60 days and
685,757 shares of common stock issuable upon exercise of the Pacer
Logistics 7.5% exchangeable preferred stock.
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following table summarizes related party transactions recorded in the
Statement of Operations.
Fiscal Year Ended
---------------------------------------------------
December 28, December 29, December 31,
Related Party Type 2001 2000 1999
- ----------------------------- ------------------------ --------------- ---------------- ------------------
Gross Revenues:
APL Limited Freight transportation $ 82.8 $ 90.6 $ 49.1
APL Limited Avoided repositioning 17.4 16.2 21.0
International freight
APL Limited Management fee 6.6 6.6 3.9
---------------- --------------- ------------------
Total related party revenues $ 106.8 $ 113.4 $ 74.0
================ =============== ==================
Operating Expenses:
Direct operating expenses:
Lease, maintenance
APL Limited and repair expense $ - $ - $ 7.0
---------------- --------------- ------------------
Selling, general and
administrative expenses:
APL Limited Corporate overhead $ - $ - $ 5.6
APL Limited Administrative services 1.0 0.6 1.1
APL Limited Information technology
services 10.0 10.0 5.8
APL de Mexico, S.A. de
C.V. Agency services 0.1 2.7 1.8
Apollo Management Management fee 0.5 0.5 0.3
A&G Investments Facility lease 0.6 0.5 0.3
KU Realty, LLC Facility lease 1.8 1.8 -
Rich Hyland Facility lease - - 0.1
Perimeter West Facility lease 1.1 - -
---------------- --------------- ------------------
Total related party SG&A
expenses $ 15.1 $ 16.1 $ 15.0
---------------- --------------- ------------------
Interest Expense:
Keller Uchida Realty
Resources, LLC $ 5.0 Million Sub Note $ 0.4 $ 0.2 $ -
---------------- --------------- ------------------
Total related party expenses $ 15.5 $ 16.3 $ 22.0
================ =============== ==================
Management believes that the terms of the related party transactions listed
above were at fair market rates.
We provide intermodal services to APL Limited. These services include moving
containers from ports to inland points, moving containers from inland points to
ports, and repositioning empty containers. These transactions were performed on
a cost reimbursement basis. Thus, no revenues or expenses were recognized for
financial reporting purposes. Reimbursements amounted to $0, $79.2 million and
$273.6 million for the fiscal years ended December 28, 2001, December 29, 2000
and December 31, 1999, respectively. The decrease in reimbursement reflects our
transfer in April 2000 of the processing of APL Limited's international traffic
receivables and payables to APL Limited, which had previously been included in
our balance sheet. This resulted in a decrease in both accounts receivable and
accounts payable of approximately $33.0 million. The transfer to APL Limited was
facilitated by changes in computer software which were not previously available.
At December 29, 2000 and December 31, 1999, we had a receivable from APL Limited
for these transactions of $0 and $31.3 million, respectively. We continue to
handle APL Limited's international traffic under contract for an annual
management fee of $6.6 million in 2001 and 2000 and $3.9 million in 1999.
52
Prior to the recapitalization, APL Land Transport Services, Inc.
("APLLTS") shared in expenses of the former parent for services including
systems support, office space and other corporate services. These expenses were
$5.6 million for the period ended May 28, 1999. In connection with the
recapitalization, we signed long-term agreements with APL Limited for
administrative services such as billing and accounts receivable and payable
processing on a per transaction basis. For 2001, 2000 and the seven months ended
December 31, 1999, $1.0, $0.6 million and $1.1 million was paid for these
services, respectively. In addition, APL Limited is currently providing us
information technology services under a long-term agreement for an annual fee of
$10.0 million. For the fiscal years ended December 28, 2001, December 29, 2000
and December 31, 1999, $10.0 million, $10.0 million and $5.8 million was paid
for these services, respectively.
In addition, we receive compensation from APL Limited for the
repositioning expense that APL Limited has avoided due to our using APL
Limited's containers in surplus locations. The total amount of revenue
recognized for these services was $17.4 million, $16.2 million and $21.0 million
for the fiscal years ended December 28, 2001, December 29, 2000 and December 31,
1999, respectively. At December 28, 2001 and December 29, 2000 $1.9 million and
$1.6 million was receivable from APL Limited, respectively.
We also provide services to the Automotive Division of APL Limited.
These services include moving containers primarily in the U.S.--Mexico trade.
The amount of revenue recognized for these services was $82.8 million, $90.6
million and $49.1 million for the fiscal years ended December 28, 2001, December
29, 2000 and December 31, 1999, respectively. At December 28, 2001 and December
29, 2000, $4.7 million and $4.4 million was receivable from APL Limited
including related drayage and miscellaneous charges, respectively.
Prior to the recapitalization, we received an allocation for lease and
maintenance and repair expenses from APL Limited. These expenses were $7.0
million for the fiscal year ended December 31, 1999.
APL de Mexico, S.A. de C.V. (APL Mexico), a wholly owned Mexican
subsidiary of APL Limited, provides various agency services to us with respect
to our bills of lading in Mexico. Expenses recorded from APL Mexico were $0.1
million, $2.7 million and $1.8 million for the fiscal years ended December 28,
2001, December 29, 2000 and December 31, 1999, respectively. At December 28,
2001 and December 29, 2000, $0 and $0.5 million was payable to APL Mexico,
respectively. Effective in 2001, we began using Pacer de Mexico S.A. de C.V.
(Pacer Mexico), a wholly owned Mexican subsidiary of our company, to handle the
services previously provided by APL Mexico.
We have entered into a management agreement with Apollo Management
("Apollo"), an affiliate of our principal shareholder, for financial and
strategic services as the Board of Directors may reasonably request. The annual
fee which has been paid for these services for the year ended December 28, 2001
and December 29, 2000 was $0.5 million, and for the partial year ended December
31, 1999 was $0.3 million. In addition, we paid Apollo a fee of $1.5 million in
1999 in connection with the recapitalization.
We lease a facility consisting of office, warehousing and trucking
space from A&G Investments, a California general partnership of which Messrs.
Goldfein and Steiner are the only partners. Mr. Goldfein is a stockholder and a
former Director and Executive Vice President of our company. Mr. Steiner is a
stockholder and a former Executive Vice President of our company. Lease payments
were $0.6 million, $0.5 million and $0.3 million for the years ended December
28, 2001, December 29, 2000 and December 31, 1999, respectively.
We lease warehouse and dock facilities in Southern California from KU
Realty, Inc. which is owned by Messrs. Keller and Uchida. Mr. Keller is a
stockholder and former President of the Freight Consolidation and Handling
Division of our company. Lease payments were $1.8 million for the years ended
December 28, 2001 and December 29, 2000.
53
In July 2001, February 2001 and August 2000 we paid scheduled semi-annual
interest payments amounting to $0.4 million in 2001 and $0.2 million in 2000 to
Mr. Keller on the $5.0 million 8.0% subordinated note issued in January 2000 as
part of the purchase price for the acquisition of Conex assets.
In April 2000, we repaid $0.4 million, including accrued interest, in notes
payable to Messrs. Orris, Angeli and Cross. The notes were part of the purchase
price for Pacer Logistics acquired on May 28, 1999.
We leased a facility consisting of office space from Richard P. Hyland, a
stockholder and a former Executive Vice President of our company. Such lease was
pursuant to an oral agreement and was on a month-to-month basis. The lease
terminated on December 31, 1999.
In connection with the acquisition of Rail Van, we assumed a lease that had
been entered into by Rail Van with an entity associated with Messrs. Bruncak and
Brashares and certain former shareholders of Rail Van. This lease commenced in
April 2001, with an annual rental payment of approximately $1.3 million. Lease
payments were $1.1 million for the year ended December 28, 2001.
Agreements with APL Limited
Administrative Services Agreement
- ---------------------------------
Pursuant to an administrative services agreement, APL Limited provides us
with administrative and support services, including:
. Accounts payable,
. Cargo claims,
. Walker administration,
. Office space and associated office services,
. Training, and
. Front line office accounting and information resource support.
We compensate APL Limited on a per transaction basis and a headcount basis,
as applicable, and we have the right to audit, at our own expense, the total
expenditures paid to APL Limited. We may terminate all or any portion of any
service provided under the agreement on 90 days' notice. Either party may
terminate this agreement if the other party defaults on the performance of its
material obligations and such default is not cured within thirty days. Upon
expiration of the administrative services agreement we will perform the services
ourselves.
Information Technology Outsourcing and License Agreement
- --------------------------------------------------------
We are currently operating under an IT supplemental agreement, dated as of
May 11, 1999 by and among APL Limited, Coyote Acquisition LLC, an affiliate of
Apollo Management, and us, which contemplates that we will enter into a final
information technology outsourcing and license agreement. If any party so
elects, the parties may enter into private mediation to finalize the information
technology outsourcing and license agreement.
The IT supplemental agreement provides that APL Limited will, for a period
of twenty years, provide us with all necessary software, licenses and related
services necessary to conduct the stacktrain business as it is now being
conducted and as it is enhanced pursuant to and during the term of the
agreement. These services will, at a minimum, include the same level of services
provided to us by APL Limited prior to our recapitalization. APL Limited will
also be responsible for obtaining, maintaining, upgrading, and replacing any
software, equipment, facilities or
54
personnel necessary in order to provide the services during the term of the
agreement. APL Limited will be required to provide personnel with the adequate
skills, experience and knowledge of our business to ensure that all information
technology systems are supported at previously existing levels, and as these
levels are subsequently enhanced. In addition, any software that relates solely
to our business will be transferred to us directly. In accordance with the
agreement, we have access to APL Limited's proprietary software that is used to
run the information systems through perpetual, worldwide, royalty-free licenses
granted to us by APL Limited. APL Limited will also ensure that we are licensed
to use all other software needed to operate the systems. These rights will
remain in place even after the agreement expires or terminates and regardless of
the reason for termination. We pay APL Limited an annual fee of $10 million for
theses services subject to increases after four years. In addition, for the
first five years we are charged for costs related to increased usage of the
services only to the extent the increase exceeds specified growth levels for the
company and thereafter for all of our actual direct costs related to volume
growth.
The IT supplemental agreement provides that we may terminate the agreement
for our convenience at any point during the term, either in its entirety or on a
system-by-system basis, by giving 120 days' notice to APL Limited. In addition,
we may terminate by giving 30 days' notice if APL Limited fails to meet
specified performance standards or is in material breach of the agreement and
fails to correct the breach in a timely fashion. The agreement is also
terminable by APL Limited, but only if we fail to meet our payment obligations
or are acquired by a competitor of APL Limited, in which case APL Limited will
be responsible for all costs related to establishing us with a comparable
service provider on a similar computer infrastructure if it elects to terminate.
APL Limited would also be responsible for the costs of transferring our systems
if we terminate the agreement for any of the following reasons:
(1) An uncorrected material breach by APL Limited;
(2) The occurrence of specified performance failures resulting from APL
Limited's willful misconduct or gross negligence; or
(3) The occurrence of any two performance failures within a 12-month period,
regardless of the cause.
In the IT supplemental agreement APL Limited has made customary
representations and warranties to us, including, that the information
technology, software, hardware and services being provided to us constitute all
such items required to provide the information technology services necessary to
run our business and relating to Year 2000 compliance of the software and
hardware used in providing the services under the agreement. APL Limited also
indemnifies us against breaches of these representations, losses resulting from
claims brought by third parties alleging infringement of their intellectual
property and losses associated with a failure of the information technology
systems to operate that is either caused by APL Limited or covered by
indemnification or warranties provided to APL Limited by the responsible third
parties. We are in the process of replacing the technology provided by APL
Limited with information technology systems currently available in the market
place from unrelated third parties. We anticipate that this replacement will be
completed by the end of 2003.
Stacktrain Services Agreement
- -----------------------------
Pursuant to a stacktrain services agreement, we arrange and administer
inland intermodal rail transportation for APL Limited's international freight
shipments and its empty containers between points in the United States, between
points in Canada and between points in the United States and Canada. In
addition, we arrange and administer inland intermodal rail transportation for
any other volume tendered by APL Automotive Logistics and APL Intermodal
Management Services, each a division of APL Limited, between points in the
United States, Canada and Mexico. In connection with this agreement, APL Limited
agreed to tender to us all of its international shipments and containerized
freight for United States or Canadian rail movement and APL Automotive Logistics
and APL Intermodal Management Services will use their best efforts to deliver
their business to us for handling.
Each year, during the term of the agreement, APL Limited has agreed to pay
us $6.6 million as a management fee in consideration for the services outlined
above. In addition, APL Limited has agreed to pay us a fee for each container
moved equal to the amount payable by us to the
55
underlying rail carrier for the movement of such containers. Any savings
received by us under the terms of our agreements with the underlying rail
carriers will be passed through on a dollar-for-dollar basis to APL Limited. We
do not assess any administrative fees against APL Limited for the movement of
its containers. In addition, for the repositioning of its empty containers, APL
Limited pays us a fee, based on established rates agreed upon by the parties,
for each empty container of APL Limited that is repositioned by us.
The stacktrain service agreement expires in 2019. However, the term of the
stacktrain services agreement will be extended in the event that the current
agreement between Pacer International and the Union Pacific Railroad Company, or
its successor, is extended. The effect of this provision is that the stacktrain
services agreement and our agreement with the Union Pacific Railroad Company
will expire simultaneously.
TPI Chassis Sublet Agreement
- ----------------------------
Pursuant to a TPI chassis sublet agreement, APL Limited sublets chassis to
us for use in the transport of international freight on the stacktrain network
on behalf of international shippers other than APL Limited. The number of
chassis to be sublet is determined according to a market plan which we deliver
to APL Limited prior to each year during the term of the TPI chassis sublet
agreement. If our chassis requirements decrease from the current market plan
allocation and APL Limited does not absorb the additional chassis into its own
fleet, we are responsible for any early lease termination penalties incurred by
APL Limited. If our need for chassis increases beyond the current market plan
allocation, APL Limited will supply additional chassis to the extent they are
available for our use. The TPI chassis sublet agreement provides that if we
consistently exceed our allocation of chassis under our market plan, or if APL
Limited consistently supplies less than such allocation, both parties will
promptly discuss the remedies for such an excess or shortage. The term of the
TPI chassis sublet agreement is the same as the term of the stacktrain services
agreement. If the TPI chassis sublet agreement is terminated prior to 2019, we
may require APL Limited to assign the leases for all of the chassis covered
under the agreement to us.
Equipment Supply Agreement
- --------------------------
An equipment supply agreement sets forth the mechanics of the supply of
containers and chassis from APL Limited to us for repositioning by us within the
interior United States. The containers and chassis which are subject to the
agreement are used by APL Limited in its international shipping operations.
Specifically, the equipment supply agreement sets forth the underlying
interchanges of possession and supply points and return locations for the
repositioning of the containers and chassis. If we fail to reposition the
equipment within the time frame specified in the agreement, we are charged $10
per day per container and $4.85 per day per chassis until repositioned. Under
the equipment supply agreement we are liable for the actual cost of repair for
each damaged container and chassis if the cost exceeds $100. The equipment
supply agreement has the same term as the stacktrain services agreement.
Primary Obligation and Guaranty Agreement
- -----------------------------------------
We are a party to a primary obligation and guaranty agreement dated March
15, 1999, with Neptune Orient Lines Limited, the parent of APL Limited. The
primary obligation and guaranty agreement provides that, prior to an initial
public offering by APL Limited or APL Bermuda Pte. Ltd., its affiliate, Neptune
Orient Lines will be directly liable for all of APL Limited's obligations under
the agreements described above. Following an initial public offering of APL
Limited or APL Bermuda Pte. Ltd., Neptune Orient Lines will guarantee any
payments owed to us by APL Limited. Such guarantee is subject to the requirement
that we first exhaust our rights to collect any guaranteed obligations from APL
Limited, so long as the collection efforts against APL Limited, in our judgement
or the judgment of Coyote Acquisition, do not prejudiced in any manner the
ability of Coyote Acquisition and us to collect on the guarantee, in which case
we and Coyote Acquisition can proceed directly against Neptune Orient Lines. The
primary obligation
56
and guaranty agreement will terminate when all other agreements and all other
guaranteed obligations are terminated or satisfied.
Non-Competition Agreement
- -------------------------
Pursuant to a non-competition agreement, Neptune Orient Lines Limited, a
Singapore corporation and the parent of APL Limited, APL Limited and their
affiliates agreed not to compete with us, either through ownership of,
participation in management of, or by lending their respective names to, any
business involved in arranging stacktrain services for a period of ten years
from the closing date of our recapitalization. Neptune Orient Lines, APL Limited
and their affiliates further agreed to refrain from soliciting or recruiting any
person employed by us as of the closing date of our recapitalization for a
period of ten years.
Tax Sharing Agreement with Coyote Acquisition
We and our direct and indirect subsidiaries have entered into a tax sharing
agreement with Coyote Acquisition, our principal stockholder. The tax sharing
agreement generally contemplates that two or more of the parties to the tax
sharing agreement may become members of an affiliated group that files a
consolidated federal income tax return for U.S. federal income tax purposes and,
perhaps, one or more consolidated, combined or unitary groups for state, local
and/or foreign tax purposes. The tax sharing agreement provides, among other
things, methods for allocating the tax liability of an affiliated group among
its members, for reimbursing Coyote Acquisition, or another entity as
appropriate, for the payment of an affiliated group's tax liability, and for
reimbursing members of an affiliated group for the use of net operating losses
and other tax benefits that reduce an affiliated group's tax liability otherwise
payable.
57
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents filed as part of this report.
1. The financial statements, financial statement schedule and accompanying
reports of independent accountants are listed in the Index to Financial
Statements and Financial Statement Schedules filed as part of this
Annual Report.
2. Exhibits
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- -------- -----------------------------------------------------------------
3.1 Amended and Restated Charter of Pacer International, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-85041) filed with
the Securities and Exchange Commission (the "Commission") on
November 5, 1999).
3.2 Amended and Restated Bylaws of Pacer International, Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4 dated November 5, 1999).
3.3 Second Amended and Restated Certificate of Incorporation of Pacer
Logistics, Inc. effective May, 2001 (Incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 29, 2001).
4.1 Indenture, dated as of May 28, 1999, among Pacer International,
Inc. the Guarantors and Wilmington Trust Company, as Trustee
(including form of 11 3/4% Senior Subordinated Notes due 2007)
(Incorporated by reference to Exhibit No. 4.2 to the Company's
Registration Statement on Form S-4 dated August 12, 1999).
4.2 Form of 11 3/4% Senior Subordinated Notes due 2007 (filed as part
of Exhibit 4.1). (Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-4 dated August 12,
1999).
4.3 First Supplemental Indenture dated as of January 13, 2000, among
Pacer International, Inc., Conex Acquisition Corporation and
Wilmington Trust Company. (Incorporated by reference to Exhibit
No. 10.25 to the Annual Report on Form 10-K for the year ended
December 31, 1999)
4.4 Second Supplemental Indenture dated as of August 31, 2000, among
Pacer International, Inc., GTS Transportation and Wilmington Trust
Company. (Incorporated by reference to Exhibit No. 4.4 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-53700)
dated January 12, 2001).
4.5 Third Supplemental Indenture dated as of October 31, 2000, among
Pacer International, Inc., RFI Group, RFI International Ltd.,
Ocean World Lines, International Logistics Management, Inc. and
Wilmington Trust Company. (Incorporated by reference to Exhibit
No. 4.5 to the Company's Registration Statement on Form S-1 dated
January 12, 2001).
4.6 Fourth Supplemental Indenture dated as of December 22, 2000, among
Pacer International, Inc., Rail Van, Inc., Rail Van LLC and
Wilmington Trust Company. (Incorporated by reference to Exhibit
No. 4.1 to the Company's Current Report on Form 8-K dated January
8, 2001).
58
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- ---------- ------------------------------------------------------------------
4.7 Shareholders' Agreement, dated as of May 28, 1999, among APL
Limited, Pacer International, Inc., Coyote Acquisition LLC and
Coyote Acquisition II LLC. (Incorporated by reference to Exhibit
No. 4.12 to the Company's Registration Statement on Form S-4 dated
August 12, 1999).
4.8 Shareholders' Agreement, dated as of May 28, 1999, by and among
Pacer International, Inc., Coyote Acquisition LLC and Coyote
Acquisition II LLC and The Management Stockholders. (Incorporated
by reference to Exhibit No. 4.13 to the Company's Registration
Statement on Form S-4 dated August 12, 1999).
4.9 Shareholders' Agreement, dated as of May 28, 1999, by and among
Pacer International, Inc., Coyote Acquisition LLC and Coyote
Acquisition II LLC, BT Capital Investors, L.P. and Pacer
International Equity Investors, LLC. (Incorporated by reference to
Exhibit No. 4.14 to the Company's Registration Statement on Form
S-4 dated August 12, 1999).
4.10 Registration Rights Agreement, dated as of May 28, 1999, between
Pacer International, Inc. and the Purchasers named therein.
(Incorporated by reference to Exhibit No. 4.18 to the Company's
Registration Statement on Form S-4 dated August 12, 1999).
4.11 Registration Rights Agreement, dated as of May 28, 1999 between
Pacer International, Inc., Coyote Acquisition LLC and Coyote
Acquisition II LLC. (Incorporated by reference to Exhibit 4.11 to
the Company's Registration Statement on Form S-1 dated January 12,
2001).
10.1 Employment Agreement for Donald C. Orris. (Incorporated by
reference to Exhibit No. 10.1 to the Company's Registration
Statement on Form S-4 dated November 5, 1999).
10.2 Employment Agreement for Gerry Angeli. (Incorporated by reference
to Exhibit No. 10.2 to the Company's Registration Statement on
Form S-4 dated November 5, 1999).
10.3 Employment Agreement for Robert L. Cross. (Incorporated by
reference to Exhibit No. 10.4 to the Company's Registration
Statement on Form S-4 dated November 5, 1999).
10.4 Credit Agreement, dated as of May 28, 1999, among Pacer
International, Inc., the lenders party thereto from time to time,
Morgan Stanley Senior Funding, Inc., as Syndication Agent, Credit
Suisse First Boston Corporation, as Documentation Agent and
Bankers Trust Company, as Administrative Agent. (Incorporated by
reference to Exhibit No. 4.1 to the Company's Registration
Statement on Form S-4 dated August 12, 1999).
10.5 First Amendment dated August 9, 1999, among Pacer International,
Inc., the lending institutions party to the Pacer International,
Inc. Credit Agreement dated May 28, 1999, Credit Suisse First
Boston, Morgan Stanley Senior Funding, Inc., and Bankers Trust
Company. (Incorporated by reference to Exhibit No. 10.26 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999).
59
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- ------------ ------------------------------------------------------------------
10.6 Second Amendment dated January 7, 2000, among Pacer International,
Inc., the lending institutions party to the Pacer International,
Inc. Credit Agreement dated May 28, 1999, Credit Suisse First
Boston, Morgan Stanley Senior Funding, Inc., and Bankers Trust
Company. (Incorporated by reference to Exhibit No. 10.27 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.7 Third Amendment dated December 22, 2000 among Pacer International,
Inc., the lending institutions party to the Pacer International,
Inc. Credit Agreement dated May 28, 1999, Credit Suisse First
Boston, Morgan Stanley Senior Funding, Inc., and Bankers Trust
Company. (Incorporated by reference to Exhibit No. 10.1 to the
Company's Current Report on Form 8-K dated January 8, 2001).
10.8 Stock Purchase Agreement, dated as of March 15, 1999, between APL
Limited and Coyote Acquisition LLC. (Incorporated by reference to
Exhibit No. 4.4 to the Company's Registration Statement on form
S-4 dated August 12, 1999).
10.9 Non-Competition Agreement, dated as of May 28, 1999, among Neptune
Orient Lines Limited, APL Limited, Pacer International, Inc. and
Coyote Acquisition LLC. (Incorporated by reference to Exhibit No.
4.5 to the Company's Registration Statement on Form S-4 dated
August 12, 1999).
10.10 Administrative Services Agreement, dated as of May 29, 2000,
between APL Limited and Pacer International, Inc. (Incorporated by
reference to Exhibit No. 10.12 to the Company's Registration
Statement on Form S-1 dated January 12, 2001).
10.11 IT Supplemental Agreement, dated as of May 11, 1999, between APL
Limited, APL Land Transport Services, Inc. and Coyote Acquisition
LLC. (Incorporated by reference to Exhibit No. 10.10 to the
Company's Registration Statement on Form S-4 dated November 5,
1999).
10.12 Stacktrain Services Agreement, dated as of May 28, 1999, among
American President Lines, Ltd., APL Co. Pte. Ltd., APL Limited and
Pacer International, Inc. (Incorporated by reference to Exhibit
No. 4.8 to the Company's Registration Statement on Form S-4 dated
August 12, 1999).
10.13 TPI Chassis Sublet Agreement, dated as of May 28, 1999, among
American President Lines, Ltd., APL Co. Pte. Ltd., APL Limited and
Pacer International, Inc. (Incorporated by reference to Exhibit
No. 4.9 to the Company's Registration Statement on Form S-4 dated
August 12, 1999).
10.14 Equipment Supply Agreement, dated as of May 28, 1999, among
American President Lines, Ltd., APL Co. Pte. Ltd., APL Limited and
Pacer International, Inc. (Incorporated by reference to Exhibit
No. 4.10 to the Company's Registration Statement on Form S-4 dated
August 12, 1999).
10.15 Primary Obligation and Guaranty Agreement, dated as of March 15,
1999, by Neptune Orient Lines Limited in favor of Coyote
Acquisition LLC and APL land Transport Services, Inc.
(Incorporated by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-4 dated August 12, 1999).
60
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- ----------- -----------------------------------------------------------------
10.16 Management Agreement, dated as of May 28, 1999, between Apollo
Management IV, L.P. and Pacer International, Inc. (Incorporated
by reference to Exhibit No. 4.15 to the Company's Registration
Statement on Form S-4 dated August 12, 1999).
10.17 Tax Sharing Agreement, dated as of May 28, 1999, by and among
Coyote Acquisition LLC, Pacer International, Inc. and Pacer
Logistics, Inc. (Incorporated by reference to Exhibit No. 4.16 to
the Company's Registration Statement on Form S-4 dated August 12,
1999).
10.18 Intermodal Transportation Agreement No. 1111, dated as of May 4,
1999 between CSX Intermodal, Inc., APL Land Transport Services,
Inc., APL Limited and APL Co. Pte. Ltd. (Incorporated by
reference to Exhibit No. 10.19 to the Company's Registration
Statement on Form S-4 dated November 5, 1999).
10.19 Domestic Incentive Agreement, dated as of May 4, 1999, between
CSX Intermodal, Inc. and Pacer International, Inc. (Incorporated
by reference to Exhibit No. 10.20 to the Company's Registration
Statement on Form S-4 dated November 5, 1999).
10.20 Rail Transportation Agreement, dated as of October 11, 1996,
between Union Pacific Railroad Company, APL Land Transport
Services, Inc., American President Lines, Ltd., and APL Co. Pte.
Ltd. (Incorporated by reference to Exhibit No. 10.21 to the
Company's Registration Statement on Form S-4 dated November 5,
1999).
10.21 Asset Purchase Agreement dated December 31, 1999, among Conex
Acquisition Corporation, Conex Global Logistics Services, Inc.,
MSL Transportation Group, Inc., Jupiter Freight, Inc., The
Michael W. Keller Living Trust, The Uchida Family Trust, Michael
Keller and Shigehiro Uchida. (Incorporated by reference to
Exhibit No. 2.1 to the Company's Current Report on Form 8-K dated
January 13, 2000).
10.22 Amendment dated January 12, 2000 to Asset Purchase Agreement
dated December 31, 1999. (Incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K dated January 13,
2000).
10.23 Equipment Services Agreement dated December 31, 1999 among
Transamerica Leasing, Inc., Pacer Logistics, Inc. and the
Company. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 7, 2000).
10.24 Rail Car Lease Agreement dated September 1, 2000 among GATX
Third Aircraft Corporation and the Company. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended September 22, 2000).
61
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- ----------- -----------------------------------------------------------------
10.25 Pacer International, Inc. 1999 Stock Option Plan. (Incorporated
by reference to Exhibit No. 10.29 to the Company's Registration
Statement on Form S-1 dated January 12, 2001).
10.26 Stock Purchase Agreement, dated August 31, 2000 by and among
Pacer International, Inc., GTS Transportation Services, Inc. and
all of the Shareholders of GTS Transportation Services, Inc.
(Incorporated by reference to Exhibit No. 10.30 to the Company's
Registration Statement on Form S-1 dated January 12, 2001).
10.27 Stock Purchase Agreement, dated October 31, 2000 by and among
Pacer International, Inc., all of the Stockholders of RFI Group,
Inc., Everett Fleisig, Bernard W. Robbins, and Certain Trusts
that are owners of Certain Stockholders of RFI Group, Inc.
(Incorporated by reference to Exhibit No. 10.31 to the Company's
Registration Statement on Form S-1 dated January 12, 2001).
10.28 Employment Agreement, dated as of October 31, 2000, between Pacer
International, Inc. and Mitchel Robbins. (Incorporated by
reference to Exhibit No. 10.32 to the Company's Registration
Statement on Form S-1 dated January 12, 2001).
10.29 Employment Agreement, dated as of October 31, 2000, between Pacer
International, Inc. and Allan Baer. (Incorporated by reference to
Exhibit No. 10.33 to the Company's Registration Statement on Form
S-1 dated January 12, 2001).
10.30 Stock Purchase Agreement, dated December 18, 2000 by and among
Pacer International, Inc., Rail Van, Inc., Rail Van LLC and all
of the Shareholders of Rail Van, Inc. (Incorporated by reference
to Exhibit No. 10.2 to the Company's Current Report on Form 8-K
dated January 8, 2001).
10.31 Equipment Use Agreement, dated May 28, 1999, between PAMC UC and
Pacer International, Inc. (Incorporated by reference to Exhibit
No. 10.35 to the Company's Registration Statement on Form S-1
dated January 12, 2001).
10.32 Employment Agreement dated as of December 22, 2000 between Pacer
International, Inc. and Jeffrey R. Brashares. (Incorporated by
reference to Exhibit B to the Company's Current Report on Form
8-K dated January 8, 2001).
10.33 Employment Agreement dated as of December 22, 2000 between Pacer
International, Inc. and Denis M. Bruncak. (Incorporated by
reference to Exhibit C to the Company's Current Report on Form
8-K dated January 8, 2001).
10.34 Employment Agreement dated as of December 1, 1998 between Pacer
International, Inc. and Lawrence C. Yarberry. (Incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on Form
10-K for the yea ended December 29, 2000).
10.35 Employment Agreement dated as of January 16, 2002 between Pacer
International, Inc. and Charles T. Shurstad.*
62
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
- ----------- -----------------------------------------------------------
10.36 Employment Agreement dated as of August 22, 2001 between Pacer
International, Inc. and Michael Killea.*
10.37 Amendment No. 1 to Domestic Incentive Agreement between CSX
Intermodal, Inc. and Pacer International, Inc. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended April 6, 2001).
10.38 Software License, Development, Support and Information Service
Provider Agreement between Qiva, Inc. and Pacer International,
Inc. (Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the Quarter Ended April 6,
2001).
10.39 Rail Car Lease Agreement dated September 25, 2001 by and between
General Electric Railcar Services Corporation and the Company.*
10.40 Rail Car Lease Agreement dated January, 2001 by and between
LaSalle National Leasing Corporation and the Company. *
10.41 Rail Car Lease Agreement dated February 14, 2001 by and between
Greenbrier Leasing Corporation and the Company.*
10.42 Separation and Release Agreement dated as of December 31, 2001
between Pacer International, Inc. and Robert L. Cross.*
21.1 Subsidiaries of the Registrant.*
- -----------
* Filed
herewith
B. Reports on Form 8-K
During the three months ended December 28, 2001, no reports on Form 8-K
were filed by the Company:
C. Other Exhibits
No exhibits in addition to those previously filed or listed in Item
14(a)(2) are filed herein.
D. Other Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts - filed herein.
63
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACER INTERNATIONAL, INC.
Date: March 22, 2000 By: /s/ Joseph P. Atturio
------------------- -------------------------
Joseph P. Atturio
Vice President, Controller and Secretary
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: March 22, 2002 By: /s/ Donald C. Orris
------------------- ---------------------
Donald C. Orris
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: March 22, 2002 By: /s/ Lawrence C. Yarberry
------------------- --------------------------
Lawrence C. Yarberry
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 22, 2002 By: /s/ Joshua J. Harris
------------------- ----------------------
Joshua J. Harris
Director
Date: March 22, 2002 By: /s/ Bruce H. Spector
------------------- ----------------------
Bruce H. Spector
Director
Date: March 22, 2002 By: /s/ Marc E. Becker
------------------- ---------------------
Marc E. Becker
Director
Date: March 22, 2002 By: /s/ Timothy J. Rhein
------------------- -----------------------
Timothy J. Rhein
Director
Date: March 22, 2002 By: /s/ Michael S. Gross
------------------- -----------------------
Michael S. Gross
Director
Date: March 22, 2002 By: /s/ Thomas L. Finkbiner
------------------- -------------------------
Thomas L. Finkbiner
Director
64
PACER INTERNATIONAL INC. AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
--------
Report of Independent Accountants .................................................... F-2
Consolidated Balance Sheets as of December 28, 2001 and December 29, 2000 ........... F-3
Consolidated Statement of Operations for the fiscal years ended December 28, 2001,
December 29, 2000 and December 31, 1999 ............................................. F-4
Consolidated Statement of Stockholders' Equity for the fiscal years ended
December 28, 2001, December 29, 2000 and December 31, 1999 .......................... F-5
Consolidated Statement of Cash Flows for the fiscal years ended December 28, 2001,
December 29, 2000 and December 31, 1999 ............................................. F-6
Notes to Consolidated Financial Statements ........................................... F-7
Schedule II - Valuation and Qualifying Accounts ...................................... S-1
All other schedules are omitted because they are not applicable or because
the required information is shown in the financial statements or the notes
thereto. Columns omitted from schedules filed have been omitted because the
information is not applicable.
F-1
Report of Independent Accountants
To the Board of Directors and Shareholders of Pacer International, Inc.:
In our opinion, the consolidated financial statements listed in the index
on page F-1 present fairly, in all material respects, the financial
position of Pacer International, Inc. and its subsidiaries at December 28,
2001 and December 29, 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 28,
2001, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the index referred to above presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
March 1, 2002
F-2
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 2001 December 29, 2000
------------------- -------------------
(In millions)
ASSETS
Current assets
Cash and cash equivalents ......................................... $ - $ -
Accounts receivable, net of allowances of $7.0 million and $9.0
million, respectively ..................................... 204.6 215.7
Accounts receivable from APL ...................................... 6.6 6.0
Prepaid expenses and other ........................................ 8.4 10.3
Deferred income taxes ............................................. 5.6 9.7
------------------- -------------------
Total current assets ........................................... 225.2 241.7
------------------- -------------------
Property and equipment
Property and equipment at cost .................................... 87.1 74.3
Accumulated depreciation .......................................... (27.8) (17.8)
------------------- -------------------
Property and equipment, net .................................... 59.3 56.5
------------------- -------------------
Other assets
Goodwill, net ..................................................... 281.5 289.8
Deferred income taxes ............................................. 57.5 59.0
Other assets ...................................................... 9.4 11.4
------------------- -------------------
Total other assets ............................................. 348.4 360.2
------------------- -------------------
Total assets ........................................................ $ 632.9 $ 658.4
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital leases ........... $ 2.0 $ 1.9
Accounts payable and other accrued liabilities .................... 203.1 227.2
------------------- -------------------
Total current liabilities ...................................... 205.1 229.1
------------------- -------------------
Long-term liabilities
Long-term debt and capital leases ................................. 395.9 403.5
Other ............................................................. 3.2 3.7
------------------- -------------------
Total long-term liabilities .................................... 399.1 407.2
------------------- -------------------
Total liabilities ................................................... 604.2 636.3
------------------- -------------------
Minority interest - exchangeable preferred stock of a subsidiary .... 25.7 25.0
------------------- -------------------
Commitments and contingencies (Notes 9 & 13)
Stockholders' equity
Preferred stock, par value $0.01 per share; 1,000,000 shares
authorized; none issued and outstanding ........................ - -
Common stock, par value $0.01 per share; 20,000,000 shares
authorized; 11,544,747 and 11,361,373 issued and outstanding ... 0.1 0.1
Additional paid-in capital ........................................ 118.6 118.5
Unearned compensation ............................................. (0.3) (0.3)
Accumulated deficit ............................................... (114.3) (121.3)
Other accumulated comprehensive income (loss) ..................... (1.1) 0.1
------------------- -------------------
Total stockholders' equity (deficit) ........................... 3.0 (2.9)
------------------- -------------------
Total liabilities and stockholders' equity .......................... $ 632.9 $ 658.4
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Dec. 28, 2001 Dec. 29, 2000 Dec. 31, 1999
----------------- ----------------- -----------------
(in millions, except per share data)
Gross revenues ........................... $ 1,670.9 $ 1,281.3 $ 927.7
Cost of purchased transportation and
services ............................... 1,339.6 1,005.6 735.4
----------------- ----------------- -----------------
Net revenues ........................ 331.3 275.7 192.3
----------------- ----------------- -----------------
Operating expenses:
Direct operating expenses .............. 101.7 90.4 76.8
Selling, general and administrative
expenses ............................ 155.9 102.6 58.9
Depreciation and amortization .......... 18.3 11.6 8.6
Merger and severance ................... 0.4 7.7 -
Other .................................. 4.0 - -
----------------- ----------------- -----------------
Total operating expenses ............ 280.3 212.3 144.3
----------------- ----------------- -----------------
Income from operations ................... 51.0 63.4 48.0
Interest expense, net .................... 39.6 34.1 18.6
----------------- ----------------- -----------------
Income before income taxes and minority
interest ............................... 11.4 29.3 29.4
----------------- ----------------- -----------------
Income taxes or charge in lieu of income
taxes .................................. 3.6 12.9 11.7
Minority interest ........................ 0.8 1.6 1.1
----------------- ----------------- -----------------
Net income ............................... $ 7.0 $ 14.8 $ 16.6
================= ================= =================
Earnings per share (Note 16):
Basic:
Earnings per share ..................... $ 0.61 $ 1.35 $ 0.78
================= ================= =================
Weighted average shares outstanding .... 11,498,231 10,970,770 10,440,000
================= ================= =================
Diluted:
Earnings per share ..................... $ 0.55 $ 1.19 $ 0.68
================= ================= =================
Weighted average shares outstanding .... 14,143,976 13,793,363 13,488,826
================= ================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
-------------------- ----------------------- Additional Divisional Unearned
No. of No. of Paid-in- Accumulated Control Comp-
Shares Amount Shares Amount Capital Deficit Account ensation
---------- ------- ----------- ---------- --------- ----------- -------- ---------
(in millions, except share amounts)
Balance December 25, 1998 ......... - $ - - $ - $ - $ - $ 55.6 $ -
========== ======= =========== ========== ========= =========== ======== =========
Net and Comprehensive Income ...... - - - - - 16.6 - -
Distribution to Shareholder ....... - - - - - (300.0) - -
Effects of Recapitalization........ - - - - - 147.3 (55.6) -
Issuance of Common Stock .......... - - 10,440,000 0.1 104.3 - - -
---------- ------- ----------- ---------- --------- ----------- -------- ---------
Balance December 31, 1999 ......... - $ - 10,440,000 $ 0.1 $ 104.3 $ (136.1) $ - $ -
========== ======= =========== ========== ========= =========== ======== =========
Net Income ........................ - - - - - 14.8 - -
Other Comprehensive Income ........ - - - - - - - -
---------- ------- ----------- ---------- --------- ----------- -------- ---------
Total Comprehensive Income ........ - - - - - 14.8 - -
Issuance of Preferred Stock
for Exercise of Options ........... 17,499 - - - 0.2 - - -
Repurchase and retirement
of Preferred Stock ................ (17,499) - - - (0.2) - - -
Unearned Compensation ............. - - - - 0.3 - - (0.3)
Amort - Unearned Compensation
(Note 7) .......................... - - - - - - - -
Issuance of Common Stock for
Acquisitions ...................... - - 580,000 - 13.0 - - -
Issuance of Common Stock for
Exercise of Options ............... - - 341,373 - 0.9 - - -
---------- ------- ----------- ---------- --------- ----------- -------- ---------
Balance December 29, 2000 ......... - $ - 11,361,373 $ 0.1 $ 118.5 $ (121.3) $ - $ (0.3)
========== ======= =========== ========== ========= =========== ======== =========
Net Income ........................ - - - - - 7.0 - -
Other Comprehensive Loss .......... - - - - - - - -
---------- ------- ----------- ---------- --------- ----------- -------- ---------
Total Comprehensive Income ........ - - - - - 7.0 - -
Issuance of Preferred Stock for
Exercise of Options .............. 27,498 - - - 0.2 - - -
Repurchase and retirement
of Preferred Stock ................ (27,498) - - - (0.2) - - -
Amort - Unearned Compensation
(Note 7) .......................... - - - - - - - -
Issuance of Common Stock
for Exercise of Options ........... - - 183,374 - 0.1 - - -
---------- ------- ----------- ---------- --------- ----------- -------- ---------
Balance December 28, 2001 ......... - $ - 11,544,747 $ 0.1 $ 118.6 $ (114.3) $ - $ (0.3)
========== ======= =========== ========== ========= =========== ======== =========
Other
Cumulative Total
Comprehensive Stockholders'
Income (Loss) Equity(Deficit)
------------- --------------
Balance December 25, 1998 ......... $ - $ 55.6
============= ============
Net and Comprehensive Income ...... - 16.6
Distribution to Shareholder ....... - (300.0)
Effects of Recapitalization........ - 91.7
Issuance of Common Stock .......... - 104.4
------------- ------------
Balance December 31, 1999.......... $ - $ (31.7)
============= ============
Net Income ........................ - 14.8
Other Comprehensive Income ........ 0.1 0.1
------------- ------------
Total Comprehensive Income ........ 0.1 14.9
Issuance of Preferred Stock
for Exercise of Options ........... - 0.2
Repurchase of Preferred Stock ..... - (0.2)
Unearned Compensation ............. - -
Amort - Unearned Compensation
(Note 7) .......................... - -
Issuance of Common Stock for
Acquisitions ...................... - 13.0
Issuance of Common Stock for
Exercise of Options ............... - 0.9
------------- ------------
Balance December 29, 2000 ......... $ 0.1 $ (2.9)
============= ============
Net Income ........................ - 7.0
Other Comprehensive Loss .......... (1.2) (1.2)
------------- ------------
Total Comprehensive Income ........ (1.2) 5.8
Issuance of Preferred Stock for
Exercise of Options ............... - 0.2
Repurchase of Preferred Stock ..... - (0.2)
Amort - Unearned Compensation
(Note 7) .......................... - -
Issuance of Common Stock for
Exercise of Options ............... - 0.1
------------- ------------
Balance December 28, 2001 ......... $ (1.1) $ 3.0
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Dec. 28, 2001 Dec. 29, 2000 Dec. 31, 1999
--------------- --------------- ---------------
(in millions)
Cash Flows from Operating Activities
Net Income ................................................................ $ 7.0 $ 14.8 $ 16.6
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation and Amortization ........................................ 18.3 11.6 8.6
Gain on Sale of Property and Equipment ............................... (0.1) (0.1) -
Deferred Taxes ....................................................... 5.6 11.4 4.6
Minority Interest .................................................... 0.8 1.6 1.1
Merger and Severance ................................................. 0.4 7.7 -
Other ................................................................ 3.5 - -
Change in Current Assets and Liabilities excluding effects of
acquisitions:
Accounts Receivable, net ........................................... 11.1 (14.3) (10.8)
Receivable from APL ................................................ (0.6) 2.2 (39.6)
Prepaid Expenses and Other ......................................... 1.9 (5.1) -
Accounts Payable and Other Accrued Liabilities ..................... (27.3) (27.9) 39.4
Other .............................................................. 1.2 (0.7) 0.9
--------------- --------------- ---------------
Net Cash Provided by Operating Activities ................................ 21.8 1.2 20.8
--------------- --------------- ---------------
Cash Flows from Investing Activities
Acquisitions, Net of Cash Acquired ........................................ - (125.6) (112.0)
Capital Expenditures ...................................................... (14.6) (5.5) (2.0)
Proceeds from Sales of Property and Equipment ............................. 0.2 0.4 40.0
--------------- --------------- ---------------
Net Cash Used In Investing Activities .................................... (14.4) (130.7) (74.0)
--------------- --------------- ---------------
Cash Flows from Financing Activities
Checks Drawn in Excess of Cash Balances ................................... - 10.9 -
Proceeds of Long-Term Debt, Net of Costs .................................. - 122.6 277.5
Proceeds from Issuance of Common Stock .................................... 0.1 0.9 104.4
Proceeds from Issuance of Preferred Stock ................................. 0.2 0.2 -
Repurchase of Preferred Stock ............................................. (0.2) (0.2) -
Distribution to APL and Recap Costs ....................................... - - (311.7)
Redemption of Preferred Stock of Subsidiary ............................... - - (2.0)
Debt, Revolving Credit Facility and Capital Lease Obligation Repayment .... (7.5) (17.1) (2.8)
--------------- --------------- ---------------
Net Cash (Used In) Provided By Financing Activities ...................... (7.4) 117.3 65.4
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... - (12.2) 12.2
--------------- --------------- ---------------
Cash and Cash Equivalents at Beginning of Year ............................ - 12.2 -
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Year .................................. $ - $ - $ 12.2
=============== =============== ===============
Disclosure of Non-Cash Financing Activities:
Issuance of Common Stock for acquisitions ................................. $ - $ 13.0 $ -
Issuance of 8.0% subordinated note for acquisition ........................ $ - $ 5.0 $ -
Issuance of Exchangeable Preferred Stock for recapitalization ............. $ - $ - $ 24.3
Issuance of note payable to management for recapitalization ............... $ - $ - $ 0.4
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Pacer International, Inc. ("Pacer" or the "Company") is a leading non-asset
based North American third-party logistics provider offering a broad array of
services to facilitate the movement of freight from origin to destination. The
Company operates in two segments, the wholesale segment and the retail segment
(see Note 10 to the Consolidated Financial Statements for segment information).
The wholesale segment provides intermodal rail service in North America by
selling intermodal service to shippers pursuant to agreements with intermodal
rail carriers. The retail segment provides trucking services, intermodal
marketing, freight consolidation and handling, international freight forwarding
and supply chain management services.
The Company has operated as an independent, stand-alone company only since
the recapitalization in May 1999. From 1984 until the recapitalization, the
wholesale business was conducted by various entities owned directly or
indirectly by APL Limited.
As of May 28, 1999, APL Land Transport Services, Inc. ("APLLTS") was
recapitalized through the purchase of shares of its common stock by affiliates
of Apollo Management, L.P. and two other investors from APL Limited and its
redemption of a portion of the shares of common stock held by APL Limited. After
the recapitalization, APLLTS formed a transitory subsidiary that was merged with
and into Pacer Logistics, making Pacer Logistics a wholly-owned subsidiary of
APLLTS. In connection with these transactions, APLLTS was renamed Pacer
International, Inc.
As part of the recapitalization, the assets and liabilities of the Company
remained at their historical basis for financial reporting purposes; for income
tax purposes, the transaction has been treated as a taxable transaction such
that the consolidated financial statements reflect a "step-up" in tax basis
resulting in the establishment of a deferred tax asset.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all entities in which the Company controls. For the year ended December 29,
2000, this includes Pacer Logistics for the entire year, Conex assets acquired
January 13, 2000, GTS Transportation Services, Inc. acquired August 31, 2000,
RFI Group, Inc. acquired October 31, 2000 and Rail Van Inc. acquired December
22, 2000. For the year ended December 31, 1999, this includes Pacer Logistics
acquired May 28, 1999. All significant intercompany transactions and balances
have been eliminated in consolidation.
Industry Segments
The Company operates in two reportable industry segments, providing
intermodal rail stacktrain services (the "wolesale" segment) and providing
logistic services (the "retail" segment). The wholesale segment's fiscal year
ends on the last Friday in December and the retail segment's fiscal year ends on
the last day in December.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include allowance
for doubtful accounts, costs of purchased transportation and services and
valuation of deferred income taxes. Actual results could differ from those
estimates.
F-7
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an
original maturity of three months or less.
Property and Equipment
Property and equipment are recorded at cost. For assets financed under
capital leases, the present value of the future minimum lease payments is
recorded at the date of acquisition as property and equipment, with a
corresponding amount recorded as a capital lease obligation. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives of the assets as follows:
Classification Estimated Useful Life
-------------- ---------------------
Rail Cars .................................... 28 Years
Containers and Chassis ....................... 5 Years
Leasehold Improvements ....................... Term of Lease
Other (including computer hardware and
software)..................................... 3 to 7 Years
When assets are sold, the applicable costs and accumulated depreciation are
removed from the accounts, and any gain or loss is included in income.
Expenditures, including those on leased assets, that extend an assets useful
life or increase its utility are capitalized and amortized. Expenditures for
maintenance and repairs are expensed as incurred.
The Company capitalizes certain costs of internally developed software.
Capitalized costs include purchased materials and services, and payroll and
payroll related costs. The cost of internally developed software is amortized on
a straight-line basis over the estimated useful life which is between three to
seven years.
Deferred Financing Costs
The deferred financing costs included in other assets relate to the cost
incurred in the placement of the Company's debt and are being amortized using
the effective interest method over the terms of the related debt which range
from 5 to 7 years.
Goodwill
Goodwill represents the excess of cost over the estimated fair value of the
net tangible and intangible assets acquired and has been amortized over 40 years
on a straight-line basis after consideration of the characteristics of each
acquisition. The Company evaluates the carrying value of goodwill and
recoverability should events or circumstances occur that bring into question the
realizable value or impairment of goodwill. The Company's principal
considerations in determining impairment include the strategic benefit to the
Company of the business related to the goodwill as measured by undiscounted
current and expected future operating income levels of the business and expected
undiscounted future cash flows. When goodwill is determined to not be
recoverable, an impairment is recognized as a charge to operations to the extent
the carrying value of related assets (including goodwill) exceeds fair value.
Amortization expense was $7.5 million, $4.7 million and $2.4 million for 2001,
2000 and 1999, respectively; and accumulated amortization was $15.0 million and
$7.5 million at December 28, 2001 and December 29, 2000, respectively.
F-8
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets", effective December 29, 2001 and
will, among other things, cease amortizing goodwill for the 2002 fiscal year
(see Recently Issued Accounting Pronouncements below).
Revenue Recognition
The Company's wholesale segment recognizes revenue and rail linehaul
expenses on a percentage-of-completion basis and remaining expenses as incurred.
Revenues from retail transportation activities including highway and rail
brokerage, local cartage and specialized trucking are recorded when delivery
requirements are met. Revenues from freight handling activities are recorded
upon receipt at the warehouse and storage revenues are recorded as earned.
Supply chain management/consulting services net revenues are recorded as earned.
Revenues are reported net of volume rebates provided to customers.
Allocation of Expenses
Prior to May 28, 1999, APLLTS was a wholly-owned subsidiary of APL Limited
(as discussed above) and was allocated certain expenses. These expenses included
systems support, office space, salaries, and other corporate services which were
either allocated or charged on a cost reimbursement basis. Management believes
that these allocations were reasonable. Subsequent to May 28, 1999, the
corporate administrative services previously provided by APL Limited are
incurred directly by the wholesale segment.
Income Taxes
The Company recognizes income tax expense using the liability method of
accounting for deferred income taxes. A deferred tax asset or liability is
recorded based upon the tax effect of temporary differences between the tax
bases of assets and liabilities and their carrying value for financial reporting
purposes. Deferred tax expense or benefit is the result of changes in the
deferred tax assets and liabilities during the year.
Other Comprehensive Income
The Company classifies items of comprehensive income by their nature in the
financial statements and display the accumulated balance of comprehensive income
separately from accumulated deficit and additional paid-in-capital in the equity
section of the balance sheet.
Other comprehensive income (loss) includes foreign currency translation
adjustments and derivative transactions, net of related tax. Other comprehensive
income (loss) consists of the following (in millions):
Derivative
Instrument Fair Total Other
Foreign Currency Value, Net of Comprehensive
Translation Adjust. Amortization Income (Loss)
--------------------- ------------------- ------------------
Beginning Balance December 31, 1999................. $ - $ - $ -
Activity during 2000 (net of $0.0 million tax) ..... 0.1 - 0.1
--------------------- ------------------- ------------------
Balance at December 29, 2000........................ $ 0.1 $ - $ 0.1
===================== =================== ==================
Activity during 2001 (net of $0.8 million tax)...... (0.1) (1.1) (1.2)
--------------------- ------------------- ------------------
Balance at December 28, 2001........................ $ - $ (1.1) $ (1.1)
===================== =================== ==================
F-9
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The assets and liabilities of the Company's foreign operations have been
translated at rates of exchange at the balance sheet date, and related revenues
and expenses have been translated at average rates of exchange in effect during
the year. As of December 28, 2001, the deferred loss on derivative instruments
accumulated in other comprehensive income (loss), are expected to be
reclassified to interest expense during the next 12 months.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and related interpretations
and complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation cost is recognized based on the difference, if any, on the
date of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
Earnings per Share
The computation of earnings per share-basic is based on net income
available to common shareholders and the weighted-average number of outstanding
common shares. The computation of earnings per share-diluted includes the
dilutive effect, if any, of outstanding Pacer Logistics 7.5% Exchangeable
Preferred Stock calculated using the as if converted method, and common stock
options.
Reclassification
During 2000, the Company reclassified railcar rental income of $10.3
million for the fiscal year ended December 31, 1999 from direct operating
expenses to revenues to be consistent with the Company's classification of
container per diem revenue. The Company also reclassified corresponding
financial information presented in Notes 3, 10 and 16 for such change. The
reclassification had no effect on the Company's income from operations, net
income or cash flows.
Financial Instruments
The carrying amounts for cash, accounts receivables and accounts payable
approximate fair value due to the short-term nature of these instruments.
Management estimates that the Senior Subordinated Notes of $150.0 million are
valued at $120.0 million and $141.8 million as of December 28, 2001 and December
29, 2000, respectively, based on quoted market prices. The carrying value of
long term debt, other than the Senior Subordinated Notes, approximates fair
value due to the floating nature of the interest rates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company sells primarily on net 30-day terms, performs credit evaluation
procedures on its customers and generally does not require collateral on its
accounts receivable. The Company maintains an allowance for potential credit
losses.
F-10
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company had no customers in 2001, one customer in 2000 and two
customers in 1999 accounting for 10% or more of revenues. Union Pacific
generated $146.9 million of revenues in both segments in 2000. The Hub Group
generated $128.2 million of revenues in the wholesale segment in 1999 and Union
Pacific generated $100.8 million of revenues in both reporting segments in 1999.
The receivable from Union Pacific was $6.0 million at December 29, 2000. In
addition, the Company had receivables from APL Limited at December 28, 2001 and
December 29, 2000 of $6.6 million and $6.0 million, respectively, primarily for
freight transportation and the repositioning of APL Limited's equipment.
Concentration of Business on Intermodal Marketing
Significant portions of the Company's retail segment revenue are derived
from intermodal marketing. As a result, a decrease in demand for intermodal
transportation services relative to other transportation services could have a
material adverse affect on the Company's results of operations.
Dependence on Railroads and Equipment and Service Availability
The Company is dependent upon the major railroads in the United States for
substantially all of the intermodal services provided by the Company. In many
markets rail services are limited to a few railroads or even a single railroad.
Consequently, a reduction in or elimination of rail service to a particular
market is likely to adversely affect the Company's ability to provide intermodal
transportation services to some of the Company's customers. Furthermore,
significant rate increases, work stoppage or adverse weather conditions can
impact the railroads and therefore the Company's ability to provide
cost-effective services to its customers.
In addition, the Company is dependent in part on the availability of rail,
truck and ocean services provided by independent third parties. If the Company
were unable to secure sufficient equipment or other transportation services to
meet its customers' needs, its results of operations could be materially
adversely affected on a temporary or permanent basis.
Reliance on Independent Contractors
The Company relies upon the services of independent contractors for
underlying transportation services for their customers. Contracts with
independent contractors are, in most cases, terminable upon short notice by
either party. Although the Company believes its relationships with independent
contractors are good, there can be no assurance that the Company will continue
to be successful in retaining and recruiting independent contractors or that
independent contractors who terminate their contracts can be replaced by equally
qualified persons.
F-11
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations," in July, 2001 and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" in October, 2001. SFAS No. 143, which is
effective for fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 will be adopted by the Company in the 2003 fiscal year. SFAS No. 144, which
is effective for fiscal years beginning after December 15, 2001, addresses
financial accounting and reporting for the impairment of long-lived assets,
excluding goodwill and intangible assets, to be held and used or disposed of.
The Company has not yet completed their analysis of the effects that these new
standards will have on the results of operations; although it does not expect
the implementation of these standards to have a significant effect on the
results of operations or financial condition.
The Financial Accounting Standards Board also issued SFAS 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." These
statements prohibit pooling-of-interests accounting for transactions initiated
after June 30, 2001, require the use of the purchase method of accounting for
all combinations after June 30, 2001 and establish a new accounting standard for
goodwill acquired in a business combination. SFAS 141 and SFAS 142 continue to
require recognition of goodwill as an asset, but do not permit amortization of
goodwill as previously required by APB Opinion No. 17 "Intangible Assets." SFAS
142 was effective for the Company on December 29, 2001. SFAS 142 will result in
significant modifications relative to the Company's accounting for goodwill.
Specifically, the Company will cease goodwill amortization, which was $7.5
million in 2001, beginning December 29, 2001. Furthermore, certain intangible
assets that are not separable from goodwill will not be amortized. However,
goodwill and other intangible assets will be subject to periodic (at least
annual) tests for impairment and recognition of impairment losses in the future
could be required based on a new methodology for measuring impairments described
below. The revised standards include transition rules and requirements for
identification, valuation and recognition of a much broader list of intangibles
as part of business combinations than prior practice, most of which will
continue to be amortized. SFAS 142 requires a two-step method for determining
goodwill impairments where step 1 is to compare the fair value of the reporting
unit with the unit's carrying amount, including goodwill. If this test suggests
that it is impaired, then step 2 is required to compare the implied fair value
of the reporting unit's goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of the reporting unit's goodwill is
greater than the implied fair value of its goodwill, an impairment loss must be
recognized for the excess. Also under SFAS 141, a one-step method is used to
determine the impairment for indefinite-lived intangible assets where the fair
value of the intangible asset is compared with its carrying amount. The Company
has completed a preliminary evaluation of goodwill using the new goodwill
impairment testing criteria set forth in SFAS 142, and has determined that the
Company will not be required to take an initial goodwill impairment charge as a
result of adoption.
F-12
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. STATEMENTS OF OPERATIONS
During 2001, the Company recorded a total of $6.9 million of charges
described below.
Direct operating expenses included $1.4 million for the repair and return
of 2,700 containers and 1,300 chassis as part of a program to downsize the
container and chassis fleet. Selling, general and administrative expenses
included $0.8 million for costs associated primarily with the consolidation of
retail segment operations in Columbus, Ohio, and $0.3 million for legal fees
related to a civil lawsuit filed by the Company against the former owner of an
acquired business. Other operating expenses included $1.9 million for the
write-off of agent balances due to an agent bankruptcy, $1.6 million for the
write-off of costs related to a postponed public offering and $0.5 million for
early termination of a chassis and container maintenance agreement. For the 2000
and 1999 periods there were no significant amounts relating to these matters.
Merger and Severance
In December 2000, the Company recorded a charge of $7.7 million relating to
the consolidation of retail segment operations resulting from the December 22,
2000 acquisition of Rail Van. The charge included $5.0 million for the severance
of 99 employees from the Chicago, Memphis, Los Angeles and Walnut Creek offices
and the termination of agency agreements. An additional $2.0 million was
included to cover lease costs through lease termination in 2006 for facilities
no longer required primarily in Walnut Creek and Memphis. The remaining $0.7
million of this charge was for the write-off of computer software under
development. Through December 28, 2001, $2.8 million had been charged to the
reserve for the severance of 80 employees and termination of agency agreements,
and $1.8 million had been charged related to facilities and other. A total of
$1.2 million of the unused reserve was released related to planned workforce
reductions (employees and agencies) that are no longer needed due to
employees/agents leaving prior to being terminated. The remaining severance
payments will be completed by the end of 2003 as payments for senior management
severance are spread over a two year period.
During 2001, the Company recorded an additional charge of $1.6 million
including $0.8 million for the severance of employees in the wholesale segment,
$0.5 million for additional lease costs due to the worsening of the real estate
market and the difficulty in subletting facilities no longer required and $0.3
million for the write-off of retail segment assets that have been abandoned. The
2001 charge was partially offset by the release of $1.2 million of remaining
unused liability from the 2000 charge previously discussed. As previously
indicated, the remaining severance is to be paid to senior management spread
over a two year period. The table below details merger and severance activity
(in millions).
Severance Facilities and Other Total
-------------- ------------------------ ---------
Beginning balance December 29, 2000 .... $ 5.0 $ 2.7 $ 7.7
Accruals............................. 0.8 0.8 1.6
Payments............................. (2.8) (1.8) (4.6)
Other................................ (1.2) - (1.2)
-------------- ------------------------ ---------
Balance at December 28, 2001............ $ 1.8 $ 1.7 $ 3.5
============== ======================== =========
F-13
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3. ACQUISITIONS
There were no acquisitions during 2001.
The Company completed four retail segment acquisitions during 2000. The
table below summarizes the purchase price allocation, net of cash acquired for
each acquisition, followed by a description of each transaction.
2000 Acquisitions Purchase Price Allocation, net of Cash Acquired
Rail
Conex GTS RFI Van Total
---------- ---------- ----------- ----------- -----------
(in millions)
Accounts receivable, net ........... $ 6.2 $ 6.7 $ 11.0 $ 62.8 $ 86.7
Prepaid expenses and other ......... 0.3 - 0.9 0.5 1.7
Property and equipment.............. 0.6 0.1 1.1 5.9 7.7
Goodwill............................ 32.0 21.2 17.4 75.2 145.8
Liabilities......................... (1.7) (10.2) (11.9) (68.4) (92.2)
---------- ---------- ----------- ----------- -----------
Total purchase price................ $ 37.4 $ 17.8 $ 18.5 $ 76.0 $ 149.7
========== ========== =========== =========== ===========
On January 13, 2000, pursuant to the terms of an asset purchase agreement,
the Company acquired substantially all of the assets and assumed specified
liabilities of Conex Global Logistics Services, Inc., MSL Transportation Group,
Inc., and Jupiter Freight, Inc. (collectively "Conex"), a multipurpose provider
of transportation services including intermodal marketing, local trucking and
freight consolidation and handling. The purchase price of $37.4 million included
acquisition fees of $1.3 million, a cash payment to owners of $25.1 million, the
issuance to Conex shareholders of an 8.0% subordinated note in the aggregate
principal amount of $5.0 million and the issuance to Conex shareholders of
300,000 shares (valued in the aggregate at $6.0 million) of common stock of
Pacer International, Inc. The Company borrowed $15.0 million under the revolving
credit facility to fund the acquisition. The results of operations for the
acquired assets are included in the Company's consolidated financial statements
beginning January 1, 2000. The acquisition resulted in $32.0 million of
goodwill. In 2001, the Company reviewed and increased the gross goodwill
recorded on this acquisition by $0.1 million.
On August 31, 2000, the Company acquired all of the capital stock of GTS
Transportation Services, Inc. ("GTS"), a provider of transportation services
including logistics and truck brokerage in North America. The purchase price of
$17.8 million included acquisition fees and expenses of approximately $0.6
million, a net cash payment to owners of $15.0 million and a maximum earn-out
amount of $2.2 million. The Company borrowed $10.0 million under the revolving
credit facility to fund the acquisition. In connection with the acquisition,
former owners of GTS that continued as employees were granted 30,000 options
(issued at fair value on the date granted) to purchase the Company's common
stock. The results of operations for the acquired company are included in the
Company's consolidated financial statements beginning September 1, 2000.
The acquisition resulted in $21.2 million of goodwill. During 2001, the Company
reviewed and decreased the gross goodwill recorded on this acquisition by $1.1
million as a result of the finalization of certain pre-acquisition
contingencies.
F-14
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On October 31, 2000, the Company acquired all of the capital stock of RFI
Group, Inc. ("RFI"), a provider of international freight forwarding and freight
transportation services. The purchase price of $18.5 million included
acquisition costs of $0.5 million, a net cash payment to owners of $16.4 million
and an estimated working capital adjustment of $1.6 million. A portion of the
net cash payment was used to repay $5.2 million of indebtedness. The Company
borrowed $18.0 million under the revolving credit facility to fund the
acquisition. In connection with the acquisition, former owners of RFI that
continued as employees were granted 45,000 plan and 80,000 non-plan options
(issued at fair value on the date granted) to purchase the Company's common
stock. The 80,000 non-plan options expired in 2001. The results of operations
for the acquired company are included in the Company's consolidated financial
statements beginning November 1, 2000. The acquisition resulted in $17.4 million
of goodwill. During 2001, the Company reviewed and increased the gross goodwill
on this acquisition by $0.3 million.
On December 22, 2000, the Company acquired all of the capital stock of Rail
Van Inc. ("Rail Van"), a provider of intermodal transportation and other
logistics services. The purchase price of $76.0 million included $4.0 million of
acquisition costs, a cash payment to owners of $67.0 million, the issuance to
Rail Van shareholders of 280,000 shares of the Company's common stock valued in
the aggregate at $7.0 million and a post-closing adjustment of $2.0 million
refunded by the sellers to the Company based on Rail Van's results for 2000
through December 22. The acquisition was funded by a borrowing of $40.2 million
under the Company's revolving credit facility, the issuance of $40.0 million in
new term loans under the credit agreement and the issuance of common stock.
Proceeds from these loans were also used to repay $8.9 million in Rail Van debt
assumed during the transaction. The results of operations for the acquired
company are included in the Company's consolidated financial statements
beginning December 23, 2000. A Section 338(h)(10) election was made to allow the
acquisition of Rail Van to be treated as an acquisition of assets for tax
purposes. The acquisition resulted in $75.2 million of goodwill.
On May 28, 1999, the Company acquired the common stock of Pacer Logistics,
Inc., a privately-held third party logistics provider. The Company paid $137.5
million for the acquisition which included acquisition fees of $2.9 million and
assumed indebtedness of $62.6 million. The Company financed the acquisition with
a portion of the proceeds from the Senior Subordinated Note offering and with
funds under the credit facility. The acquisition resulted in goodwill of $123.1
million.
During 2000, the Company reviewed and increased the gross goodwill recorded
on the 1999 acquisition of Pacer Logistics by $2.9 million. In December 2000,
the Company determined the deferred tax asset arising as a result of the 2000
acquisitions. This entry increased gross goodwill by $2.8 million.
The acquisitions of Pacer Logistics, Inc., Conex, GTS, RFI and Rail Van
were accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations". The aggregate purchase price as shown
above were allocated to the underlying assets and liabilities based upon
preliminary estimates of fair values at the date of acquisition, with the
remainder allocated to goodwill.
The acquisitions of Pacer Logistics, Inc., Conex assets, GTS, RFI and Rail
Van were accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16, "Business Combinations". For the 2001, 2000 and 1999 years
goodwill was being amortized over 40 years. The Company determined 40-year
amortization periods were appropriate after considering a number of factors: 1)
there are no legal, regulatory or contractual provisions associated with the
acquisitions that may limit the useful lives of the goodwill, 2) the services
provided by the acquisitions (as part of the Company's retail segment) are not
subject to obsolescence, and 3) the Company is not aware of any expected actions
of competitors and others that may restrict the retail segment's ability to
successfully compete in the industry. With the adoption of FAS 142, goodwill
will cease to be amortized commencing December 29, 2001, but will be subject to
new impairment testing criteria.
F-15
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma results of operations, giving effect to the Company's acquisition
of Conex assets, GTS, RFI and Rail Van (and the Company's recapitalization and
acquisition of Pacer Logistics which occurred on May 28, 1999) at the beginning
of each period presented is as follows:
Fiscal Year Ended Fiscal Year Ended
December 29, 2000 December 31, 1999
--------------------- ---------------------
(Unaudited)
Gross revenues ................................. $ 1,897.4 $ 1,791.5
Net revenues ................................... 338.1 305.4
Net income ..................................... 8.8 18.2
Earnings per share:
Basic ....................................... $ 0.78 $ 1.66
Diluted ..................................... $ 0.74 $ 1.41
NOTE 4. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases are summarized as follows (in millions):
December 28, December 29,
2001 2000
---------------- ----------------
Senior subordinated notes (11.75%; due June 1, 2007) ..... $ 150.0 $ 150.0
Term loan (5.5%; due May 28, 2006) ....................... 171.7 173.0
Revolving credit facility (5.1%; due May 28, 2004) ....... 70.8 76.8
Subordinated note (8.0%; due January 13, 2003) ........... 5.0 5.0
Capital lease obligations (Note 13) ...................... 0.4 0.6
---------------- ----------------
Total ........................................... 397.9 $ 405.4
Less current portion ..................................... 2.0 1.9
---------------- ----------------
Long-term portion ............................... $ 395.9 $ 403.5
================ ================
In conjunction with the Company's recapitalization and acquisition of Pacer
Logistics on May 28, 1999, the Company issued $150.0 million aggregate principal
amount of 11.75% senior subordinated notes due June 1, 2007 under the indenture
dated as of May 28, 1999. Interest on the notes is payable semi-annually in cash
on each June 1 and December 1, commencing on December 1, 1999. The Company may
redeem the notes, in whole at any time or in part from time to time on and after
June 1, 2003, upon not less than 30 nor more than 60 days' notice, at the
following redemption prices: 2003 -105.875%; 2004 -102.938%; 2005 and thereafter
- -100.00%. The indenture provides that upon the occurrence of a change of
control, each holder of notes will have the right to require that the Company
purchase all or a portion of such holder's notes at a purchase price equal to
101.0% of the principal amount thereof plus accrued interest to the date of
purchase.
The notes are fully and unconditionally guaranteed, on a senior
subordinated basis, jointly and severally, by each of the Company's
subsidiaries. The indenture contains covenants limiting the Company's ability to
incur additional indebtedness, and restricts the Company's ability to pay
dividends or make other restricted payments, consummate asset sales, or
otherwise dispose of all or substantially all of the assets of the Company and
its subsidiaries.
F-16
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On May 28, 1999, the Company also entered into a credit agreement that
originally provided for a seven-year $135.0 million term loan (the "Term Loan")
which was used to finance the recapitalization and specified indebtedness of the
Company and a five-year $100.0 million revolving credit facility (the "Revolving
Credit Facility"). The interest rate for the Term Loan is the lesser of 2% in
excess of the prime lending rate as determined by the administrative agent, 2.5%
in excess of the federal funds rate, or 3% in excess of the Eurodollar rate
subject to increases and decreases based upon achievement of financial ratios.
The Term Loan requires minimum scheduled repayments of $1.3 million annually
between the year 2000 and 2005 with the remaining portion maturing in 2006. The
interest rate for the Revolving Credit Facility is the lesser of 1.5% in excess
of the prime lending rate as determined by the administrative agent, 1.5% in
excess of the federal funds rate or 2.5% in excess of the Eurodollar rate
subject to increases and decreases based upon achievement of financial ratios.
The interest rate for the Term Loan and the Revolving Credit Facility increases
or decreases by 0.25% for each change in our leverage ratio between 3.5 and 4.0,
between 4.0 and 5.0, and greater than 5.0. At December 28, 2001, the interest
rates for the Term Loan and Revolving Credit Facility were 5.5% and 5.1%,
respectively. The rates for the Term Loan and Revolving Credit Facility are
reset on a monthly basis.
The credit agreement contains customary covenants, the most restrictive of
which limits the Company's ability to declare dividends, prepay debt, make
investments, incur additional indebtedness, make capital expenditures, engage in
mergers, acquisitions and asset sales, and issue redeemable common stock and
preferred stock, subject to exceptions. The Company is also required to comply
with specified financial covenants including a consolidated interest coverage
ratio and an adjusted total leverage ratio. At December 28, 2001, the Company
was in compliance with these covenants.
On December 22, 2000, the Company entered into a third amendment to the
credit agreement to provide for an additional term loan in the amount of $40.0
million which was borrowed to finance the acquisition of Rail Van. Similar to
the original term loan, the interest rate for the new term loan is the lesser of
2% in excess of the prime lending rate as determined by the administrative
agent, 2.5% in excess of the federal funds rate, or 3% in excess of the
Eurodollar rate subject to increases and decreases based upon achievement of
certain financial ratios. At December 28, 2001, the interest rate for the new
term loan was 5.5%. The new term loan requires minimum scheduled repayments of
$0.4 annually between 2001 and 2005. The maturity date for the new term loan is
May 28, 2006.
The Company must pay a commitment fee equal to 0.5% per annum on the unused
portion of the Revolving Credit Facility, subject to decreases based on the
achievement of financial ratios and subject to increases based on the amount of
unused commitments. At December 28, 2001, the Company had $23.4 million
available under the Revolving Credit Facility. On August 9, 1999, the Company
entered into a first amendment to the credit agreement to increase the maximum
amount that can be drawn under the revolving credit facility on the day of
notification of borrowing to $10.0 million from $2.5 million. On January 7,
2000, the Company entered into a second amendment to the credit agreement to
modify the definition of excess cash flow to allow for the acquisition of Conex
assets.
In conjunction with the transactions described above in Note 3, the Company
borrowed $83.2 million under the Revolving Credit Facility, issued $40.0 million
in new term loans (as discussed below) and issued Conex shareholders an 8%
subordinated note in the aggregate principal amount of $5.0 million due January
13, 2003.
The loans and letters of credit under the credit agreement are guaranteed
by all of the existing and future direct and indirect wholly-owned subsidiaries.
The Company's obligations and the obligations of such subsidiaries are
collateralized by a first priority perfected lien on substantially all of the
Company's properties and assets and all of the properties and assets of such
subsidiaries, whether such properties and assets are now owned or subsequently
acquired, subject to exceptions.
F-17
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2001, the Company repaid $0.2 million in capital lease obligations,
$6.0 million of the Revolving Credit Facility, $1.3 million of the Term Loans
and $36,000 remaining of the notes payable to management. During 2000, the
Company repaid $0.1 million in capital lease obligations, $8.9 million of debt
assumed as part of the Rail Van acquisition, $6.4 million of the Revolving
Credit Facility, $1.3 million of the Term Loan and $0.4 million of notes payable
to management.
Contractual maturities of long-term debt (including capital lease
obligations) during each of the five years subsequent to 2001 and thereafter are
as follows (in millions):
2002.................................... $ 2.0
2003.................................... 6.8
2004.................................... 72.6
2005.................................... 1.8
2006.................................... 164.7
Thereafter............................. 150.0
----------
Total................................. $ 397.9
==========
NOTE 5. HEDGING ACTIVITIES
On December 30, 2000, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" (as amended by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of SFAS 133."). SFAS 133 established accounting and reporting
standards for derivatives and hedging activities, which requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of transactions entered
into for hedging purposes. The adoption of SFAS 133 did not result in a
cumulative effect adjustment being recorded to net income for the change in
accounting as the Company had no derivative instruments outstanding.
The Company has an interest rate risk management policy with the objective
of managing its interest costs. To meet these objectives, the Company employs
hedging strategies to limit the effects of changes in interest rates on its
income and cash flows. The Company does not acquire derivative instruments for
any purpose other than cash flow hedging purposes. The Company does not
speculate using derivative instruments. The Company believes that its interest
rate risk management policy is generally effective. Nonetheless, the Company's
profitability may be adversely affected during particular periods as a result of
changing interest rates. In addition, hedging transactions using derivative
instruments involve risks such as counter-party credit risk and legal
enforceability of hedging contracts. The counter-parties to the Company's
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. These counter-parties
potentially expose the Company to loss in the event of nonperformance.
Cash Flow Hedging Instruments
Management continually identifies and monitors changes in interest rate
exposures that may adversely impact expected future cash flows by evaluating
hedging opportunities. The Company maintains risk management control systems to
monitor interest rate cash flow risk attributable both to the Company's
outstanding or forecasted debt obligations and to the Company's offsetting hedge
positions. The risk management control systems involve the use of analytical
techniques, including cash flow sensitivity analyses, to estimate the impact of
changes in interest rates on the Company's future cash flows.
F-18
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company entered into two interest rate swap agreements on April 11,
2001 with a combined notional amount of $100.0 million which mature on October
11, 2002, to manage fluctuations in cash flows resulting from interest rate
risk. These swap agreements effectively change the variable-rate cash flows on
the Company's debt obligations to fixed-rate cash flows. Under the terms of the
interest rate swap agreements, the Company receives variable interest rate
payments based on LIBOR and makes fixed interest rate payments at 4.43%.
The Company records the fair value of interest rate swap agreements
designated as hedging instruments as a derivative asset or liability. Changes in
the fair value of the interest rate swap agreements are reported as unrealized
gains or losses in stockholders' equity as a component of accumulated other
comprehensive income (loss). If a derivative instrument is designated as a hedge
but the derivative instrument is not fully effective in hedging the designated
risk, the ineffective portion of the gain or loss is reported in interest
expense immediately. The cash flows associated with the hedge are classified in
the same category as the item being hedged.
Interest expense for 2001 includes no net gains or losses representing cash
flow hedge ineffectiveness, since the critical terms of the Company's swap
agreements and debt obligations are matched. The Company recognizes additional
interest expense resulting from amortization of amounts deferred to Other
Comprehensive Income (Loss).
At December 31, 1999, the Company was a party to an interest rate swap
agreement for which it paid a fixed rate on an aggregate notional amount of $2.7
million which is used to hedge its variable interest rate exposure on certain
debt and was accounted for as an adjustment of interest expense over the life of
the debt. The Company received a variable rate of interest on the swap of 5.5%
at December 31, 1999 and paid a fixed rate based on LIBOR, which was 5.9% at
December 31, 1999. During 1999, an insignificant amount was charged to interest
expense for the swap. The swap terminated on January 10, 2000.
NOTE 6. INCOME TAXES
The Company is required to file separate U.S. corporate income tax returns,
independent of Pacer Logistics, Inc. and its subsidiaries. The Company and its
subsidiary, Pacer Logistics, Inc., would be eligible to elect and file U.S.
consolidated corporation income tax returns if the Company owns at least 80% of
the total voting power and total value of the stock of Pacer Logistics, Inc.
For federal and state income tax purposes, the recapitalization of the
Company was a taxable business combination and a qualified stock purchase. The
buyer and seller jointly agreed to treat the transaction as an asset acquisition
in accordance with Section 338 (h)(10) of the Internal Revenue Code and such
election has been made. An allocation of the purchase price to the tax basis of
assets and liabilities based on their respective fair value at May 28, 1999 was
finalized for income tax purposes during 1999.
In connection with the recapitalization, the Company recorded a deferred
tax asset of approximately $81.2 million at May 28, 1999 related to future tax
deductions for the net excess of the tax basis of the assets and liabilities
over the financial statement carrying amounts with a corresponding credit to
Stockholders' Equity.
For periods prior to May 28, 1999, APLLTS' operating results were included
in the consolidated income tax returns of APL Limited. A charge in lieu of
income taxes was recorded using the separate return method, as if the Company
were a separate taxpayer.
F-19
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The reconciliation of the net effective income tax rate to the U.S. federal
statutory income tax rate is as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Dec. 28, 2001 Dec. 29, 2000 Dec. 31, 1999
--------------- --------------- ---------------
U.S. Federal Statutory Rate........... 35.0% 35.0% 35.0%
Increases (Decreases) in Rate
Resulting From:
State Tax, Net of Federal Benefit..... 6.9% 6.0% 3.8%
Revisions to Prior Years'
Estimated Liability Including Tax
Audit Adjustments..................... (21.3)% - -
Non-Deductible Book Goodwill.......... 9.0% 2.7% 1.0%
Other Permanent Book/Tax
Differences........................... 2.0% 0.3% -
--------------- --------------- ---------------
Net Effective Tax Rate................ 31.6% 44.0% 39.8%
=============== =============== ===============
The provision for income taxes is as follows (in millions):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Dec. 28, 2001 Dec. 29, 2000 Dec. 31, 1999
--------------- --------------- ---------------
Current:
Federal ........................... $ (2.2) $ 4.8 $ 6.3
State ............................. (0.6) 1.4 0.9
Foreign ...........................
--------------- --------------- ---------------
Total Current ................... (2.8) 6.2 7.2
Deferred:
Federal ........................... 4.5 5.2 3.7
State ............................. 1.9 1.5 0.8
--------------- --------------- ---------------
Total Deferred .................. 6.4 6.7 4.5
--------------- --------------- ---------------
Total Provision ...................... $ 3.6 $ 12.9 $ 11.7
=============== =============== ===============
F-20
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows the tax effects of the Company's cumulative
temporary differences included in the Consolidated Balance Sheets at December
28, 2001 and December 29, 2000 (in millions):
December 28, December 29,
2001 2000
---------------- ----------------
Tax Loss Carry-Forwards................................ $ 7.6 $ -
Property and Equipment................................. (6.8) (4.8)
Allowance for Doubtful Accounts........................ 2.8 3.8
Accrued Liabilities.................................... 3.0 6.0
Tax Basis in Excess of Book - Recapitalization......... 60.3 67.7
Other.................................................. (3.8) (4.0)
---------------- ----------------
Total Net Deferred Tax Asset................... $ 63.1 $ 68.7
================ ================
As of December 28, 2001, the Company has net operating loss carryforwards
of $24.1 million for federal income tax purposes. These carryforwards will
expire in 2021. In order for these net operating loss carryforwards to be
utilized, the Company must continue to comply with the change in ownership
restrictions.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Pacer has not recognized
a valuation allowance since management has determined that it is more likely
than not that the results of future operations will generate sufficient taxable
income to realize all deferred tax assets.
NOTE 7. PENSION PLANS AND STOCK OPTION PLANS
Effective May 28, 1999, the Company's employees were eligible for the Pacer
Logistics, Inc. 401(k) plan and no longer participate in the former parent's
pension, postretirement benefits and profit-sharing plans. Under the Pacer
Logistics, Inc. 401(k) plan, the Company matches 50% of the first 6% of base
salary contributed by the employee. Matching contributions by the Company to the
plan in 2001, 2000 and 1999 were $1.2 million, $0.8 million and $0.5 million,
respectively.
The former parent maintained defined benefit pension plans for certain
domestic shoreside employees, healthcare benefit plans for retired employees and
profit-sharing plans for non-union employees. The costs and benefits of these
plans were allocated by the former parent to the Company and were included in
general and administrative expenses.
On May 28, 1999, the Board of Directors authorized the creation of the
Pacer International, Inc. 1999 Stock Option Plan under which options to purchase
1,793,747 shares of the Company's common stock may be granted, including options
for 470,247 and 92,614 shares which were part of the 1997 and 1998 Pacer
Logistics, Inc. Stock Option Plan, respectively, that were rolled over into the
1999 plan as part of the acquisition of Pacer Logistics. In addition, under the
1999 Stock Option Plan, options to purchase 44,997 shares of preferred stock
were granted which were rolled over from the 1997 Pacer Logistics Stock Option
Plan. There are no cash-out provisions for the Company's common or preferred
stock in the event of exercise.
F-21
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The 1999 plan provided for initial grants to specified employees. The
aggregate number of shares subject to these initial grants was 985,500 and their
exercise price was $10.00 per share. The options were granted at fair value.
These initial grants were divided into three tranches, Tranche A, Tranche B and
Tranche C. Tranche A options vest in five equal installments on the date of the
grant's first five anniversary dates, provided the employee is employed by the
Company on each anniversary date. Tranche B options generally vest on the date
of grant's seventh anniversary date if the employee is employed by the Company
on that date. However, if on any of the grant's first five anniversary dates
certain per share target values are attained and the employee is employed by the
Company on that date, then 20% of the Tranche B options will vest. Accelerated
vesting of the Tranche B options is possible if a sale of the Company occurs
prior to the date of grant's fifth anniversary and the fair market value of the
per share consideration to be received by the shareholder equals or exceeds an
amount calculated in accordance with this plan. Tranche C options vest in
substantially the same manner as Tranche B options, including acceleration upon
a sale of the Company, except that the per share target values as of a given
anniversary date are increased. Options granted to non-employee directors vest
in four equal installments on the date of grant's first four anniversary dates.
In 1999, subsequent to the initial grants, 80,000 options were granted to
management personnel to purchase Pacer International, Inc. common stock at
$20.00 per share. The options were granted at an exercise price that exceeded
the fair value. The weighted-average grant-date fair value of these options was
$16.71 per share. In addition, 24,000 options with an exercise price of $10.00
per share were forfeited due to employee resignations.
During 2000, 151,500 options were granted under the plan to management
personnel to purchase Pacer International, Inc. common stock at $20.00 per
share, and 145,000 options were granted to management personnel at $25.00 per
share. All of the 151,500 $20.00 options were granted at below market price. The
weighted-average grant-date fair value of these options was $20.10 per share.
The $25.00 exercise price options were granted at an exercise price that
exceeded the fair value. The weighted-average grant-date fair value of these
options was $22.72 per share. Options forfeited due to employee resignations
were 301,000 options with an exercise price of $10.00 per share, and 15,000
options with an exercise price of $20.00 per share. Certain members of
management exercised 287,373 options to purchase Pacer International Inc. common
stock at an average exercise price of $1.22 per share, and 54,000 options were
exercised by management at $10.00 per share. In addition, certain members of
management exercised 17,499 Pacer International, Inc. preferred stock options
with an exercise price of $9.00 per share. The Company elected, at its
discretion, to repurchase and retire the preferred stock that arose from the
exercise of the options. Included in selling, general and administrative
expenses on the Statement of Operations is $53,904 and $22,000 of amortization
of unearned compensation for 2001 and 2000, respectively.
During 2001, 279,000 options were granted under the plan to management
personnel to purchase Pacer International, Inc. common stock at $25.00 per
share. The options were granted at fair value. Options forfeited due to employee
resignations were 67,000 options with an exercise price of $10.00 per share,
65,000 options with an exercise price of $20.00 per share and 5,000 options with
an exercise price of $25.00 per share. Certain members of management exercised
182,874 options to purchase Pacer International Inc. common stock at an average
exercise price of $0.22 per share, and 500 options were exercised by management
at $10.00 per share. In addition, certain members of management exercised 27,498
Pacer International, Inc. preferred stock options with an exercise price of
$9.00 per share. The Company elected, at its discretion, to repurchase and
retire the preferred stock that arose from the exercise of the options.
As of December 28, 2001, 66,886 options remain available for future grant
under the plan.
F-22
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A vested option that has not yet been exercised will automatically
terminate on the first to occur of the grant's tenth anniversary, ninety days
following the employee's termination of employment for any reason other than
death or disability, twelve months following the employee's termination of
employment due to death or disability, or as otherwise determined by the
committee.
Each option that is vested as of the date of the sale of the Company
remains exercisable until the sale's closing, after which time such option is
unenforceable. Non-vested Tranche A, Tranche B and Tranche C options will vest
in accordance with the vesting schedules described above, however, an option
that vests after the Company is sold will remain exercisable for 10 days before
such portion of the option terminates and is of no further force or effect. All
options granted under this plan are nontransferable except upon death, by such
employee's will or the laws of descent and distribution, or transfers to family
members of the employee that are approved by the committee.
This plan has a term of ten years, subject to earlier termination by the
Board of Directors, who may modify or amend this plan in any respect, provided
that no amendment or modification affects an option already granted without the
consent of the option holder.
F-23
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the transactions of the Pacer
International, Inc. 1999 Stock Option Plan adopted May 28, 1999 as of
December 28, 2001.
Weighted Weighted
Avg.Exercise Avg.Exercise
Common Price- Preferred Price-
Stock Common Stock Preferred
---------- -------------- -------------- ---------------
Balance at December 25, 1998 ......... - - - -
Options rolled over .................. 562,861 $ 2.27 44,997 $ 9.00
Granted .............................. 1,065,500 $ 10.75 - -
Cancelled or expired ................. (24,000) $ 10.00 - -
---------- -------------- -------------- ---------------
Balance at December 31, 1999 ......... 1,604,361 $ 7.79 44,997 $ 9.00
========== ============== ============== ===============
Options exercisable, end of year ..... 143,158 $ 4.67 9,999 $ 9.00
Granted .............................. 296,500 $ 22.40 - -
Canceled or expired .................. (316,000) $ 10.47 - -
Exchanged ............................ - - - -
Exercised ............................ (341,373) $ 2.61 (17,499) $ 9.00
---------- -------------- -------------- ---------------
Balance at December 29, 2000 ......... 1,243,488 $ 12.02 27,498 $ 9.00
========== ============== ============== ===============
Options exercisable, end of year ..... 206,030 $ 10.38 9,999 $ 9.00
Granted .............................. 279,000 $ 25.00 - -
Canceled or expired .................. (137,000) $ 15.29 - -
Exchanged ............................ - - - -
Exercised ............................ (183,374) $ 0.25 (27,498) $ 9.00
---------- -------------- -------------- ---------------
Balance at December 28, 2001 ......... 1,202,114 $ 16.45 - -
========== ============== ============== ===============
Options exercisable, end of year ..... 257,781 $ 10.87 - -
Options available for future grant.... 66,886 - -
The following table summarizes information about stock options outstanding at
December 28, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life (Months) Price Exercisable Price
- ------------------------- --------------- --------------- -------------- ------------- -----------------
Common Stock
------------
$ 8.61 29,364 85 $ 8.61 29,364 $ 8.61
$ 10.00 602,250 88 $ 10.00 204,517 $ 10.00
$ 20.00 151,500 99 $ 20.00 18,900 $ 20.00
$ 25.00 419,000 109 $ 25.00 5,000 $ 25.00
--------------- -------------
Total 1,202,114 97 $ 16.45 257,781 $ 10.87
F-24
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A total of 80,000 non-plan options were granted upon consummation of the
RFI acquisition on October 31, 2000. These options vested immediately and were
exercisable on or before June 30, 2001. These options expired during 2001.
The Company applies APB Opinion 25 interpretations in accounting for its
stock option plans. Had compensation expense been determined for the stock
options granted in 2000 and 1999 based on the fair value at grant date
consistent with SFAS 123 "Accounting for Stock-Based Compensation", the
Company's pro forma net income and earnings per share for 2000 and 1999 would
not have been significantly different.
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing with the following
weighted-average assumptions for grants: dividend yield of 0.0%, risk-free
interest rate of 4.9% and expected life of 7 years (in determining the "minimum
value", SFAS 123 does not require the volatility of the Company's common stock
underlying the options to be calculated or considered because the Company is not
publicly traded).
F-25
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8. RELATED PARTY TRANSACTIONS
The following table summarizes related party transactions recorded in the
Statements of Operations.
Fiscal Year Ended
---------------------------------------------------
December 28, December 29, December 31,
Related Party Type 2001 2000 1999
- ------------------------------- --------------------- --------------- ---------------- ------------------
Gross Revenues:
APL Limited Freight transportation $ 82.8 $ 90.6 $ 49.1
APL Limited Avoided repositioning 17.4 16.2 21.0
International freight
APL Limited Management fee 6.6 6.6 3.9
---------------- --------------- ------------------
Total related party revenues $ 106.8 $ 113.4 $ 74.0
================ =============== ==================
Operating Expenses:
Direct operating expenses:
Lease, maintenance
APL Limited and repair expense $ - $ - $ 7.0
---------------- --------------- ------------------
Selling, general and
administrative expenses:
APL Limited Corporate overhead $ - $ - $ 5.6
APL Limited Administrative services 1.0 0.6 1.1
APL Limited Information technolog
services 10.0 10.0 5.8
APL de Mexico, S.A. de
C.V. Agency services 0.1 2.7 1.8
Apollo Management Management fee 0.5 0.5 0.3
A&G Investments Facility lease 0.6 0.5 0.3
KU Realty, LLC Facility lease 1.8 1.8 -
Rich Hyland Facility lease - - 0.1
Perimeter West Facility lease 1.1 - -
---------------- --------------- ------------------
Total related party SG&A
expenses $ 15.1 $ 16.1 $ 15.0
---------------- --------------- ------------------
Interest Expense:
Keller Uchida Realty
Resources, LLC $5.0 Million Sub Note $ 0.4 $ 0.2 $ -
---------------- --------------- ------------------
Total related party expenses $ 15.5 $ 16.3 $ 22.0
================ =============== ==================
Management believes that the terms of the related party transactions listed
above were at fair market rates.
The Company provides intermodal services to APL Limited. These services
include moving containers from ports to inland points, moving containers from
inland points to ports, and repositioning empty containers. These transactions
were performed on a cost reimbursement basis. Thus, no revenues or expenses were
recognized for financial reporting purposes. Reimbursements amounted to $0,
$79.2 million and $273.6 million for the fiscal years ended December 28, 2001,
December 29, 2000 and December 31, 1999, respectively. The decrease in
reimbursement reflects the Company's transfer in April 2000 of the processing of
APL Limited's international traffic receivables and payables to APL Limited,
which had previously been included in the Company's balance sheet. This resulted
in a decrease in both accounts receivable and accounts payable of approximately
$33.0 million. The transfer to APL Limited was facilitated by changes in
computer software which were not previously available. The Company continues to
F-26
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
handle APL Limited's international traffic under contract for an annual
management fee of $6.6 million in 2001 and 2000 and $3.9 million in 1999.
Prior to the recapitalization, APL Land Transport Services, Inc.
("APLLTS") shared in expenses of the former parent for services including
systems support, office space and other corporate services. These expenses were
$5.6 million for the period ended May 28, 1999. In connection with the
recapitalization, the Company has signed long-term agreements with APL Limited
for administrative services such as billing and accounts receivable and payable
processing on a per transaction basis. For 2001, 2000 and the seven months ended
December 31, 1999, $1.0 million, $0.6 million and $1.1 million was paid for
these services, respectively. In addition, APL Limited is currently providing
the Company information technology under a long-term agreement for an annual fee
of $10.0 million. For the fiscal years ended December 28, 2001, December 29,
2000 and December 31, 1999, $10.0 million, $10.0 million and $5.8 million was
paid for these services, respectively.
In addition, the Company receives compensation from APL Limited for
the repositioning expense that APL Limited has avoided due to the Company using
APL Limited's containers in surplus locations. The total amount of revenue
recognized for these services was $17.4 million, $16.2 million and $21.0 million
for the fiscal years ended December 28, 2001, December 29, 2000 and December 31,
1999, respectively. At December 28, 2001 and December 29, 2000 $1.9 million and
$1.6 million was receivable from APL Limited, respectively.
The Company also provides services to the Automotive Division of APL
Limited. These services include moving containers primarily in the U.S.--Mexico
trade. The amount of revenue recognized for these services was $82.8 million,
$90.6 million and $49.1 million for the fiscal years ended December 28, 2001,
December 29, 2000 and December 31, 1999, respectively. At December 28, 2001 and
December 29, 2000, $4.7 million and $4.4 million was receivable from APL Limited
including related drayage and miscellaneous charges, respectively.
Prior to the recapitalization, APLLTS received an allocation for lease
and maintenance and repair expenses from APL Limited. These expenses were $7.0
million for the fiscal year ended December 31, 1999.
APL de Mexico, S.A. de C.V. (APL Mexico), a wholly owned Mexican
subsidiary of APL Limited, provides various agency services to the Company with
respect to its bills of lading in Mexico. Expenses recorded by the Company from
APL Mexico were $0.1 million, $2.7 million and $1.8 million for the fiscal years
ended December 28, 2001, December 29, 2000 and December 31, 1999, respectively.
At December 28, 2001 and December 29, 2000, $0 and $0.5 million was payable to
APL Mexico, respectively. Effective in 2001, the Company began using Pacer de
Mexico S.A. de C.V. (Pacer Mexico), a wholly owned Mexican subsidiary of the
Company, to handle the services previously provided by APL Mexico.
The Company has entered into a management agreement with Apollo
Management ("Apollo"), an affiliate of our principal shareholder, for financial
and strategic services as the Board of Directors may reasonably request. The
annual fee which has been paid for these services for the years ended December
28, 2001 and December 29, 2000 was $0.5 million, and for the partial year ended
December 31, 1999 was $0.3 million. In addition, the Company paid Apollo a fee
of $1.5 million in 1999 in connection with the recapitalization.
The Company leases a facility consisting of office, warehousing and
trucking space from A&G Investments, a California general partnership of which
Messrs. Goldfein and Steiner are the only partners. Mr. Goldfein is a
stockholder and a former Director and Executive Vice President of the Company.
Mr. Steiner is a stockholder and a former Executive Vice President of the
Company. Lease payments were $0.6 million, $0.5 million and $0.3 million for the
years ended
F-27
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 28, 2001, December 29, 2000 and December 31, 1999, respectively.
The Company leases warehouse and dock facilities in Southern California
from KU Realty, Inc. which is owned by Messrs. Keller and Uchida. Mr. Keller is
a stockholder and President of the Freight Consolidation and Handling Division
of the Company. Lease payments were $1.8 million for the years ended December
28, 2001 and December 29, 2000.
In July 2001, February 2001 and August 2000 the Company paid scheduled
semi-annual interest payments amounting to $0.4 million in 2001 and $0.2 million
in 2000 to Mr. Keller on the $5.0 million 8.0% subordinated note issued in
January 2000 as part of the purchase price for the acquisition of Conex assets.
In April 2000, the Company repaid $0.4 million, including accrued
interest, in notes payable to Messrs. Orris, Angeli and Cross. The notes were
part of the purchase price for Pacer Logistics acquired on May 28, 1999.
The Company leased a facility consisting of office space from Richard
P. Hyland, a stockholder and a former Executive Vice President of the Company.
Such lease was pursuant to an oral agreement and was on a month-to-month basis.
The lease terminated on December 31, 1999.
In connection with the acquisition of Rail Van, the Company assumed a
lease that had been entered into by Rail Van with an entity associated with
Messrs. Bruncak and Brashares and certain former shareholders of Rail Van. This
lease commenced in April, 2001, with an annual rental payment of approximately
$1.3 million. Lease payments were $1.1 million for the year ended December 28,
2001.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings, claims and assessments,
including environmental, arising in the normal course of its business
activities. However, management believes none of these items will have a
material adverse impact on the Company's consolidated financial position,
results of operations or liquidity.
Two subsidiaries of Pacer Logistics, Interstate Consolidation, Inc. and
Intermodal Container Service, Inc., were named defendants in a class action
filed in July 1997 in the State of California, Los Angeles Superior Court,
Central District, alleging, among other things, breach of fiduciary duty, unfair
business practices, conversion and money had and received in connection with
monies allegedly wrongfully deducted from truck drivers' earnings. The
defendants entered into a Judge Pro Tempore Submission Agreement dated as of
October 9, 1998, pursuant to which the plaintiffs and defendants have waived
their rights to a jury trial, stipulated to a certified class, and agreed to a
minimum judgement of $250,000 and a maximum judgement of $1.75 million. On
August 11, 2000, the Court issued its Statement of Decision, in which Interstate
Consolidation, Inc. and Intermodal Container Service, Inc. prevailed on all
issues except one. The only adverse ruling was a Court finding that Interstate
failed to issue certificates of insurance to the owner-operators and therefore
failed to disclose that in 1998, Interstate's retention on its liability policy
was $250,000. The court has ordered that restitution of $488,978 be paid for
this omission. The court entered judgment on the August 11, 2000 decision on
January 23, 2002. Plaintiffs' counsel has indicated that he intends to appeal
the entire ruling and we intend to appeal the restitution issue. Based upon
information presently available and in light of legal and other defenses and
insurance coverage, management does not expect these legal proceedings, claims
and assessments, individually or in the aggregate, to have a material adverse
impact on the Company's consolidated financial position, results of operations
or liquidity.
F-28
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10. SEGMENT INFORMATION
The Company has two reportable segments, the wholesale segment and the
retail segment, which have separate management teams and offer different but
related products and services. The wholesale segment provides intermodal rail
service in North America by selling intermodal service to shippers pursuant to
agreements with intermodal rail trains. The retail segment provides trucking
services, intermodal marketing, freight consolidation and handling,
international freight forwarding and supply chain management services. Prior to
May 28, 1999, the Company had only one reportable segment, the wholesale
segment.
International revenues generated by the Company's retail segment for 2001
were $108.8 million in Europe and $7.6 million in Canada. The Company's
wholesale segment generated $54.5 million in revenues for 2001 from Mexico. For
2000, revenues generated from RFI's international operations since acquisition
were $18.0 million. The Company's wholesale segment generated $51.7 million in
revenues for 2000 from Mexico and the retail segment generated $12.4 million
from Canada. The Company's asset base is predominantly in the United States.
The following table presents reportable segment information for the fiscal
years ended December 28, 2001, December 29, 2000 and December 31, 1999 (in
millions).
Wholesale Retail Other Consolidated
------------ ---------- ----------- ----------------
Fiscal year ended December 28, 2001
Gross revenues ................................. $ 808.8 $ 952.8 $ (90.7) $ 1,670.9
Net revenues ................................... 187.9 143.4 331.3
Income from operations ......................... 37.1 15.5 (1.6) 51.0
Interest expense, net .......................... 22.1 17.5 39.6
Tax expense .................................... 4.8 (1.2) 3.6
Net income ..................................... 10.2 (0.8) (2.4) 7.0
Depreciation and amortization .................. 5.6 12.7 18.3
Capital expenditures ........................... 8.1 6.5 14.6
Total assets ................................... 439.7 258.1 (64.9) 632.9
Fiscal year ended December 29, 2000
Gross revenues ................................. $ 814.7 $ 503.9 $ (37.3) $ 1,281.3
Net revenues ................................... 183.2 92.5 275.7
Income from operations ......................... 49.7 13.7 63.4
Interest expense, net .......................... 25.3 8.8 34.1
Tax expense .................................... 12.5 0.4 12.9
Net income ..................................... 11.9 4.5 (1.6) 14.8
Depreciation and amortization .................. 5.4 6.2 11.6
Capital expenditures ........................... 2.0 3.5 5.5
Total assets ................................... 457.2 279.4 (78.2) 658.4
Fiscal year ended December 31, 1999
Gross revenues ................................. $ 713.2 $ 233.2 $ (18.7) $ 927.7
Net revenues ................................... 154.1 38.2 192.3
Income from operations ......................... 38.9 9.1 48.0
Interest expense, net .......................... 16.4 2.2 18.6
Tax expense .................................... 8.5 3.2 11.7
Net income ..................................... 14.0 3.7 (1.1) 16.6
Depreciation and amortization .................. 6.0 2.6 8.6
Capital expenditures ........................... 0.1 1.9 2.0
Total assets ................................... 391.7 139.9 (76.6) 455.0
F-29
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Data in the "Other" column includes elimination of intercompany balances,
subsidiary investment and additionally for 2001, the write-off of IPO costs. All
intersegment services are provided and purchased at quoted market rates.
For the year ended December 28, 2001 no customer contributed more than 10%
of the Company's total gross revenues. For the year ended December 29, 2000, the
Company had one customer which contributed more than 10% of the Company's total
gross revenues. Total gross revenues of $146.9 million were generated from Union
Pacific (generated by both reporting segments).
For the year ended December 31, 1999, the Company had two customers,
respectively which contributed more than 10% of the Company's total gross
revenues. Total gross revenues of $128.2 million were generated by the wholesale
segment from Hub Group and total gross revenues of $100.8 million were generated
from Union Pacific (generated by both reporting segments).
NOTE 11. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 28, 2001 and December 29, 2000 ($ in
millions):
2001 2000
------------ ------------
Railcars............................................ $ 26.9 $ 26.9
Containers and Chassis.............................. 26.6 27.2
Leasehold improvements and Other (including computer
hardware and software).............................. 33.6 20.2
------------ ------------
Total...................................... 87.1 74.3
Less: Accumulated Depreciation and Amortization.... (27.8) (17.8)
------------ ------------
Property and Equipment, net........................ $ 59.3 $ 56.5
============ ============
Depreciation and amortization of property and equipment was $10.8 million,
$6.9 million and $6.2 million for the years ended December 28, 2001, December
29, 2000 and December 31, 1999, respectively. The Company retired $0.8 million
and $0.5 million of accumulated depreciation associated with the sale of
containers and chassis in 2001 and 2000, respectively. Equipment under capital
lease are included above with a cost of $1.1 million and $1.0 million and
accumulated amortization of $0.7 million and $0.4 million at December 28, 2001
and December 29, 2000, respectively.
During 2001, the Company had capital expenditures of $14.6 million
primarily for wholesale and retail segment computer conversion and expansion.
The Company received $0.2 million from the sale of containers and other
equipment and retired $1.8 million of property during the year.
During 2000, the Company added $7.8 million in property and equipment due
to the acquisition of Conex assets, GTS, RFI and Rail Van. In addition, capital
expenditures of $5.5 million primarily for leasehold improvements and computer
and related equipment were incurred during 2000. The Company received $0.4
million from the sale of containers and other equipment during the year and
retired $0.8 million of property.
As part of the recapitalization of the Company and acquisition of Pacer
Logistics, the Company received $39.6 million in net proceeds from the sale and
leaseback of 199 railcars originally purchased in 1998. A deferred gain of $1.6
million was recorded upon sale and is being amortized over the 13 year life of
the lease. An additional $0.4 million was received from sales of other property
in 1999.
F-30
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 28, 2001 and December
29, 2000 were as follows (in millions):
2001 2000
-------------- -------------
Accounts Payable ............................................. $ 96.8 $ 102.7
Accrued Rail Liability ....................................... 31.8 37.5
Accrued Volume Rebates Payable ............................... 17.9 11.5
Accrued Equipment Maintenance and Lease ...................... 5.7 13.5
Accrued Acquisition Costs .................................... 2.1 8.1
Accrued Compensation and Benefits ............................ 4.1 6.7
Merger and Severance ......................................... 3.5 6.1
Accrued Interest Payable ..................................... 3.8 2.9
Other Accrued Liabilities .................................... 37.4 38.2
-------------- -------------
Total Accounts Payable and Accrued Liabilities ............. $ 203.1 $ 227.2
============== =============
NOTE 13. LEASES
The Company leases certain doublestack railcars, containers, chassis, data
processing equipment and other property. Future minimum lease payments under
noncancelable leases at December 28, 2001 for the five years subsequent to 2001
and thereafter are summarized as follows (in millions):
Capital Operating
Leases Leases
------------ -------------
2002..................................................... $ 0.3 $ 60.0
2003..................................................... 0.1 48.9
2004..................................................... - 44.0
2005..................................................... - 37.4
2006..................................................... - 32.5
Thereafter............................................... - 158.2
------------ -------------
Total Minimum Payments................................. 0.4 $ 381.0
=============
Less amount representing interest (at an
effective rate of 6%)................................... -
------------
Present value of minimum lease payments.................. $ 0.4
============
Rental expense was $85.6 million, $66.7 million and $50.4 million for the
fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999,
respectively. The net book value of property under capital lease at December 28,
2001 and December 29, 2000 was approximately $0.4 million and $0.6 million,
respectively.
On May 28, 1999 the Company received, as part of the Company's
recapitalization and acquisition of Pacer Logistics, $39.6 million in net
proceeds from the sale and leaseback (operating) of 199 railcars originally
purchased in 1998.
F-31
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company took delivery of 1,500 new 53-foot containers and chassis
financed through an operating lease in the fourth quarter of 1999. During 2000,
the Company received 4,156 leased containers and 3,425 leased chassis and
returned 1,470 primarily 48-ft leased containers and 506 leased chassis. In
addition, 593 owned 48-ft containers were retired. During 2001, the Company
received 1,100 leased containers and 80 leased chassis and returned 2,278
primarily 48-ft leased containers and 1,629 leased chassis.
The Company has entered into operating lease agreements for 1,300 railcars
during 2000 and 2001 as described below. All of the railcars have been received
and the Company does not anticipate ordering any additional railcars during
2002.
Lease Lease No. Received Received
Date Term Ordered In 2000 In 2001
----------- --------- ----------- ------------ ------------
9/1/2000 Monthly 200 200
10/4/2000 15 Yrs 250 85 165
1/2/01 5 Yrs 250 250
2/14/01 15 Yrs 100 100
6/19/01 15 Yrs 250 250
9/25/01 5 Yrs 250 250
----------- ------------ ------------
Total 1,300 285 1,015
=========== ============ ============
The two five-year term lease contracts have two additional five-year
renewal options. The leases include change of control provisions, however these
only apply if the new entity does not assume all of the obligations and when
certain financial requirements are not met, such as, for example, the new entity
maintaining a minimum net worth of $17.4 million or a Standard & Poor's credit
rating of at least B+. If these requirements were not met, the lessor would have
the right to retake the railcars and/or collect damages after disposal of the
equipment, if necessary, to recover costs associated with the lease of the
equipment.
The Company receives income from others for the use of its doublestack
railcars and containers. These income amounts are included in gross revenues.
Rental income was $52.5 million, $30.1 million and $16.9 million for the fiscal
years ended December 28, 2001, December 29, 2000 and December 31, 1999,
respectively.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows ($ in millions):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Dec. 28, 2001 Dec. 29, 2000 Dec. 31, 1999
--------------- --------------- ---------------
Cash Payments:
Interest.................. $ 35.3 $ 32.3 $ 15.4
Income Taxes.............. $ 1.0 $ 10.8 $ 2.5
F-32
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 15. MINORITY INTEREST
Pursuant to the Company's recapitalization and acquisition of Pacer
Logistics, 24,300 of Pacer Logistics' one million authorized shares of preferred
stock were issued to certain management shareholders of Pacer Logistics as 7.5%
exchangeable preferred stock on May 28, 1999. The remainder have been reserved
for issuance by Pacer Logistics as payment-in-kind dividends of 7.5% annually.
The preferred shares are convertible into 100 shares of Pacer International
common stock for each preferred share and may be converted at the holders option
until May 28, 2003. Subject to limitations under the Company's credit agreement,
the Company has the option to convert the Pacer Logistics exchangeable preferred
stock into Pacer International preferred stock or cash anytime after August 28,
2000. The shares are mandatorily redeemable for $1,000 per share by Pacer
International on May 28, 2009. Prior to conversion, the preferred stock of the
subsidiary has no voting rights.
Pursuant to the Second Amended and Restated Certificate of
Incorporation of Pacer Logistics, Inc. effective in May 2001, the Company, among
other things, extended the date that existing provisions apply, from May 28,
2001 to May 28, 2003 including the right to exchange deadline for the Series B
Exchangeable Preferred Stock of Pacer Logistics. The annual 7.5% paid-in-kind
dividends on the Series B Exchangeable Preferred Stock ceased to accrue as of
May 28, 2001 and were replaced by a cash only participation dividend which
accrue at a percentage of common stock dividends paid, if any.
NOTE 16. EARNINGS PER SHARE
The following table sets forth the computation of earnings per
share-basic and diluted (in millions, except share and per share amounts):
Fiscal year Fiscal year Fiscal year
Ended Ended ended
December 28, 2001 December 29, 2000 December 31, 1999
--------------------- ---------------------- ---------------------
Numerator:
Net income.......................................... $ 7.0 $ 14.8 $ 16.6
Less: Net income for the period January 1, 1999
Through May 28, 1999 (a)................. - - (8.5)
--------------------- ---------------------- ---------------------
Net income-basic.................................. $ 7.0 $ 14.8 $ 8.1
Minority interest................................. 0.8 1.6 1.1
--------------------- ---------------------- ---------------------
Numerator for earnings per share-diluted............ $ 7.8 $ 16.4 $ 9.2
===================== ====================== =====================
Denominator:
Denominator for earnings per share-basic-
Common shares outstanding....................... 11,498,231 10,970,770 10,440,000
Effect of dilutive securities:
Stock options................................... 410,901 587,749 813,982
Exchangeable preferred stock of subsidiary...... 2,234,844 2,234,844 2,234,844
--------------------- ---------------------- ---------------------
Denominator for earnings per share-diluted.......... 14,143,976 13,793,363 13,488,826
===================== ====================== =====================
Earnings per share-basic............................ $ 0.61 $ 1.35 $ 0.78
===================== ====================== =====================
Earnings per share-diluted.......................... $ 0.55 $ 1.19 $ 0.68
===================== ====================== =====================
F-33
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(a) Net income for the period from January 1, 1999 through May 28, 1999 has
been excluded as prior to the recapitalization on May 28, 1999 the Company
was a division of APL Limited and did not have common stock.
NOTE 17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As discussed in Note 4, in conjunction with the Company's
recapitalization and acquisition of Pacer Logistics on May 28, 1999 the Company
issued $150.0 million of 11.75% senior subordinated notes due June 1, 2007 and
entered into a credit agreement that provided for a seven-year $135.0 million
term loan due May 28, 2006 and a five-year $100.0 million revolving credit
facility due May 28, 2004. In addition, on December 22, 2000, the Company
entered into an amendment to the credit agreement that provided for an
additional term loan in the amount of $40.0 million that was borrowed to finance
the acquisition of Rail Van. The notes are fully and unconditionally guaranteed,
on a senior subordinated basis, jointly and severally, by each of the Company's
subsidiaries. The term loans and letters of credit under the credit agreement
are guaranteed by all of the existing and future direct and indirect
wholly-owned subsidiaries. The Company's obligations and the obligations of such
subsidiaries are collateralized by a first priority perfected lien on
substantially all of the Company's properties and assets and all of the
properties and assets of such subsidiaries, whether such properties and assets
are now owned or subsequently acquired, subject to exceptions.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and affiliates whose securities collateralize an issue
registered or being registered." This information is not intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with generally accepted
accounting principles.
Condensed Consolidating Statements of Operations
December 28, 2001 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Gross revenues.................................... $ 808.8 $ 952.8 $ (90.7) $ 1,670.9
Cost of purchased transportation and
services...................................... 620.9 809.4 (90.7) 1,339.6
----------- -------------- --------------- --------------
Net revenues...................................... 187.9 143.4 - 331.3
Operating expenses................................ 152.4 127.9 - 280.3
----------- -------------- --------------- --------------
Income (loss) from operations..................... 35.5 15.5 - 51.0
Interest expense.................................. 22.1 17.5 39.6
Equity in net earnings (losses) of subsidiaries... (1.6) - 1.6 -
----------- -------------- --------------- --------------
Income before income taxes and minority
Interest..................................... 11.8 (2.0) 1.6 11.4
Income taxes (benefit)............................ 4.8 (1.2) - 3.6
Minority interest................................. - 0.8 - 0.8
----------- -------------- --------------- --------------
Net income (loss)................................. $ 7.0 $ (1.6) $ (1.6) $ 7.0
=========== ============== =============== ==============
F-34
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 29, 2000 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Gross revenues ............................... $ 814.7 $ 503.9 $ (37.3) $ 1,281.3
Cost of purchased transportation and
services ................................. 631.5 411.4 (37.3) 1,005.6
----------- -------------- --------------- --------------
Net revenues ................................. 183.2 92.5 - 275.7
Operating expenses ........................... 133.5 78.8 - 212.3
----------- -------------- --------------- --------------
Income (loss) from operations ................ 49.7 13.7 - 63.4
Interest expense ............................. 25.3 8.8 - 34.1
Equity in net earnings (losses) of
subsidiaries.............................. 2.9 - (2.9) -
----------- -------------- --------------- --------------
Income before income taxes and minority
Interest ................................ 27.3 4.9 (2.9) 29.3
Income taxes (benefit) ....................... 12.5 0.4 - 12.9
Minority interest ............................ - 1.6 - 1.6
----------- -------------- --------------- --------------
Net income (loss) ............................ $ 14.8 $ 2.9 $ (2.9) $ 14.8
=========== ============== =============== ==============
December 31, 1999 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Gross revenues ............................... $ 713.2 $ 233.2 $ (18.7) $ 927.7
Cost of purchased transportation and
services ................................. 559.1 195.0 (18.7) 735.4
----------- -------------- --------------- --------------
Net revenues ................................. 154.1 38.2 - 192.3
Operating expenses ........................... 115.2 29.1 - 144.3
----------- -------------- --------------- --------------
Income (loss) from operations ................ 38.9 9.1 - 48.0
Interest expense ............................. 16.4 2.2 - 18.6
Equity in net earnings (losses) of
subsidiaries.............................. 2.6 - (2.6) -
----------- -------------- --------------- --------------
Income before income taxes and minority
Interest ................................ 25.1 6.9 (2.6) 29.4
Income taxes (benefit) ....................... 8.5 3.2 - 11.7
Minority interest ............................ - 1.1 - 1.1
----------- -------------- --------------- --------------
Net income (loss) ............................ $ 16.6 $ 2.6 $ (2.6) $ 16.6
=========== ============== =============== ==============
F-35
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Balance Sheets
December 28, 2001 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
ASSETS
Current assets ............................... $ 66.5 $ 162.9 $ (4.2) $ 225.2
Property and equipment, net .................. 45.1 14.2 - 59.3
Investment in subsidiaries ................... 239.5 - (239.5) -
Goodwill, net ................................ 23.3 258.2 - 281.5
Deferred income taxes ........................ 56.8 0.7 - 57.5
Other assets ................................. 8.5 0.9 - 9.4
----------- -------------- --------------- --------------
Total assets ................................ $ 439.7 $ 436.9 $ (243.7) $ 632.9
=========== ============== =============== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities .......................... $ 184.3 $ 25.0 $ (4.2) $ 205.1
Long-term debt ............................... 250.8 145.1 - 395.9
Other liabilities ............................ 1.6 1.6 3.2
Minority interest - exchangeable
preferred stock of a subsidiary ........... - 25.7 - 25.7
Total stockholders' equity (deficit) ......... 3.0 239.5 (239.5) 3.0
----------- -------------- --------------- --------------
Total liabilities and stockholders' equity ... $ 439.7 $ 436.9 $ (243.7) $ 632.9
=========== ============== =============== ==============
December 29, 2000 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
ASSETS
Current assets ............................... $ 79.9 $ 177.2 $ (15.4) $ 241.7
Property and equipment, net .................. 42.0 14.5 - 56.5
Investment in subsidiaries ................... 239.5 - (239.5) -
Goodwill, net ................................ 24.1 265.7 - 289.8
Deferred income taxes ........................ 62.2 (3.2) - 59.0
Other assets ................................. 9.5 5.1 (3.2) 11.4
----------- -------------- --------------- --------------
Total assets ................................ $ 457.2 $ 459.3 $ (258.1) $ 658.4
=========== ============== =============== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities .......................... $ 202.9 $ 42.3 $ (16.1) $ 229.1
Long-term debt ............................... 255.4 148.1 - 403.5
Other liabilities ............................ 1.8 1.9 3.7
Minority interest - exchangeable
preferred stock of a subsidiary ........... - 25.0 - 25.0
Total stockholders' equity (deficit) ......... (2.9) 242.0 (242.0) (2.9)
----------- -------------- --------------- --------------
Total liabilities and stockholders' equity ... $ 457.2 $ 459.3 $ (258.1) $ 658.4
=========== ============== =============== ==============
F-36
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Cash Flows
December 28, 2001 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Net cash provided by operating activities ...... $ 15.1 $ 6.7 $ - $ 21.8
Investing activities:
Capital expenditures ........................ (8.1) (6.5) - (14.6)
Proceeds from sales of property and
equipment .............................. 0.2 - - 0.2
----------- -------------- --------------- --------------
Net cash used in investing activities .......... (7.9) (6.5) - (14.4)
Financing activities:
Proceeds from issuance of common stock ....... 0.1 - - 0.1
Proceeds from issuance of preferred stock .... 0.2 - - 0.2
Repurchase of preferred stock ................ (0.2) - - (0.2)
Debt, revolving credit facility and capital
Lease obligation repayment ............... (7.3) (0.2) - (7.5)
----------- -------------- --------------- --------------
Net cash (used in) provided by financing
activities ............................... (7.2) (0.2) - (7.4)
Net increase (decrease) in cash and cash
equivalents .............................. - - - -
Cash and cash equivalents at beginning of
year ...................................... - - - -
----------- -------------- --------------- --------------
Cash and cash equivalents at end of
year ...................................... $ - $ - $ - $ -
=========== ============== =============== ==============
F-37
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 29, 2000 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Net cash provided by operating activities ...... $ 11.0 $ (9.8) - $ 1.2
Investing activities:
Acquisitions, net of cash acquired .......... (125.6) - - (125.6)
Capital expenditures ........................ (2.0) (3.5) - (5.5)
Proceeds from sales of property and
equipment .............................. 0.3 0.1 - 0.4
----------- -------------- --------------- --------------
Net cash used in investing activities .......... (127.3) (3.4) - (130.7)
Financing activities:
Checks drawn in excess of cash balances ...... (2.4) 13.3 - 10.9
Proceeds of long-term debt, net of costs ..... 122.6 - - 122.6
Proceeds from issuance of common stock ....... 0.9 - - 0.9
Proceeds from issuance of preferred stock .... 0.2 - - 0.2
Repurchase of preferred stock ................ (0.2) - - (0.2)
Debt, revolving credit facility and capital
Lease obligation repayment ............... (17.0) (0.1) - (17.1)
----------- -------------- --------------- --------------
Net cash (used in) provided by financing
activities ............................... 104.1 13.2 - 117.3
Net increase (decrease) in cash and cash
equivalents .............................. (12.2) - - (12.2)
Cash and cash equivalents at beginning of
year ...................................... 12.2 - - 12.2
----------- -------------- --------------- --------------
Cash and cash equivalents at end of
year ...................................... $ - $ - $ - $ -
=========== ============== =============== ==============
F-38
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999 (dollars in millions)
Guarantor Consolidating Consolidated
Parent Subsidiaries Adjustments Pacer
----------- -------------- --------------- --------------
Net cash provided by operating activities ....... $ 15.9 $ 4.9 $ - $ 20.8
Investing activities:
Acquisitions, net of cash acquired ........... (112.0) - - (112.0)
Capital expenditures ......................... (0.1) (1.9) - (2.0)
Proceeds from sales of property and
equipment ............................... 39.6 0.4 - 40.0
----------- -------------- --------------- --------------
Net cash used in investing activities ........... (72.5) (1.5) - (74.0)
Financing activities:
Proceeds of long-term debt, net of costs ...... 277.5 - - 277.5
Proceeds from issuance of common stock ........ 104.4 - - 104.4
Distribution to APL and recap costs ........... (310.4) (1.3) - (311.7)
Redemption of preferred stock of subsidiary . . - (2.0) - (2.0)
Debt, revolving credit facility and capital
Lease obligation repayment ................ (2.7) (0.1) - (2.8)
----------- -------------- --------------- --------------
Net cash (used in) provided by financing
activities ................................ 68.8 (3.4) - 65.4
Net increase (decrease) in cash and cash
equivalents ............................... 12.2 - - 12.2
Cash and cash equivalents at beginning of
year ....................................... - - - -
Cash and cash equivalents at end of
year ....................................... $ 12.2 $ - $ - $ 12.2
=========== ============== =============== ==============
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for each
of the quarters in 2001 and 2000 (in millions, except per share amounts):
Quarters
----------------------------------------------
First Second Third Fourth
--------- ----------- -------- ---------
Fiscal year ended December 28, 2001
Gross revenues............................. $ 440.3 $ 431.5 $ 398.1 $ 401.0
Net revenues............................... 80.9 80.8 80.3 89.3
Income from operations (a) ................ 11.4 14.2 11.4 14.0
Net income (loss)(a)....................... (0.4) 2.4 1.0 4.0
Basic earnings (loss) per share............ $ (0.04) $ 0.21 $ 0.09 $ 0.35
Diluted earnings (loss) per share (d)...... $ (0.04) $ 0.19 $ 0.07 $ 0.28
Fiscal year ended December 29, 2000 (b)
Gross revenues............................. $ 308.6 $ 299.6 $ 307.2 $ 365.9
Net revenues............................... 65.5 65.9 66.3 78.0
Income from operations (c) ............... 17.5 20.1 18.8 7.0
Net income (c)............................. 4.4 6.9 6.0 (2.5)
Basic earnings (loss) per share............ $ 0.41 $ 0.62 $ 0.54 $ (0.22)
Diluted earnings (loss) per share (d)...... $ 0.36 $ 0.52 $ 0.46 $ (0.22)
(a) In September, 2001 the Company recorded a $0.4 million merger and severance
charge as well as $4.0 million in other charges related to the
restructuring and consolidation of operations.
(b) 2000 amounts include the results of operations since acquisition for the
acquisitions of Conex assets on January 13, 2000, GTS on August 31, 2000,
RFI on October 31, 2000 and Rail Van on December 22, 2000.
(c) In December 2000 the Company recorded a $7.7 million merger and severance
charge for the consolidation and restructuring of the retail segment.
(d) Diluted earnings per share for the first quarter of 2001 and the fourth
quarter of 2000 excludes the effects of stock options and minority interest
as they were determined to be anti-dilutive. This differs from the
Company's first quarter 2001 Form 10-Q filed on May 17, 2001 and from the
fourth quarter amount shown in the Quarterly Financial Data footnote,
included in the Company's year 2000 annual report on Form 10-K filed on
March 29, 2001. The minority interest is now also considered antidilutive.
F-39
Schedule II
Pacer International, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(in millions)
Column A Column B Column C Column D Column E
- ----------------------------- ------------ ------------- ------------------------------ ------------
Balances at Additions Balances at
Beginning (Charged)/ End of
of Fiscal Credited to Fiscal
Description Period Income Deductions (1) Other Period
- ----------------------------- ------------ ------------- --------------- ----------- ------------
December 28, 2001
- -----------------
Allowance for doubtful
accounts.............. $ (9.0) $ (3.3) $ 5.3 $ (7.0)
December 29, 2000
- -----------------
Allowance for doubtful
accounts.............. $ (3.0) $ (1.8) $ 1.6 $ (5.8) (2) $ (9.0)
December 31, 1999
- -----------------
Allowance for doubtful
accounts.............. $ (0.7) $ (0.8) $ 0.4 $ (1.9) (3) $ (3.0)
- ---------
(1) Represents write-off of amounts.
(2) Represents the historical allowance recorded on Conex, GTS, RFI and Rail
Van books at the date of acquisition.
(3) Represents the historical allowance recorded on Pacer Logistics books at
the date of acquisition.
S-1
EXHIBIT INDEX
Exhibit Document Description
- --------------------------------------------------------------------------------
10.35 Employment Agreement dated as of January 16, 2002 between Pacer
International, Inc. and Charles T. Shurstad.
10.36 Employment Agreement dated as of August 22, 2001 between Pacer
International, Inc. and Michael Killea.
10.39 Rail Car Lease Agreement dated September 25, 2001 by and
between General Electric Railcar Services Corporation and the
Company.
10.40 Rail Car Lease Agreement dated January, 2001 by and between
LaSalle National Leasing Corporation and the Company.
10.41 Rail Car Lease Agreement dated February 14, 2001 by and between
Greenbrier Leasing Corporation and the Company.
10.42 Separation and Release Agreement dated as of December 31, 2001
between Pacer International, Inc. and Robert L. Cross.
21.1 Subsidiaries of Registrant