AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 2002 REGISTRATION NO. 333-53700 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- PACER INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) TENNESSEE 4731 62-0935669 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) 2300 CLAYTON ROAD, SUITE 1200 CONCORD, CALIFORNIA 94520 (887) 917-2237 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ----------------- DONALD C. ORRIS CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 5251 DTC PARKWAY, SUITE 1000 DENVER, COLORADO 80111 (303) 694-5730 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS) ----------------- WITH COPIES TO: JAMES M. LURIE JOHN A. TRIPODORO O'SULLIVAN LLP CAHILL GORDON & REINDEL 30 ROCKEFELLER PLAZA 80 PINE STREET NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10005 (212) 408-2400 (212) 701-3000 ----------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, please check the following box. [_] ----------------- CALCULATION OF REGISTRATION FEE ================================================================================ TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE ----------------------------------------------------------------------- Common stock, $0.01 par value $225,000,000.00 $37,500.00(1) ================================================================================ (1)Previously paid. ----------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED APRIL 11, 2002 SHARES PACER INTERNATIONAL, INC. COMMON STOCK ------------- We are selling shares of common stock and the selling stockholders are selling shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "PACR." The underwriters have an option to purchase a maximum of additional shares from the selling stockholders to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8. UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO AND PROCEEDS TO SELLING PUBLIC COMMISSIONS PACER STOCKHOLDERS -------- ------------ ----------- ------------ Per Share $ $ $ $ Total.... $ $ $ $ Delivery of the shares of common stock will be made on or about , 2002. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CREDIT SUISSE FIRST BOSTON BEAR, STEARNS & CO. INC. ------------- DEUTSCHE BANK SECURITIES JPMORGAN UBS WARBURG THE DATE OF THIS PROSPECTUS IS , 2002. [PHOTOS/GRAPHICS] ----------------- TABLE OF CONTENTS PAGE ---- PROSPECTUS SUMMARY..................... 1 RISK FACTORS........................... 8 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS................... 17 USE OF PROCEEDS........................ 18 DIVIDEND POLICY........................ 18 CAPITALIZATION......................... 19 DILUTION............................... 21 SELECTED FINANCIAL INFORMATION......... 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 25 BUSINESS............................... 42 MANAGEMENT............................. 59 PRINCIPAL AND SELLING STOCKHOLDERS..... 66 PAGE ---- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 69 DESCRIPTION OF CERTAIN INDEBTEDNESS 76 DESCRIPTION OF CAPITAL STOCK....... 80 SHARES ELIGIBLE FOR FUTURE SALE.... 87 MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK.................. 88 UNDERWRITING....................... 91 NOTICE TO CANADIAN RESIDENTS....... 94 LEGAL MATTERS...................... 95 EXPERTS............................ 95 ADDITIONAL INFORMATION............. 95 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................... F-1 ----------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2002 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. i The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. In this prospectus, "our company," "Pacer International," "we," "us" and "our" refer to Pacer International, Inc. and its consolidated subsidiaries, and "Pacer Logistics" refers to our subsidiary Pacer Logistics, Inc. References to our wholesale operations include our stacktrain operations and references to our retail operations include our intermodal marketing, truck brokerage and services, international freight forwarding, supply chain management services and freight consolidation and handling. This prospectus contains market data related to the transportation and logistics industries and their segments, including the third-party logistics market, and estimates regarding their size and growth. This market data has been included in reports published by organizations such as Standard & Poor's, Cass Information Systems, the American Trucking Association, the Association of American Railroads and Armstrong & Associates. Except as otherwise noted, statements as to our size and position relative to our competitors are based on revenues. ii PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BUT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. BEFORE INVESTING IN OUR COMMON STOCK, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS We are a leading North American non-asset based logistics provider. Within North America, we are one of the largest truck brokers, and we are one of the largest intermodal marketing companies, which facilitate the movement of freight by trailer or container using two or more modes of transportation. With one of the largest ground-based networks in North America, we were responsible for approximately 25% of all U.S. intermodal rail container shipments in 2001. According to Armstrong & Associates, total expenditures managed by third party logistics service providers in North America grew at a compounded annual rate of approximately 16% between 1998 and 2001. We believe our size, geographic scope and comprehensive service offering provide us with distinct competitive advantages to capitalize on this growth trend. These advantages include: the ability to pass volume rate savings and economies of scale to our customers; a significant opportunity to cross-sell services to existing customers; the flexibility to tailor services to our customers' needs in rapidly changing freight markets; and the ability to provide more reliable and consistent services. Using our proprietary information systems, we provide logistics services to numerous Fortune 500 and multi-national companies, including Ford, General Electric, Heinz, Wal-Mart, ConAgra, Whirlpool, Union Pacific, Sony and CompUSA, which together represented 23% of our 2001 gross revenues, as well as numerous middle-market companies. We utilize a non-asset based strategy in which we seek to limit our investment in equipment and facilities and reduce working capital requirements through arrangements with transportation carriers and equipment providers. This strategy provides us with access to freight terminals and facilities and control over transportation-related equipment without owning assets. We provide our logistics services from two operating segments, our retail segment which provides services principally to end-user customers and our wholesale segment which provides services principally to transportation intermediaries and international shipping companies. We believe the unique combination of our wholesale and retail products and our ability to provide a comprehensive portfolio of services in rapidly changing freight markets provides us with competitive advantages by presenting significant opportunities for enhanced growth and operational synergies. For example, from 2000 to 2001, revenues generated by our wholesale segment which were originated by our retail segment increased from approximately $37 million to $91 million. RETAIL . INTERMODAL MARKETING--We are one of the largest intermodal marketing companies in North America. We arrange for and optimize the movement of our customers' freight in containers and trailers utilizing truck and rail transportation. These services are provided both internally through our wholesale service and our truck brokerage and services division, and externally through third-party rail and truck carriers. We provide customized tracking of shipments and analysis of charges, negotiate transportation rates, consolidate billing and handle claims for freight loss or damage on behalf of our customers. . TRUCK BROKERAGE AND SERVICES--We are one of the largest truck brokers in North America. We arrange the movement of freight in containers or trailers by truck using a nationwide network of over 5,000 independent trucking contractors. By utilizing our aggregate volumes to negotiate rates, we are able to provide high quality service at attractive prices. We also arrange for local trucking and flatbed and specialized heavy-haul trucking services on behalf of our customers. Our local trucking services are largely provided in and around major U.S. cities as an integral part of our wholesale, intermodal marketing and freight consolidation and handling product offerings. We provide these services through our independent agents and contractors who operate a fleet of over 1,400 trucks. 1 . INTERNATIONAL FREIGHT FORWARDING--We provide our customers with services necessary to move freight internationally. We purchase cargo space from ocean vessels and airlines on a wholesale basis for resale to our customers. We also track and trace shipments and provide customs brokerage services, including documentation preparation and calculation of duties and other charges for compliance with import and export regulations. . SUPPLY CHAIN MANAGEMENT--We provide customized logistics services throughout our customers' operations, from raw material delivery through distribution of finished goods. We arrange for infrastructure and equipment, integrated with our customers' existing systems, to handle distribution planning, just-in-time delivery and automated ordering. We also provide and manage warehouses, distribution centers and other facilities for select customers and consult on identifying and eliminating bottlenecks in our customers' supply chains by analyzing freight patterns and costs, optimizing facility locations, and developing internal policies and procedures. We leverage these capabilities to drive additional volume to our service offerings. . FREIGHT CONSOLIDATION AND HANDLING--We focus on providing customers with an integrated package of freight handling services that is customized to their specific shipping patterns and inventory needs. Some of the more common freight handling services we provide include the transfer of freight from international containers to rail-based or truck containers (transloading), repackaging merchandise from various shipments for distribution to multiple customer sites (consolidation/deconsolidation) and warehousing. We provide these services primarily on the West coast where the majority of U.S. container freight originates. WHOLESALE . INTERMODAL SERVICES --We are the largest non-railroad provider of intermodal rail service in North America. We provide our customers with single company control over a 50,000 mile rail network through long term operating agreements with major railroads, including Union Pacific, CSX, Canadian National Railroad, and the two largest railroads in Mexico. Using this network, we transport cargo containers stacked two high on specially designed railcars (stacktrain method) which provides economic advantages over traditional rail configurations. We provide our customers with rail capacity, equipment and shipment tracking on a nationwide basis and control one of the industry's largest fleets of stacktrain equipment, including railcars, containers and chassis (steel frames with rubber tires used to transport containers over the highway). We sell this service primarily to intermodal marketing companies, including our own intermodal marketing company, large automotive intermediaries and international shipping companies. In 2001, we generated gross revenues of $1.7 billion, net revenues of $331.3 million and adjusted EBITDA of $76.2 million. As a result of strong industry trends and a disciplined acquisition strategy aimed at developing a comprehensive portfolio of logistics services, we have experienced considerable growth since our recapitalization in May 1999. A critical component of our growth is our management team which has an average of 25 years of experience in the logistics industry. We believe their knowledge, relationships and experience provide us with a significant competitive advantage. BUSINESS STRATEGY We intend to increase our revenue and profitability by: . CAPITALIZING ON STRONG LOGISTICS INDUSTRY TRENDS AND FUNDAMENTALS The highly fragmented logistics market is consolidating and rapidly growing. We believe we are well positioned to benefit from these trends as providers of single point to point or limited logistics 2 offerings will find it increasingly difficult to compete. As transportation management becomes increasingly sophisticated and the cost effectiveness of outsourcing increases, we believe companies will continue to seek full service supply chain management from a single company like us. According to Armstrong & Associates, total expenditures managed by third-party logistics service providers in North America exceeded $60 billion in 2001 and have grown at a 16% compounded annual rate over the last three years. We believe that our established market position, longstanding relationships with rail and truck carriers and our broad package of services will enable us to benefit from the expected continued growth in outsourcing of logistics functions. . LEVERAGING OUR COMPREHENSIVE SERVICE PORTFOLIO ACROSS OUR EXISTING CUSTOMER BASE Total expenditures by our customers on third-party logistics providers is such that capturing only a few additional percentage points of their total logistics expenditures would result in considerable growth for us. We believe that we can leverage our portfolio of services, track record, relationships and understanding of our existing customers' businesses to capture additional freight volume and provide additional logistics services. We also believe that the trend toward vendor consolidation will facilitate our ability to capture additional business from our existing customers. While we estimate that only 11% of our customer base currently uses more than one of our services, we have been successful in cross-selling services to several customers in the past year. For example, two of our leading retail customers began to use our wholesale product to move freight more economically out of Mexico and as a lower cost alternative to trucking and several intermodal customers began to use our services for their local trucking needs. . CONTINUING TO DRIVE OPERATIONAL EFFICIENCIES We initiated several new operating programs in 2001 that we believe will result in significant cost savings in the future. We have added a sales management function across our divisions to optimize profitability based on domestic freight flows. Within our wholesale segment, we have upgraded our process for collecting container use fees, transferred the management of the maintenance of our container and chassis fleet in house, dedicated a team to optimize container utilization and are in the process of installing an enterprise wide information technology system to replace an operating agreement with an outside party. In our retail segment, the consolidation of our rail and truck brokerage business on one system is expected to reduce systems costs per transaction and also allow multiple customers to utilize our supply chain management systems. In addition, we have established formal management processes and measures to increase utilization of our internal trucking and wholesale businesses across our divisions. . CONTINUING OUR NON-ASSET BASED LOGISTICS STRATEGY We will continue to utilize a non-asset based logistics strategy in which we limit our investment in equipment and facilities and reduce working capital requirements through contracts and operating arrangements with rail carriers, independent trucking operators and other contractors and leasing companies. In our retail business, third-party equipment owners and operators and railroads provide the actual transportation of freight that we arrange on behalf of our customers. Our wholesale business utilizes leased equipment, a majority of which can either be returned or terminated within 90 days or is associated with revenue generating arrangements. Our contracts provide us with access to freight terminals and facilities and control over transportation-related equipment without having to own them. We will continue to leverage our scale and our experience in managing large fleets of equipment owned by others to obtain favorable contract rates. Over the past two years, we generated average annual adjusted EBITDA of $79 million per year while our maintenance capital expenditures have averaged approximately $3 million per year. 3 . PURSUING OPPORTUNITIES FOR ADDITIONAL GROWTH In addition to capitalizing on industry growth trends and leveraging our existing service portfolio across our current customer base, we intend to grow our business by expanding our customer base and internally and externally developed services. Expanding our customer base--We believe that we will be able to leverage our size, breadth of service offerings and reputation to attract new customers. We believe that many companies who currently purchase logistics services from multiple sources or who are not currently using a third-party logistics provider will be attracted to an opportunity to shift to a single full-service logistics provider like us. We target customers by industry or key end-markets. This enables us to take advantage of our expertise in specific markets as well as target freight which is best suited for our service offerings. Expanding product offerings--In order to handle our customers' diverse logistics requirements, we intend to continue to increase our range of service offerings. Because we focus on providing customized solutions, we frequently assist customers in developing new processes and solving problems and through acquisitions and internal growth have expanded our product portfolio and geographic reach in response to our customers' needs. We believe that as the logistics market continues to consolidate, providers of a single point to point or limited logistics offering will find it increasingly difficult to compete which may increase the number of attractive acquisition opportunities. We intend to continue to invest in building our comprehensive portfolio of logistics services and geographic coverage internally or through opportunistic and accretive acquisitions to take advantage of growth opportunities. RISK FACTORS An investment in our common stock involves a high degree of risk. Potential investors should carefully consider the risk factors set forth under "Risk Factors" beginning on page 8 and the other information contained in this prospectus prior to making an investment decision regarding our common stock. We have operated as an independent, stand-alone company only since our recapitalization on May 28, 1999. From 1984 until our recapitalization, we only provided wholesale intermodal services as a wholly-owned subsidiary of APL Limited. On the date of our recapitalization, we began providing retail and logistics services to customers through our acquisition of Pacer Logistics, at which Don Orris, our Chairman, President and Chief Executive Officer, and other members of our senior management team, were executive officers. As a result of the substantial change in our business resulting from the recapitalization and our acquisition of Pacer Logistics, our historical financial information prior to our recapitalization is not necessarily indicative of our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a separate, independent entity providing wholesale transportation services during the periods presented. CORPORATE INFORMATION We were incorporated in Tennessee on November 4, 1974. Our principal executive offices are located at 2300 Clayton Road, Suite 1200, Concord, California 94520 and our telephone number is 887-917-2237. Our website is located at www.pacer-international.com. Information contained on our website does not constitute a part of this prospectus. 4 THE OFFERING Common stock offered............................. shares by us shares by the selling stockholders Total offering................................ shares Common stock to be outstanding after the offering shares Use of proceeds.................................. We expect to use the net proceeds from this offering to us for the repayment of debt and other general corporate purposes. See "Use of Proceeds." We will not receive any proceeds from the sale of our common stock by the selling stockholders. Proposed Nasdaq National Market symbol........... PACR The number of shares of common stock to be outstanding after this offering is based on our shares of common stock outstanding as of December 28, 2001 after giving effect to the issuance of 2,234,844 shares of common stock upon the exchange of all outstanding shares of Pacer Logistics exchangeable preferred stock prior to the consummation of this offering, based on an exchange rate of 100 shares of common stock for each outstanding share of Pacer Logistics exchangeable preferred stock. The number of shares to be outstanding after the offering excludes: . 1,202,114 shares of common stock issuable upon the exercise of options outstanding as of December 28, 2001 under our stock option plan, at exercise prices ranging from $8.61 to $25.00 per share, with a weighted average exercise price of $16.45; and . 66,886 shares of common stock reserved for future grant under our stock option plan. Unless otherwise indicated, all share and per share information in this prospectus gives effect to an amendment to our existing charter to increase the number of authorized shares of common stock to 150,000,000 shares and the declaration of a for stock split of the common stock to be effected prior to the effective date of the registration statement of which this prospectus is a part. Except as otherwise indicated in this prospectus, we have presented the information in this prospectus on the assumption that the underwriters do not exercise their over-allotment option. 5 SUMMARY HISTORICAL FINANCIAL INFORMATION The following table presents our summary historical financial information. The summary historical data at December 28, 2001 and for the three years ended December 28, 2001 have been derived from, and should be read in conjunction with, our audited financial statements and related notes appearing elsewhere in this prospectus. The following information should be read in conjunction with "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. YEAR ENDED --------------------------------------- DECEMBER 31, DECEMBER 29, DECEMBER 28, 1999(A) 2000(B) 2001 ------------ ------------ ------------ (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Gross revenues................................. $ 927.7 $ 1,281.3 $ 1,670.9 Cost of purchased transportation and services.. 735.4 1,005.6 1,339.6 ----------- ----------- ----------- Net revenues................................... 192.3 275.7 331.3 Direct operating expenses...................... 76.8 90.4 101.7 Selling, general and administrative expenses... 58.9 102.6 155.9 Depreciation and amortization.................. 8.6 11.6 18.3 Merger and severance........................... -- 7.7 0.4 Other.......................................... -- -- 4.0 ----------- ----------- ----------- Income from operations......................... 48.0 63.4 51.0 Net income..................................... $ 16.6 $ 14.8 $ 7.0 Earnings per share: Basic(c)..................................... $ 0.78(d) $ 1.35 $ 0.61 Diluted(c)................................... $ 0.68(d) $ 1.19 $ 0.55 Weighted average common shares outstanding: Basic........................................ 10,440,000 10,970,770 11,498,231 Diluted...................................... 13,488,826 13,793,363 14,143,976 OTHER FINANCIAL DATA: EBITDA(e)...................................... $ 56.6 $ 75.0 $ 69.3 EBITDA margin(f)............................... 29.4% 27.2% 20.9% Adjusted EBITDA(g)............................. $ 57.3 $ 82.7 $ 76.2 Adjusted EBITDA margin(f)...................... 29.8% 30.0% 23.0% Capital expenditures(h)........................ $ 2.0 $ 5.5 $ 14.6 Cash provided by operating activities.......... 20.8 1.2 21.8 Cash (used in) investing activities............ (74.0) (130.7) (14.4) Cash provided by (used in) financing activities 65.4 117.3 (7.4) AS OF DECEMBER 28, 2001 ------------------ AS ACTUAL ADJUSTED(I) ------ ----------- BALANCE SHEET DATA: Working capital.............................................. $ 20.1 Total assets................................................. 632.9 Total debt including capital leases and current maturities... 397.9 Minority interest--exchangeable preferred stock of subsidiary 25.7 -- Total stockholders' equity................................... 3.0 -------- (a)Includes the results of Pacer Logistics since acquisition on May 28, 1999. (b)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. (c)For the year ended December 31, 1999, the pre-tax one-time bonus payment of $0.7 million affected basic earnings per share by $0.04, and diluted earnings per share by $0.03. For the year ended December 29, 2000, the pre-tax merger and severance charge of $7.7 million affected basic earnings per share by $0.39, and diluted earnings per share by $0.31. For the year ended December 28, 2001, the pre-tax one-time charges of $6.9 million affected basic earnings per share by $0.41, and diluted earnings per share by $0.34. (d)Net income of $8.5 million for the period from January 1, 1999 through May 28, 1999 has been excluded as prior to our 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. 6 (e)EBITDA represents income before income taxes, interest expense, depreciation and amortization and minority interest (payment-in-kind dividends on Pacer Logistics' 7.5% exchangeable preferred stock). EBITDA is presented because it is commonly used by investors to analyze and compare operating performance and to determine a company's ability to service and/or incur debt. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (f)EBITDA margins and adjusted EBITDA margins are calculated as a percentage of net revenues. (g)Adjusted EBITDA represents EBITDA as defined in note (d) above adjusted for the elimination of one-time bonus payments of $0.7 million related to the acquisition of Pacer Logistics for the year ended December 31, 1999, merger and severance charges of $7.7 million for the year ended December 29, 2000, and merger, severance and other one-time charges of $6.9 million for the year ended December 28, 2001. (h)Capital expenditures for the year ended December 28, 2001 included $7.2 million for the conversion from APL Limited's computer systems to a stand-alone system for the wholesale segment, $3.5 million for the expansion of the Rail Van, Inc. computer systems and $1.1 million for new offices associated with our warehousing facilities. Capital expenditures for the year ended December 29, 2000 included $2.3 million for leasehold improvements. Excluding these amounts, capital expenditures would have been $2.8 million and $3.2 million for the years ended December 28, 2001 and December 29, 2000, respectively. (i)As adjusted for this offering, the repayment of borrowings under our credit facility with the net proceeds from this offering and the exchange of all Pacer Logistics' exchangeable preferred stock for shares of our common stock prior to consummation of this offering. 7 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, WHICH WE BELIEVE ARE THE MATERIAL RISKS FACING US. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND, THEREFORE, YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISK FACTORS RELATING TO THE COMMON STOCK AND THE OFFERING WE HAVE A SINGLE STOCKHOLDER WHO CAN SUBSTANTIALLY INFLUENCE THE OUTCOME OF ALL MATTERS VOTED UPON BY OUR STOCKHOLDERS AND PREVENT ACTIONS WHICH A STOCKHOLDER MAY OTHERWISE VIEW FAVORABLY. Upon consummation of this offering, Apollo Management, L.P. will beneficially own approximately % of our outstanding common stock ( % if the underwriters' overallotment option is exercised in full). As a result, Apollo Management will be able to substantially influence all matters requiring stockholder approval, including the election of directors, the approval of significant corporate transactions, such as acquisitions, the ability to block an unsolicited tender offer and any other matter requiring a supermajority vote of stockholders. This concentration of ownership could delay, defer or prevent a change in control of our company or impede a merger, consolidation, takeover or other business combination which you, as a stockholder, may otherwise view favorably. BECAUSE WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS, A CHANGE IN CONTROL OF OUR COMPANY THAT YOU AS A STOCKHOLDER MAY CONSIDER FAVORABLE COULD BE PREVENTED. Provisions of our restated charter and amended bylaws may discourage, delay or prevent a change in control of our company that a stockholder may consider favorable. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. These provisions include: . authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares in order to thwart a takeover attempt; . a classified board of directors with staggered, three-year terms, which may lengthen the time required to gain control of the board of directors; . prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; . requiring super-majority voting to effect particular amendments to our restated charter and amended bylaws; . limitations on who may call special meetings of stockholders; . prohibiting stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; . establishing advance notice requirements for nominations of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and . prohibiting business combinations with interested stockholders unless particular conditions are met. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. In addition, the Tennessee Greenmail Act may discourage, delay or prevent a change in control of our company. 8 THERE HAS NOT BEEN A PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND WE CANNOT ASSURE YOU THAT AN ACTIVE PUBLIC MARKET WILL DEVELOP. Our common stock is a new issue of securities for which there is currently no trading market. Although we expect our common stock to be quoted on The Nasdaq Stock Market's National Market, an active trading market for our common stock may not develop or be sustained following this offering. Moreover, even if an active market does develop, stockholders may not be able to resell their shares at prices equal to or greater than the initial public offering price. FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE. The market price of our common stock could decline as a result of sales by our existing stockholders of a large number of shares of our common stock in the market after this offering or the perception that such sales may occur. These sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate. There will be approximately shares of common stock outstanding immediately after this offering. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, except for shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. The remaining shares will be "restricted securities" as defined in Rule 144. Subject to the 180-day lock-up agreement with the underwriters, these restricted securities may be sold in the future without registration under the Securities Act to the extent permitted under Rule 144 and Rule 701 under the Securities Act. Commencing 180 days after the date of this prospectus, approximately outstanding shares of these restricted securities will be eligible for sale under Rule 144 subject to applicable holding period, volume limitations, manner of sale and notice requirements set forth in applicable SEC rules and shares of the restricted securities will be saleable without regard to these restrictions under Rule 144(k). In addition, commencing 180 days after the date of this prospectus, stockholders holding approximately outstanding shares of these restricted securities will have registration rights which could allow those holders to sell their shares freely through a registration statement filed under the Securities Act. After this offering, we will have shares of common stock reserved for issuance under our stock option plan, of which options to purchase shares were outstanding as of December 28, 2001. Promptly following this offering, we intend to file a registration statement on Form S-8 to register these shares which, upon effectiveness, will permit substantial additional sales of shares of our common stock as these shares are issued. YOU WILL SUFFER AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE COMMON STOCK YOU PURCHASE. Prior investors have paid substantially less per share than the price in this offering. The initial public offering price is expected to be substantially higher than the net tangible book value per share of the outstanding common stock immediately after this offering. Accordingly, based on an assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of common stock in this offering will experience immediate and substantial dilution of approximately $ per share in net tangible book value of the common stock. In addition, there were outstanding stock options at December 28, 2001. If all of these options were exercised on the date of the closing of this offering, investors purchasing shares in this offering would suffer total dilution of $ per share. RISKS RELATED TO OUR BUSINESS WE ARE DEPENDENT UPON THIRD PARTIES FOR EQUIPMENT AND SERVICES ESSENTIAL TO OPERATE OUR BUSINESS AND IF WE FAIL TO SECURE SUFFICIENT EQUIPMENT OR SERVICES, 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 9 secure sufficient transportation equipment or transportation services from these third parties to meet our customers' needs, customers may 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. IF WE HAVE DIFFICULTY ATTRACTING AND RETAINING AGENTS AND INDEPENDENT CONTRACTORS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. We rely extensively on the services of agents and independent trucking 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 trucking contractors are good we may not be able to maintain our relationships with them. Contracts with agents and independent trucking contractors are, in most cases, terminable upon short notice by either party. If an agent terminates its relationship with us, some customers and independent trucking 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 trucking contractors with equally qualified persons. We compete with transportation service companies for the services of independent commission agents and with trucking companies for the services of independent trucking 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 trucking contractors resulting in increased compensation expenses to us and our competitors who also rely on them. In addition, because independent trucking 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. IF WE MAKE FUTURE ACQUISITIONS, THEY MAY BE FINANCED IN A WAY THAT DILUTES YOUR INVESTMENT IN US, REDUCES OUR REPORTED EARNINGS OR IMPOSES ADDITIONAL RESTRICTIONS ON OUR BUSINESS. As we did in the acquisitions of Conex and Rail Van in 2000, if we make future acquisitions, we may issue shares of capital stock that dilute other stockholders, incur debt, assume significant liabilities or create additional expenses related to intangible assets, any of which might reduce our reported earnings or reduce earnings per share and cause our stock price to decline. In addition, any financing that we might need for future acquisitions may be available to us only on terms that restrict our business. COMPETITION IN OUR INDUSTRY MAY CAUSE 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, shipping departments of our customers 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 the 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 10 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 net revenues and income from operations. OUR CUSTOMERS WHO ARE ALSO COMPETITORS COULD TRANSFER THEIR BUSINESS TO NON-COMPETITORS WHICH WOULD DECREASE OUR PROFITABILITY. As a result of our company operating in two distinct but related intermodal segments, we buy and sell transportation services from and to many companies with which we 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. It is possible that these customers could transfer their business away from us to other companies with which they do not compete. 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 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. A significant portion of the freight moved by us for our customers originates at ports on the West coast. Freight arriving at West coast ports must be offloaded from ships by longshoremen, none of whom are our employees. The longshoremen labor contracts expire on June 30, 2002. Any work stoppage or slowdown by the longshoremen at these West coast ports 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. 11 AS WE EXPAND OUR SERVICES INTERNATIONALLY, WE MAY BECOME SUBJECT TO 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 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 business and one of our current stockholders, supplies us with chassis from its equipment fleet which we manage 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 if we fail to 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 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. 12 IF WE LOSE KEY PERSONNEL AND QUALIFIED TECHNICAL STAFF, OUR ABILITY TO MANAGE 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. 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 OPERATIONS WHICH ARE NOT IN COMPLIANCE. We are licensed by the 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 operators 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 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 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 those 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. 13 OUR OPERATING RESULTS ARE SUBJECT TO CYCLICAL FLUCTUATIONS AND OUR QUARTERLY REVENUES MAY ALSO FLUCTUATE, POTENTIALLY AFFECTING OUR STOCK PRICE. 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. Any unexpected reduction in revenues for a particular quarter could cause our quarterly operating results to be below the expectations of public market analysts or stockholders. In this event, the trading price of our common stock may fall significantly. IF THE MARKETS IN WHICH WE OPERATE DO NOT GROW, OUR BUSINESS COULD BE ADVERSELY AFFECTED. This prospectus contains market data related to the transportation and logistics industries and their segments, including the third-party logistics market, and estimates regarding their size and historical growth. This market data has been included in reports published by organizations such as Standard & Poor's, Cass Information Systems, Armstrong & Associates, the Association of American Railroads, and the American Trucking Association. These industry publications generally indicate that they have derived this data from sources believed to be reasonable, but do not guarantee the accuracy or completeness of the data. While we believe these industry publications to be reliable, we have not independently verified this data or any of the assumptions on which the estimates are based. The failure of these markets to continue to grow may have a material adverse effect on our business and the market price of our common stock. OUR DEBT LEVELS MAY LIMIT OUR FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING AND IN PURSUING OTHER BUSINESS OPPORTUNITIES. As of December 28, 2001 after giving effect to this offering and the exchange of all outstanding shares of Pacer Logistics exchangeable preferred stock for our common stock our long-term debt would have been approximately $ million, while our total capitalization would have been $ million. We also have the ability to incur new debt, subject to limitations under 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; . 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; 14 . 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; . 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. 15 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. 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 IDENTIFY, MAKE AND 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; . 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. In addition, we cannot assure you that we will be able to identify suitable acquisition candidates or be able to acquire them on reasonable terms or at all. 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. 16 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements 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 industries 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 and can be identified 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 all information currently available to us and 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, these forward-looking statements. 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 prospectus include: . general economic and business conditions; . industry trends; . increases in our leverage; . changes in our business strategy, development plans or cost savings plans; . our ability to integrate acquired businesses; . the loss of one or more of our major customers; . competition; . availability of qualified personnel; . changes in, or the failure to comply with, government regulations; and . the other factors discussed under "Risk Factors." You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus. 17 USE OF PROCEEDS Our net proceeds from this offering are estimated to be approximately $ million, assuming an offering price of $ per share, the midpoint of the range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated expenses of the offering. We intend to use the net proceeds to us from this offering to repay indebtedness outstanding under our credit agreement plus accrued interest as follows: . $39.7 million will be used to repay the outstanding principal amount of the $40 million term loan described below, . $28.8 million will be used to repay a portion of the $135 million term loan described below, and . $68.5 million will be used to repay borrowings under the revolving credit facility. At December 31, 2001, outstanding borrowings under our credit agreement totaled approximately $242 million, consisting of: . $171.7 million of term loans which represents the outstanding portions of the $135 million term loan incurred in May 1999 to finance a portion of our recapitalization and acquisition of Pacer Logistics and the $40 million term loan incurred in December 2000 to finance a portion of our acquisition of Rail Van. These term loans currently bear interest at the rate of 5.5% per annum and mature on May 28, 2006. . $70.8 million of borrowings under the revolving credit facility incurred to finance our acquisitions of Conex, GTS, RFI and Rail Van in January, August, October and December 2000, respectively. Borrowings under the revolving credit facility currently bear interest at the rate of 5.1% per annum and mature on May 28, 2004. We will not receive any proceeds for the sale of our common stock by the selling stockholders, including if the underwriters exercise the over-allotment option. DIVIDEND POLICY We have not paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings, if any, to repay debt or to finance the further expansion and continued growth of our business. In addition, our ability to pay cash dividends is currently restricted under the terms of our credit agreement and the indenture governing our senior subordinated notes. Future dividends, if any, will be determined by our board of directors. 18 CAPITALIZATION The following table sets forth our capitalization as of December 28, 2001: . on an actual basis; and . on an as adjusted basis to reflect the exchange of all outstanding shares of Pacer Logistics exchangeable preferred stock for 2,234,844 shares of our common stock and the sale by us of shares of our common stock in this offering at an assumed initial offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated expenses of the offering payable by us, and the application of the proceeds therefrom. You should read this table in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. DECEMBER 28, 2001 -------------- AS ACTUAL ADJUSTED ------- -------- (IN MILLIONS) Current maturities of long-term debt and capital leases............................. $ 2.0 $ ======= === Long-term debt: Capital leases..................................................................... $ 0.1 $ Senior credit facilities(1) Revolving credit facility........................................................ 70.8 -- Term loans....................................................................... 170.0 Senior subordinated notes(1)....................................................... 150.0 Subordinated note(2)............................................................... 5.0 ------- --- Total long-term debt......................................................... 395.9 ------- --- Minority interest-exchangeable preferred stock of subsidiary........................ 25.7 -- Stockholders' equity: Preferred stock: $0.01 par value; 1,000,000 shares authorized actual, 50,000,000 as adjusted; none issued and outstanding............................................ -- -- Common stock: $0.01 par value, 20,000,000 shares authorized actual, 150,000,000 as adjusted; 11,544,747 shares issued and outstanding actual, shares as adjusted 0.1 Additional paid-in capital......................................................... 118.6 Unearned compensation.............................................................. (0.3) Accumulated deficit................................................................ (114.3) (3) Other accumulated comprehensive income (loss)...................................... (1.1) ------- --- Total stockholders' equity....................................................... 3.0 ------- --- Total capitalization............................................................... $ 424.6 $ ======= === -------- (1)For a description of the senior credit facilities and the senior subordinated notes, see "Description of Certain Indebtedness." (2)Conex Global Logistics Services, Inc., one of our subsidiaries, issued an 8.0% Non-Negotiable Subordinated Note Due 2003 in the aggregate principal amount of $5.0 million to the former shareholders of Conex in connection with our acquisition of Conex in 2000. (3)Reflects the write-off of deferred loan costs in connection with repayment of indebtedness under our credit agreement. The write-off will be recognized in the quarter in which the offering is consummated and the indebtedness is repaid. 19 The foregoing table excludes: . 1,202,114 shares of common stock issuable upon the exercise of options outstanding as of December 28, 2001, at exercise prices ranging from $8.61 to $25.00 per share, with a weighted average exercise price of $16.45; and . 66,886 shares of common stock reserved for future grant under our stock option plan. 20 DILUTION Our net tangible book value as of December 28, 2001, after giving effect to the exchange of all outstanding shares of Pacer Logistics exchangeable preferred stock for 2,234,844 shares of our common stock, was $(278.5) million, or $(20.21) per share of common stock. We have calculated this amount by: . subtracting our total liabilities from our total tangible assets; and . then dividing the difference by the adjusted number of shares of common stock outstanding. If we give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us, our adjusted net tangible book value as of December 28, 2001 would have been $ million, or $ per share. This amount represents an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................................ $ Net tangible book value per share as of December 28, 2001................... $(20.21) Increase in net tangible book value per share attributable to new investors. ------- Net tangible book value per share after this offering.......................... -- Dilution per share to new investors............................................ $ == The following table summarizes on the basis described above, as of December 28, 2001, the difference between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors, at an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us: SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders(1) 13,779,591(2) % $144,051,552 % $10.45 New investors(1)........ ---------- --- ------------ --- Total................ % $ % ========== === ============ === -------- (1)Excludes shares of our common stock to be sold by the selling stockholders to the new investors in the offering for which we will not receive any net proceeds. (2)Includes 2,234,844 shares of common stock to be issued upon exchange of the Pacer Logistics exchangeable preferred stock prior to the effective date of the registration statement of which this prospectus is a part. If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to shares, or % of the total shares of common stock outstanding after this offering, the number of shares held by existing stockholders will be reduced to % of the total shares of common stock outstanding after this offering, and the dilution to new investors will be $ per share. The tables above assume no exercise of stock options outstanding on December 28, 2001. As of December 28, 2001, there were options outstanding to purchase 1,202,114 shares of common stock, at a weighted average exercise price of $16.45 per share. To the extent any of these options are exercised, there will be further dilution to new investors. If all of these outstanding options had been exercised as of December 28, 2001, net tangible book value per share after this offering would have been $ and total dilution per share to new investors would have been $ . 21 SELECTED FINANCIAL INFORMATION The following table presents, as of the dates and for the periods indicated, selected historical financial information for us and our predecessor as discussed below. The selected historical data at December 28, 2001 and December 29, 2000 and for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999 have been derived from, and should be read in conjunction with, our audited financial statements and related notes appearing elsewhere in this prospectus. The selected historical data at December 31, 1999, December 25, 1998 and December 26, 1997 and for the year ended December 25, 1998 and the periods from November 13, 1997 through December 26, 1997 and December 28, 1996 through November 12, 1997 have been derived from our, or our predecessor's, audited financial statements which are not included in this prospectus. Prior to our May 1999 recapitalization, our name was APL Land Transport Services, Inc., ("APLLTS") and we were a wholly-owned subsidiary of APL Limited. See note 1 to our audited financial statements included in this prospectus. Our 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 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, APLLTS was comprised of three operating divisions. In November, 1998, APLLTS transferred all of its non-stacktrain divisions to its parent, APL Limited. Accordingly, at the time of our May 1999 recapitalization, we only provided wholesale stacktrain services, but with our acquisition of Pacer Logistics, we began providing retail and logistics services to customers. The financial information for the year ended December 31, 1999 includes the results of operations of our wholesale stacktrain operations for the full year plus the results of Pacer Logistics since May 28, 1999, the date of acquisition. In connection with our recapitalization and acquisition of Pacer Logistics, we were renamed Pacer International and we ceased to be a subsidiary of APL Limited. The following table should also be read in conjunction with our audited financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. 22 THE PREDECESSOR -------------------- FOR THE PERIOD -------------------- DECEMBER 28, 1996 THROUGH NOVEMBER 12, 1997(A) -------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Gross revenues.............................. $523.8 Cost of purchased transportation and services................................... 407.5 ------ Net revenues................................ 116.3 Direct operating expenses................... 53.1 Selling, general and administrative expenses 21.4 Depreciation and amortization............... 3.0 Merger and severance........................ -- Other....................................... -- ------ Income from operations...................... 38.8 ------ Net income.................................. $ 22.9 Net income per share: Basic..................................... (d) Diluted................................... (d) Weighted average common shares outstanding: Basic..................................... (d) Diluted................................... (d) BALANCE SHEET DATA (AT END OF PERIOD): Working capital............................. $ -- Total assets................................ -- Total debt including capital leases and current maturities......................... -- Minority interest--exchangeable preferred stock of subsidiary........................ -- Total stockholders' equity (deficit)........ -- OTHER FINANCIAL DATA: EBITDA(f)................................... $ 41.8 EBITDA Margin(g)............................ 35.9% Adjusted EBITDA(h).......................... $ 41.8 Adjusted EBITDA margin (g).................. 35.9% Capital expenditures........................ $ -- Cash provided by operating activities....... 18.2 Cash provided by (used in) investing activities................................. 3.6 Cash provided by (used in) financing activities................................. (21.8) THE COMPANY ----------------------------------------------------------------- FOR THE YEAR YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED ------------ ------------ ------------ ------------ ------------ NOVEMBER 13, 1997 THROUGH DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 29, DECEMBER 28, 1997(A) 1998 1999(B) 2000(C) 2001 ------------ ------------ ------------ ------------ ------------ (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Gross revenues.............................. $ 60.7 $598.9 $ 927.7 $ 1,281.3 $ 1,670.9 Cost of purchased transportation and services................................... 47.4 466.3 735.4 1,005.6 1,339.6 ------ ------ ----------- ----------- ----------- Net revenues................................ 13.3 132.6 192.3 275.7 331.3 Direct operating expenses................... 7.4 64.5 76.8 90.4 101.7 Selling, general and administrative expenses 3.2 28.3 58.9 102.6 155.9 Depreciation and amortization............... 0.7 6.6 8.6 11.6 18.3 Merger and severance........................ -- -- -- 7.7 0.4 Other....................................... -- -- -- -- 4.0 ------ ------ ----------- ----------- ----------- Income from operations...................... 2.0 33.2 48.0 63.4 51.0 ------ ------ ----------- ----------- ----------- Net income.................................. $ 1.0 $ 20.6 $ 16.6 $ 14.8 $ 7.0 Net income per share: Basic..................................... (d) (d) $ 0.78(e) $ 1.35 $ 0.61 Diluted................................... (d) (d) 0.68(e) 1.19 0.55 Weighted average common shares outstanding: Basic..................................... (d) (d) 10,440,000 10,970,770 11,498,231 Diluted................................... (d) (d) 13,488,826 13,793,363 14,143,976 BALANCE SHEET DATA (AT END OF PERIOD): Working capital............................. $(32.5) $(37.2) $ (3.7) $ 12.6 $ 20.1 Total assets................................ 111.9 156.1 455.0 658.4 632.9 Total debt including capital leases and current maturities......................... -- -- 284.4 405.4 397.9 Minority interest--exchangeable preferred stock of subsidiary........................ -- -- 23.4 25.0 25.7 Total stockholders' equity (deficit)........ 29.6 55.6 (31.7) (2.9) 3.0 OTHER FINANCIAL DATA: EBITDA(f)................................... $ 2.7 $ 39.8 $ 56.6 $ 75.0 $ 69.3 EBITDA Margin(g)............................ 20.3% 30.0% 29.4% 27.2% 20.9% Adjusted EBITDA(h).......................... $ 2.7 $ 41.9 $ 57.3 $ 82.7 $ 76.2 Adjusted EBITDA margin (g).................. 20.3% 31.6% 29.8% 30.0% 23.0% Capital expenditures........................ $ -- $ 39.7 $ 2.0 $ 5.5 $ 14.6 Cash provided by operating activities....... 12.7 31.8 20.8 1.2 21.8 Cash provided by (used in) investing activities................................. -- (38.5) (74.0) (130.7) (14.4) Cash provided by (used in) financing activities................................. (12.7) 6.7 65.4 117.3 (7.4) 23 -------- (a)The following information for the year ended December 26, 1997 has been presented for comparative purposes only and is the combination of the December 28, 1996 to November 12, 1997 period, set forth above as the Predecessor, and the November 13, 1997 to December 26, 1997 period, set forth above as the Company. As a result of the change in ownership, these numbers are not indicative of what the full year 1997 was or would have been if the change in ownership had not occurred. 1997 ------ Gross revenues............................... $584.5 Cost of purchased transportation and services 454.9 Net revenues................................. 129.6 Income from operations....................... 40.8 Net income................................... 23.9 EBITDA(d).................................... 44.5 EBITDA margin(e)............................. 34.3% (b)Includes the results of Pacer Logistics, since acquisition on May 28, 1999. (c)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. (d)Not applicable as prior to our recapitalization we were a division of APL Limited and did not have common stock. (e)Net income of $8.5 million for the period 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. (f)EBITDA represents income before income taxes, interest expense, depreciation and amortization and minority interest (payment-in-kind dividends on Pacer Logistics' 7.5% exchangeable preferred stock). EBITDA is presented because it is commonly used by investors to analyze and compare operating performance and to determine a company's ability to service and/or incur debt. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (g)EBITDA margins and adjusted EBITDA margins are calculated as a percentage of net revenues. (h)Adjusted EBITDA represents EBITDA as defined in (f) above adjusted for non-recurring costs of $2.1 million for the year ended December 25, 1998, the elimination of one-time bonus payments of $0.7 million related to the acquisition of Pacer Logistics for the year ended December 31, 1999, merger and severance charges of $7.7 million for the year ended December 29, 2000, and merger, severance and other one-time charges of $6.9 million for the year ended December 28, 2001. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES AND THE OTHER FINANCIAL INFORMATION APPEARING IN THE BACK OF THIS PROSPECTUS. DUE TO OUR LIMITED OPERATING HISTORY, ACQUISITIONS AND RAPID GROWTH, PERIOD-TO-PERIOD COMPARISONS OF FINANCIAL DATA ARE NOT NECESSARILY INDICATIVE, AND YOU SHOULD NOT RELY UPON THEM AS AN INDICATOR OF OUR FUTURE PERFORMANCE. THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS, SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." 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 truck brokerage and 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 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 truck brokerage and 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 25 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 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 26 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. . 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 27 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 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. Our results for 2001 were negatively impacted by the continuation of the general economic downturn, and particularly a cyclical slowdown in the automotive sector. As a result, our intermodal marketing, truck brokerage and freight handling operations experienced reduced shipments from major retailers and other customers including Ford, Kmart and Bridgestone, and our wholesale operations were affected by reduced automotive shipments. Ford and Bridgestone were two key customers of our 2000 acquisitions. These factors have resulted in reduced shipments which have caused our actual results to be less than the pro forma results as presented in note 3 to the consolidated financial statements. 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. Gross revenues in our retail segment increased $448.9 million in fiscal year 2001 as compared to fiscal year 2000. The 2000 acquisitions of GTS, RFI and Rail Van represented $484.5 million of the increase in retail segment gross revenues. 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 truck service operations. The decrease in intermodal marketing, truck brokerage and freight handling primarily reflects the cyclical slowdown in the automotive sector. The truck service increase was due primarily to increased cross-selling business across our divisions additional J.C. Penney business in Los Angeles as well as the addition of two agents in the division. Wholesale segment gross revenues decreased $5.9 million, or 0.7%, reflecting an increase in wholesale third-party domestic operations offset by a decrease in wholesale automotive and wholesale international operations. The increase in the wholesale third-party domestic operations was a result of increased freight revenues from several intermodal marketing companies, including our intermodal marketing operations, as well as an increase in repositioning revenues of $3.6 million. The wholesale automotive operations decrease in freight revenues reflected the cyclical slowdown in the automotive sector, while the wholesale international operations decrease in freight revenue was primarily a result of the loss of low margin business of an international shipping customer. In the aggregate, freight revenues in the wholesale segment decreased $31.9 million, or 4.2%. This decrease was partially offset by increased ancillary revenues of $22.4 million from railcar rental and container per diem revenue associated with the increase in equipment in 2001. The freight revenue decrease reflected reduced container volumes of 19,151, or 2.7%, as well as a 1.6% decline in the average freight revenue per container. Container volume declines were due primarily to the reduction in automotive traffic resulting from the cyclical slowdown noted above, as well as the loss of the international shipping customer. The reduction in the average freight revenue per container resulted primarily from the elimination of the 3% fuel surcharge during 2001 as well as overcapacity in selected markets which increased competitive pressures to reduce transportation prices, principally in the first half of 2001. 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 and cross-selling activities. 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 retail segment net revenues, while the remaining retail segment operations decreased $12.4 million primarily 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 wholesale segment gross margin increased to 23.2% in 2001 from 22.5% in 2000 due primarily to the increase in ancillary services such as railcar rental and container per diem revenue partially offset by reduced margins on freight transportation associated with the elimination of the fuel surcharge during 2001 as well as competitive market pressures in the first half of 2001 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. 30 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 primarily as a result of increased expenses associated with the 2000 acquisitions as well as filling out the infrastructure of our wholesale division. 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 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 goodwill amortization expense was $7.5 million and $4.7 million for 2001 and 2000, respectively. We adopted SFAS 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." 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 cost savings associated with the plan were 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, borrowings 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 31 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. 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. As a result, we have not recognized any minority interest expense since that date. 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 33 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 31, 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 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 34 $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. 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 35 2000 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 $12.6 million at December 28, 2001 and December 29, 2000, respectively. Our operating cash flows are also the primary source for funding our contractual obligations. The table below summarizes our major commitments consisting of long-term debt, capital lease and operating lease requirements as of December 28, 2001 on an actual basis and as adjusted to give effect to this offering and the application of the proceeds therefrom to repay indebtedness under our credit facility. DEBT AND LEASE OBLIGATION PAYMENT REQUIREMENTS ($ IN MILLIONS) FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEARS TOTAL 2002 2003 2004 2005-2006 THEREAFTER - ------------- ------------ ------------ ------------ ------------- ------------- BEFORE/AFTER BEFORE/AFTER BEFORE/AFTER BEFORE/AFTER BEFORE/AFTER BEFORE/AFTER OFFERING OFFERING OFFERING OFFERING OFFERING OFFERING - ------------- ------------ ------------ ------------ ------------- ------------- Long-term debt...... $397.5/$260.5 $ 1.7/-- $ 6.8/$5.0 $ 72.5 /$2.2 $166.5/$103.3 $150.0/$150.0 Operating leases (1) $381.0/$381.0 $60.0/$60.0 $48.9/$48.9 $ 44.0/$44.0 $ 69.9/$69.9 $158.2/$158.2 Capital leases...... $ 0.4/$0.4 $ 0.3/$0.3 $ 0.1/$0.1 -- -- -- ------------- ----------- ----------- ------------ ------------- ------------- Total:........... $778.9/$641.9 $62.0/$60.3 $55.8/$54.0 $116.5/$46.2 $236.4/$173.2 $308.2/$308.2 ============= =========== =========== ============ ============= ============= -------- (1)These amounts represent the aggregate operating lease expense that will be reflected in our statement of operations during these periods to the extent these operating leases remain outstanding. 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. After giving effect to the repayment of borrowings under our revolving credit facility from the proceeds of this offering, 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 36 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. 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 $7.2 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 $3.6 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 our 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 our 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 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 37 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 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 3/4% 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 are generally 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 substantially all of 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 ===== === ===== 38 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 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, of which 80,000 have been cancelled. 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, of which 15,000 have been cancelled. 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 39 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. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued SFAS 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. 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 this management's discussion and analysis section and notes 1, 4 and 5 of the consolidated financial statements included in this prospectus describe significant aspects of our financial instrument programs which have a material market risk. 40 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 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 expands, 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. 41 BUSINESS OVERVIEW We are a leading North American non-asset based logistics provider. Within North America, we are one of the largest truck brokers, and we are one of the largest intermodal marketing companies, which facilitate the movement of freight by trailer or container using two or more modes of transportation. With one of the largest ground-based networks in North America, we were responsible for approximately 25% of all U.S. intermodal rail container shipments in 2001. According to Armstrong & Associates, total expenditures managed by third-party logistics service providers in North America grew at a compounded annual rate of approximately 16% between 1998 and 2001. We believe our size, geographic scope and comprehensive service offering provide us with distinct competitive advantages to capitalize on this growth trend. These advantages include: the ability to pass volume rate savings and economies of scale to our customers; a significant opportunity to cross-sell services to existing customers; the flexibility to tailor services to our customers' needs in rapidly changing freight markets; and the ability to provide more reliable and consistent services. Using our proprietary information systems, we provide logistics services to numerous Fortune 500 and multi-national companies, including Ford, General Electric, Heinz, Wal-Mart, ConAgra, Whirlpool, Union Pacific, Sony and CompUSA, which together represented 23% of our 2001 gross revenues, as well as numerous middle-market companies. We utilize a non-asset based strategy in which we seek to limit our investment in equipment and facilities and reduce working capital requirements through arrangements with transportation carriers and equipment providers. This strategy provides us with access to freight terminals and facilities and control over transportation-related equipment without owning assets. In 2001, we generated gross revenues of $1.7 billion, net revenues of $331.3 million and adjusted EBITDA of $76.2 million. As a result of strong industry trends and a disciplined acquisition strategy aimed at developing a comprehensive portfolio of logistics services, we have experienced considerable growth since our recapitalization in May 1999. A critical component of our growth is our management team which has an average of 25 years of experience in the logistics industry. We believe their knowledge, relationships and experience provide us with a significant competitive advantage. BUSINESS STRATEGY We intend to increase our revenue and profitability by: . CAPITALIZING ON STRONG LOGISTICS INDUSTRY TRENDS AND FUNDAMENTALS The highly fragmented logistics market is consolidating and rapidly growing. We believe we are well positioned to benefit from these trends as providers of single point to point or limited logistics offerings will find it increasingly difficult to compete. As transportation management becomes increasingly sophisticated and the cost effectiveness of outsourcing increases, we believe companies will continue to seek full service supply chain management from a single company like us. Manufacturer and retailers are facing increasingly complex supply chain management issues due to rapidly changing freight patterns, increased international trade and global sourcing, more prevalent just-in-time inventory systems, increasingly demanding customer fulfillment requirements and pressures to reduce costs. According to Armstrong & Associates, total expenditures managed by third-party logistics service providers in North America exceeded $60 billion in 2001 and have grown at a 16% compounded annual rate over the last three years. We believe that our established market position, longstanding relationships with rail and truck carriers and our broad package of services will enable us to benefit from the expected continued growth in outsourcing of logistics functions. . LEVERAGING OUR COMPREHENSIVE SERVICE PORTFOLIO ACROSS OUR EXISTING CUSTOMER BASE Total expenditures by our customers on third-party logistics providers is such that capturing only a few additional percentage points of their total logistics expenditures would result in considerable growth for us. We believe that we can leverage our portfolio of services, track record, relationships and understanding of our existing customers' businesses to capture additional freight volume and provide 42 additional logistics services. While we estimate that only 11% of our customer base currently uses more than one of our services, we have been successful in cross-selling services to several customers in the past year. For example, two of our leading retail customers began to use our wholesale product to move freight more economically out of Mexico and as a lower cost alternative to trucking and several intermodal customers began to use our services for their local trucking needs. We believe the unique combination of our wholesale and retail products and our ability to provide a comprehensive portfolio of services in rapidly changing freight markets provides us with competitive advantages by presenting significant opportunities for enhanced growth and operational synergies. We have dedicated a portion of our sales force to focus on selling additional services to our existing customers and have aligned our employee incentive program to encourage cross-selling. In addition, we have implemented new performance measurement tools to track on-time pick-up and delivery and claims management which allow our sales force to distinguish our high service reliability from our competitors. . CONTINUING TO DRIVE OPERATIONAL EFFICIENCIES We initiated several new operating programs in 2001 that we believe will result in significant cost savings in the future. We have added a sales management function across our divisions to optimize profitability based on domestic freight flows. Within our wholesale segment, we have upgraded our process for collecting container use fees, transferred the management of the maintenance of our container and chassis fleet in house, dedicated a team to optimize container utilization and are in the process of installing an enterprise wide information technology system to replace an operating agreement with an outside party. In addition, we feel that there exists considerable opportunity for additional cost savings from our recently acquired businesses. In our retail segment, the consolidation of our rail and truck brokerage business on one system is expected to reduce system costs per transaction and also allow multiple customers to utilize our supply chain management systems. We have also established formal management processes and measures to increase utilization of our internal trucking and wholesale businesses across our divisions. . CONTINUING OUR NON-ASSET BASED LOGISTICS STRATEGY We will continue to utilize a non-asset based logistics strategy in which we limit our investment in equipment and facilities and reduce working capital requirements through contracts and operating arrangements with rail carriers, independent trucking operators and other contractors and leasing companies. In our retail business, third-party equipment owners and operators and railroads provide the actual transportation of freight that we arrange on behalf of our customers. Our wholesale business utilizes leased equipment, a majority of which can either be returned or terminated within 90 days or is associated with revenue generating arrangements. Our contracts provide us with access to freight terminals and facilities and control over transportation-related equipment without having to own them. As a non-asset based logistics provider, we can focus on optimizing the transportation solution for our customers. We will continue to leverage our scale and our experience in managing large fleets of equipment owned by others to obtain favorable contract rates. This strategy allows us to maintain a high level of operating flexibility and expand operations or introduce new products without having to invest a significant amount of capital. Also, by maintaining a cost structure that is highly variable in nature, we are able to respond quickly to changing market and economic conditions by adjusting the size of our operating fleet. Over the past two years, we generated average annual adjusted EBITDA of $79 million per year while our maintenance capital expenditures have averaged approximately $3 million per year. . PURSUING OPPORTUNITIES FOR ADDITIONAL GROWTH In addition to capitalizing on industry growth trends and leveraging our existing service portfolio across our current customer base, we intend to grow our business by expanding our customer base and internally and externally developed services. 43 Expanding our customer base--We believe that we will be able to leverage our size, breadth of service offerings and reputation to attract as new customers both companies that currently buy logistics services from our competitors as well as companies that are not currently using a third-party logistics provider. We believe that many companies will be attracted to an opportunity to shift to a single full-service logistics provider like us. We target customers by industry or key end-markets. This enables us to take advantage of our expertise in specific markets as well as target freight which is best suited for our service offerings. Expanding product offerings--In order to handle our customers' diverse logistics requirements, we intend to continue to increase our range of service offerings. Because we focus on providing customized solutions, we frequently assist customers in developing new processes and solving problems and have expanded our product portfolio and geographic reach in response to our customers' needs. In addition to organic new product development, through strategic acquisitions we have successfully added rail-related logistics services, truck brokerage, freight handling and international freight forwarding to our service portfolio and expanded the geographic coverage of our intermodal marketing capabilities. We believe that as the logistics market continues to consolidate, providers of a single point to point or limited logistics offering will find it increasingly difficult to compete which may increase the number of attractive acquisition opportunities. We intend to continue to invest in building our comprehensive portfolio of logistics services and geographic coverage internally or through opportunistic and accretive acquisitions to take advantage of growth opportunities. THE LOGISTICS INDUSTRY OVERVIEW The domestic logistics market includes the transport of goods made and consumed domestically, the domestic portion of the transport of international freight and the supply of logistics services such as warehousing and logistics administration. According to Cass Information Systems, the total domestic logistics market, including freight transportation and carrying costs, in 2000, the last year for which information is currently available, exceeded $1 trillion, representing over 10% of the U.S. economy measured as a percentage of 2000 gross domestic product. Providers of freight transportation services include private shippers who manage the transportation of their own freight, for-hire service providers such as over-the-road trucking companies and third-party transportation and logistics companies such as intermodal marketing companies. The bases of competition in the freight transportation segment of the industry are primarily cost, delivery time, reliability and precision of delivery and pick-up, as well as freight-specific requirements such as handling and temperature control. Transportation modes include rail, highway, water, air and pipeline transportation. According to the American Trucking Association, the total domestic transportation market in 2001 was $698.8 billion, with ground transportation, comprised of highway and rail, the largest component, totaling $652.3 billion in 2001. Transportation service offerings that utilize multiple modes of transportation are commonly known as intermodal. The logistics market also includes several types of intermediary firms that facilitate the movement of freight by providing services such as logistics administration, warehousing and intermodal marketing. Intermodal marketing companies sell intermodal service to shippers while buying space on intermodal rail trains. These companies provide a link between intermodal rail service providers and a significant number of shippers and often provide additional transportation and logistical services such as consolidation and warehousing. Manufacturers and retailers are facing increasingly complex supply chain management issues due to rapidly changing freight patterns, increased world trade and global sourcing, more prevalent just-in-time inventory systems, increasingly demanding customer fulfillment requirements and pressures to reduce costs. Growth within 44 the third-party logistics industry is being driven by the continuing trend of companies outsourcing their transportation and logistics needs in order to focus on their core businesses and achieve the cost savings third-party logistics providers can provide through improved efficiency, lower inventory requirements, volume rate savings and other economies of scale. The U.S. market for third-party logistics services is highly fragmented; however, we believe there is increased pressure on smaller companies to consolidate given the size and scope of benefits that larger third-party logistics companies can provide. As transportation management continues to become increasingly sophisticated, and the cost effectiveness of outsourcing increases, we believe companies will continue to seek full service supply chain management support from a single company, like us, that can manage their multiple transportation requirements. THIRD-PARTY LOGISTICS SERVICES Logistics services is the management and transportation of materials and inventory throughout the supply chain. The third-party logistics services business has been bolstered in recent years by the competitiveness of the global economy, which causes shippers to focus on reducing handling costs, operating with lower inventories and shortening inventory transit times. According to Armstrong & Associates, the third-party logistics services sector of the domestic logistics market was approximately $61 billion in 2001 and grew at a compounded annual rate of approximately 16% between 1998 and 2001. Using a network of transportation, handling and storage providers in multiple transportation modes, third-party logistics services companies seek to improve their customers' operating efficiency by reducing their inventory levels and related handling costs. Many third-party logistics service providers are non-asset-based, primarily utilizing physical assets owned by others in multiple transport modes. The third-party logistics services business increasingly relies upon advanced information technology to link the shipper with its inventory and as an analytical tool to optimize transportation solutions. This trend favors the larger, more professionally managed companies that have the resources to support a sophisticated information technology infrastructure. INTERMODAL/STACKTRAIN Rail transportation is the primary mode for the movement of intermodal freight with motor carriers typically providing transportation at the points of origin and destination. Intermodal transportation addresses some of the problems of traditional rail service because the use of multiple modes of transit allows for "door-to-door" transportation in a competitive manner. According to the ATA, the intermodal rail market comprised approximately $6.7 billion, or 1.0%, of total domestic freight transportation costs in 2001. According to the Association of American Railroads, from 1991 to 2001, U.S. railroad intermodal traffic increased at a compound annual rate of approximately 6% while overall rail traffic grew only approximately 3% compounded annually. According to the ATA, in 2001, approximately $6.7 billion, or 16%, of railroads' total revenues were generated from intermodal shipments. As intermodal transportation has increased as a percentage of railroad revenues and volume, railroads have made significant capital expenditures upgrading track and equipment to increase the efficiency of intermodal service. Cost reduction and improved technology are expected to yield improved process management, asset utilization and service quality and reliability. We anticipate that these improvements will be passed through to intermodal service. In addition, the increased spending on railroad infrastructure is expected to further improve the ability of intermodal rail transport to compete with motor carriers. Intermodal transportation has benefited from the introduction of stacktrain service, consisting of the movement of cargo containers stacked two high on special rail cars. Stacktrain service significantly improves the efficiency of intermodal transportation by increasing capacity at low incremental cost without sacrificing quality of service. 45 According to S&P, in the intermodal sector, railroads and shippers rely on intermodal marketing companies which currently handle approximately two-thirds of all intermodal shipments. An intermodal marketing company arranges intermodal transportation for global, national and regional retailers and manufacturers. The intermodal marketing industry originated because railroads chose not to invest in the infrastructure and resources needed to market their intermodal services. Intermodal marketing companies pass on the economies of scale attributable to volume purchasing arrangements to shippers and provide shippers access to large equipment pools. In addition, intermodal marketing companies generally have superior information systems and can take full responsibility for shipments that may move among numerous railroads or truckers while in transit. TRUCKING According to the ATA, the trucking segment of the transportation industry generated revenues of $610.2 billion in 2001, or 87.3% of total domestic freight transportation costs. The trucking market is comprised of private and for-hire fleets, handling either truckload or less-than-truckload shipments over various lengths of haul. Relative advantages of trucking versus other modes include flexibility of pickup, route, and delivery as well as relatively rapid delivery cycles. Trucking is often at a cost disadvantage versus other modes of transportation, such as rail, due to capacity limitations and high variable costs related to fuel and labor. However, trucking is often advantageous for shorter lengths of haul. Private fleets operated by shippers represent the largest sector of the non-local trucking industry, but has been losing market share to for-hire carriers since deregulation of the industry began in 1980. Shippers' increased focus on cost reduction and core competencies has led to an accelerated rate of growth of the for-hire trucking sector. The trucking industry is divided into the truckload and less-than-truckload sectors, both of which are highly fragmented. The truckload sector is composed primarily of specialized carriers operating in markets defined by the length of haul and the type of equipment utilized. According to the ATA, excluding private fleets, revenues in the truckload segment were $273.9 billion in 2001. A majority of the trucking services we provide are truckload services. Less-than-truckload carriers specialize in consolidating smaller shipments into truckload quantities for transportation across regional and national networks. Many less-than-truckload carriers have high fixed costs due to investments in infrastructure. Other less-than-truckload carriers utilize the fixed facilities of others and provide specialized outsourced services. According to the ATA, the less-than-truckload market generated $62.7 billion of revenues in 2001. We derive only a small portion of our revenues from less-than-truckload freight. Other elements of the trucking industry include truck brokerage and the use of independent contractors to provide services. Truck brokerage involves the outsourced arrangement of trucking services by a third-party with a licensed carrier on behalf of a shipper. Truck brokerage allows the provider to offer trucking services without actually having dedicated capacity. The use of independent contractors generally facilitates a low investment in transportation equipment and increased flexibility. RAILROADS According to the ATA, the railroad industry generated revenues of $35.4 billion in 2001, or 5.1% of the total domestic freight transportation market excluding logistics services. The major participants in the rail market are Union Pacific ($12 billion of 2001 revenues), Burlington Northern Santa Fe ($9.2 billion), CSX Transportation ($8.1 billion) and Norfolk Southern ($6.2 billion). Rail transportation is particularly competitive for moving freight over long distances, due to its high capacity per shipment and low variable labor and fuel requirements per ton/mile. Rail service generally offers less flexibility relative to trucking because it is limited in its origin and destination points. The railroad industry has been characterized in recent years by several mergers, including Burlington Northern and Santa Fe in 1995, Union Pacific and Southern Pacific in 1996 and most recently, the division of Conrail between CSX and Norfolk Southern which was completed in June 1999. Integration problems have contributed to rail service disruptions following certain of the mergers. For example, following the Union Pacific/Southern Pacific merger, labor shortages and delayed integration of the companies' 46 information systems contributed to misrouted and lost freight cars as well as general service delays. In addition, the Conrail/CSX/Norfolk Southern transaction has resulted in some service disruptions in markets formerly served by Conrail. Despite these difficulties, the railroad mergers have generally contributed to cost savings in the industry by cutting employment, and the railroads are expected to return to historical service levels as the integration problems are resolved. In addition, railroads have reduced their costs through increased utilization of new technology and outsourcing. FREIGHT HANDLING, CONSOLIDATION AND STORAGE Because of the complexity of freight patterns and the need to optimize multi-modal routes, the handling and storage of freight on behalf of the shipper is often required during the transportation process. Certain of these services involve freight consolidation and deconsolidation, in which freight is unloaded, temporarily stored in warehouses or on cross-docks, and then re-loaded for further shipment. An example of such a service category in which we compete involves the unloading of imported container freight on the West coast and the reconsolidation of the freight into new shipments for domestic redistribution. INTERNATIONAL FREIGHT FORWARDING International freight forwarding includes airfreight forwarding, ocean freight forwarding and customs brokerage. In airfreight forwarding, an indirect air carrier procures shipments from a large number of customers, consolidates shipments bound for a particular destination from a common place of origin, determines the routing over which the consolidated shipment will move and purchases cargo space from airlines on a volume basis. In addition, air freight forwarders may secure space on an airline in the spot market, based upon the immediate volume needs of the customer. In ocean freight forwarding, an indirect ocean carrier or non-vessel operating common carrier contracts with ocean shipping lines to obtain transportation for a fixed number of containers between various points in a specified time period at an agreed upon rate. Customs brokerage requires knowledge of complex tariff laws and customs regulation in each country in which freight is transported. A customs broker prepares and files all documentation required to clear customs, pays and collects freight charges and deposits import duties with the appropriate foreign and domestic governmental authorities. A customs broker may also provide for the posting of surety bonds, bonded warehousing, assistance in obtaining the most appropriate commodity classification, duty reduction and duty drawback programs (which involve obtaining refunds of duties or taxes when goods or materials are exported out of a region after previously being imported into that region). We provide ocean freight forwarding, customs brokerage services and air freight forwarding services. OUR SERVICE OFFERINGS We provide our logistics services from two operating segments, our retail segment which provides services principally to end-user customers and our wholesale segment which provides services principally to transportation intermediaries and international shipping companies. We believe the unique combination of our wholesale and retail product and our ability to provide a comprehensive portfolio of services in rapidly changing freight markets provides us with competitive advantages by presenting significant opportunities for enhanced growth and operational synergies. For example, from 2000 to 2001, revenues generated by our wholesale segment and originated by our retail segment increased from approximately $37 million to $91 million. See note 10 to the consolidated financial statements for the financial results by segment. RETAIL SERVICES INTERMODAL MARKETING We are one of the largest intermodal marketing companies in North America. We arrange for and optimize the movement of our customers' freight in containers and trailers throughout North America utilizing truck and rail transportation. 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 47 from the train and is available for pick-up, we arrange for the shipment to be 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. 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 enables us to provide enhanced service to our customers and the opportunity for increased profitability and growth. TRUCK BROKERAGE AND SERVICES We are one of the largest truck brokers in North America. 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). We arrange the movement of freight in containers or trailers by truck using a network of over 5,000 independent trucking contractors. We manage all aspects of these services for our customers, including selecting qualified carriers, negotiating rates, tracking shipments, billing and resolving difficulties. Our nationwide network of approved independent carriers provides service to virtually any North American destination. Through this network, we are able to manage our customers' needs for multiple modes of transportation using trucking services as a component. Through our contractual arrangements, we take advantage of the opportunities provided by long haul national carriers, short haul regional carriers, private fleets and dedicated fleets. By utilizing our aggregate volumes to negotiate rates, we are able to provide high quality service at attractive prices. 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 is limited. We contract with independent trucking contractors who in the aggregate own and operate a fleet of more than 725 vehicles equipped with flatbed and specialized trailers. 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 contractors who control more than 675 trucks. We also maintain interchange agreements with many 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. We believe that our ability to provide a range of trucking services creates a competitive advantage as companies increasingly seek to outsource to those service providers which can manage multiple transportation requirements over a broad geographic area. 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. 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. 48 As an indirect ocean carrier or non-vessel operating common carrier, we arrange for the transportation 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 materials and inventory throughout their supply chains and 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. We also 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. In addition, we 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. FREIGHT CONSOLIDATION & HANDLING 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. Some of the more common freight handling services we provide include the transfer of freight from international containers to rail-based or truck containers (transloading), repackaging merchandise from various shipments for distribution to multiple customer sites (consolidation/deconsolidation) and warehousing. These services are primarily offered on the West coast where the majority of U.S. container freight originates. WHOLESALE SERVICES INTERMODAL RAIL 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 49 largest non-railroad provider of intermodal rail service in North America. We sell intermodal service primarily to intermodal marketing companies, large automotive intermediaries, international shipping companies 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, Canadian National Railroad and the two largest 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, competitive 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 provide APL Limited and other shipping companies with equipment repositioning services 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 customers, we receive compensation from the shipping companies for our repositioning service and from the other customers for shipment of their freight. Management believes that we have access to over 100,000 empty containers annually for repositioning. In 2001, 2000 and 1999, we filled 81,376, 68,579 and 73,741 repositioned containers, respectively, with freight for shipment via our stacktrain 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 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. Our wholesale business was recognized in 1997, 1998 and 1999 as "Best of the Best" for on-time performance, value, equipment and operations, customer service and technology and was ranked first overall as an intermodal service provider in a survey of 3,500 shippers conducted by Logistics Management & Distribution Report and Cahners Research. We received the "Quality One" award from Ford in 1999 and the Truckload Carrier Quality Award for Intermodal in 1999 and 2000 from Ryder Transportation. We were also the Rail Carrier of the Year in 2000 for GE and the Intermodal Marketing Company Carrier of the Year in 1999 for Wal-Mart. In addition, we are ISO 9002 certified. We believe that our unique market position and service offerings position us to capitalize on considerable growth opportunities in the intermodal transportation market. 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 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 50 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 a significant portion of our retail operations onto the Rail Van information technology platform. 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. CUSTOMERS We currently provide retail services on a nationwide basis to retailers and manufacturers, including a number of Fortune 500 and multi-national companies such as Ford, General Electric, Heinz, Wal-Mart, ConAgra, Whirlpool, Union Pacific, Sony and CompUSA, as well as numerous middle market companies. 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. 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). 51 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 employees and 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 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 relationships 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 assist, 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 five 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. On the date of the recapitalization, we began providing retail and logistics services to customers through our acquisition of Pacer Logistics, which was run by Mr. Orris and several other of our senior executives. 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. 52 In 2000 we acquired four companies in the 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, consolidation/deconsolidation 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 that 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. 53 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. A majority of our leased equipment can either be returned or terminated within 90 days or is associated with revenue generating arrangements. As of December 28, 2001, our wholesale equipment fleet consisted of the following: OWNED LEASED TOTAL ----- ------ ------ Containers 48' Containers........................... 144 12,970 13,114 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'* Chassis................ -- 4,260 4,260 ----- ------ ------ Total................................ 5,863 21,557 27,420 ===== ====== ====== Doublestack Railcars Total................................ 210 1,645 1,855 ===== ====== ====== -------- * Represents the current allocation of chassis sublet to us pursuant to our agreement with APL Limited. See "Certain Relationships and Related Transactions." 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. 54 The following table shows our expense for on-going maintenance and repairs for containers, chassis and railcars (in millions): MAINTENANCE OPERATING EXPENSE 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 Maintenance Operating Expense......... $25.4 $26.7 $21.0 ===== ===== ===== At the time of our recapitalization in May 1999, we outsourced to a third-party the management of the maintenance and repair of our container and chassis fleet. In March 2001, we terminated the management agreement and brought the management of this function in-house. We believe that this change will result in a net savings to us in future periods. SUPPLIERS RAILROADS We have long-term contracts with five railroads, Union Pacific, CSX, Canadian National Railroad, and the two largest 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 our 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. 55 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 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. 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 wholesale business competes primarily with over-the-road full truckload carriers, conventional intermodal movement of trailers-on-flatcars and containerized intermodal rail services offered directly by railroads. Competition in our wholesale and retail business 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. Our major competitors in the retail business include C.H. Robinson, Expeditors International, ForwardAir, UTI Worldwide, Exel, Alliance Shippers, Menlo Logistics, EGL, Inc. and Hub Group and in the wholesale business include Burlington Northern Santa Fe, Union Pacific, CSX Intermodal and J.B. Hunt Transport. 56 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 surety 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 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. 57 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. LITIGATION 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 judgment of $250,000 and a maximum judgment 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. Plaintiff's counsel has indicated 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 effect 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. 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 aboveground 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. 58 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information regarding our directors and executive officers. NAME AGE POSITION ---- --- -------- 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 Carl K. Kooyoomjian.................... 55 Chairman--Retail Segment Charles T. Shurstad.................... 55 President--Wholesale Segment Michael F. Killea...................... 40 Executive Vice President and General Counsel Denis M. Bruncak....................... 47 Chief Commercial Officer--Retail Segment Jeffrey R. Brashares................... 49 President, Transportation Services--Retail Segment Joshua J. Harris....................... 37 Director Thomas L. Finkbiner.................... 48 Director Michael S. Gross....................... 40 Director Bruce H. Spector....................... 59 Director Marc E. Becker......................... 29 Director Timothy J. Rhein....................... 61 Director DONALD C. ORRIS has served as Chairman, President and Chief Executive Officer of our company since May 1999. Mr. Orris serves as Chief Executive Officer pursuant to the terms of the Management 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 (f/k/a Logistics International 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") 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 and 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 May 1998. From April 1990 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. 59 CARL K. KOOYOOMJIAN has served as Chairman of the retail segment of our company 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 the wholesale segment of our company 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. DENIS M. BRUNCAK has served as Chief Commercial Officer 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 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 founding senior partner in Apollo Management, L.P. 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 NRT, Incorporated, Clark Retail Enterprises, Inc., Breuners Home Furnishings Corporation, Quality Distribution, Inc., Compass Minerals Group, Inc. and Resolution Performance Products Inc. THOMAS L. FINKBINER was elected to serve as a Director of our company effective 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 was elected to serve as a Director of our company effective April 1, 2000. Mr. Gross is a founding senior 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 Retail Enterprises, Inc., Encompass Services Corporation, Rare Medium, Inc., Saks, Inc. and United Rentals, Inc. BRUCE H. SPECTOR has served as a Director of our company since May 1999. Mr. Spector served as a full time consultant to Apollo Management commencing in 1992 and became a partner in Apollo Management in 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 Park Media, LLC, Vail Resorts, Inc. and Metropolis Realty Trust, Inc. 60 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, Quality Distribution, Inc. and WMC Mortgage Corp. TIMOTHY J. RHEIN has served as a Director of our Company since May 1999. Mr. Rhein was Chairman of the Board of APL Limited from October 1995 until his retirement in June 2001. Mr. Rhein served as APL Limited's President and Chief Executive Officer from October 1995 to October 1999, and 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. DIRECTORS' TERMS Upon completion of this offering, our board of directors will be divided into three classes that serve staggered three-year terms, as follows: BOARD CLASS EXPIRATION MEMBER ----- ---------- ------- Class I.......................................... 2003 Class II......................................... 2004 Class III........................................ 2005 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 compliance functions. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the auditors are independent of management. Prior to this offering, the members of the audit committee consisted of Messrs. Harris, Rhein and Becker. Effective upon consummation of this offering, the audit committee will consist of Mr. Harris and two new directors to be named within 90 days of this offering who will qualify as independent directors under Nasdaq rules. 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. 61 EXECUTIVE COMPENSATION The following 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 compensated executive officers whose salary and bonus exceeded $100,000 in 2001. SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION -------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUT --------------------------------- ---------- ------ SECURITIES RESTRICTED UNDERLYING ALL OTHER ANNUAL STOCK OPTIONS LTIP OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARD(S)(2) SARS 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(4)....... 2001 $235,000 $ 63,450 -- -- -- -- $5,250 2000 $235,000 $121,410 -- -- -- -- $4,038 1999 $235,000 $121,410 -- -- 100,000 -- $5,604 Jeffrey R. Brashares(5).. 2001 $572,000 -- -- -- -- -- $2,625 Denis M. Bruncak(5)...... 2001 $572,000 -- -- -- -- -- $2,625 -------- (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 2,329.25, 2,264.16, and 2,264.16 shares of Pacer Logistics 7.5% Exchangeable Preferred Stock, respectively, 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). These shares of Pacer Logistics preferred stock will be exchanged for 232,925, 226,416 and 226,416 shares of our common stock, respectively, prior to the consummation of this offering. (3)Consists of company matching contributions to 401(k) plan. (4)Mr. Cross resigned as Executive Vice President effective December 31, 2001. (5)Messrs. Brashares and Bruncak joined Pacer International on December 22, 2000 as a result of our acquisition of Rail Van. 62 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 each of the officers named in the above Summary Compensation Table at December 28, 2001. NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1) SHARES ACQUIRED ------------------------- ------------------------- NAME ON EXERCISE VALUE REALIZED EXERCISABLE 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 on an assumed initial offering price of per share, the midpoint of the range set forth on the cover of this prospectus, less the exercise price, multiplied by the number of shares underlying the option. (2)Upon exercise of preferred stock options, we repurchased the shares at the option exercise price and cancelled and retired those shares. (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, 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 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 63 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. These 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 us 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. 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 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, and Gerry Angeli. 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 64 commencement date. The minimum base salary under these employment agreements is $225,000 per year for each of Messrs. Orris and Angeli, 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. We have also entered into employment agreements dated as of December 22, 2000 with each of Denis M. Bruncak and Jeffrey 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 Mess. Bruncak and Brashares, subject to increase by our board of directors. Under the employment agreements Messrs. Orris and Angeli may receive annual bonuses of up to $180,000 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 and Angeli 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 and Angeli, and for a period of two years following termination, in the case of Messrs. Bruncak and Brashares. We entered into an employment agreement with Robert L. Cross providing for a minimum base salary of $200,000 per year and otherwise having substantially the same terms as the employment agreements with Messrs. Orris and Angeli. Mr. Cross resigned effective December 31, 2001. We have entered into a separation and release agreement as of December 31, 2001 with Mr. 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 regard to any business in competition with us. 65 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of shares of the common stock as of December 28, 2001, and as adjusted to reflect the sale of the shares of common stock offered by us and the selling stockholders in this offering, for: . each person or entity known by us to beneficially own more than 5% of the common stock; . each executive officer named in the summary compensation table; . each of our directors; . all executive officers and directors as a group; and . each selling stockholder. 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 13,779,591 shares of common stock outstanding as of December 28, 2001 after giving effect to the 2,234,844 shares of our common stock to be issued upon exchange of the Pacer Logistics preferred stock prior to the consummation of this offering, and shares of common stock outstanding after completion of this offering, The table assumes that the underwriters' over-allotment option is not exercised and excludes any shares purchased in this offering by the respective beneficial owners. 66 BENEFICIAL OWNERSHIP BEFORE OFFERING ----------------------------------------------- COMMON STOCK BENEFICIAL UNDERLYING OWNERSHIP COMMON OPTIONS SHARES TO BE AFTER OFFERING(2) STOCK EXERCISABLE SOLD IN THE ----------------- OUTSTANDING WITHIN 60 DAYS TOTAL PERCENT OFFERING(2) TOTAL PERCENT ----------- -------------- ---------- ------- ------------ ----- ------- Apollo Management IV, L.P.(1).................. 9,390,000 -- 9,390,000 68.1% c/o Apollo Management, L.P. 1301 Avenue of the Americas New York, NY 10019 APL Limited................ 750,000 -- 750,000 5.4 1111 Broadway Oakland, CA 94607 Donald C. Orris(3)......... 389,674(4) 26,667 416,341 3.0 Gerry Angeli(3)............ 383,165(5) 26,667 409,832 3.0 Robert L. Cross(3)......... 383,165(5) 26,667 409,832 3.0 Jeffrey R. Brashares(3).... 80,000 -- 80,000 * Denis M. Bruncak(3)........ 80,000 -- 80,000 * Joshua J. Harris(6)........ 9,690,000(7) 3,000 9,693,000 70.3 Thomas L. Finkbiner(8)..... -- 1,500 1,500 * Michael S. Gross(6)........ 9,390,000(7) 1,500 9,391,500 68.1 Bruce M. Spector(6)........ 9,390,000(7) 3,000 9,393,000 68.2 Marc E. Becker(6).......... 9,390,000(7) 3,000 9,393,000 68.2 Timothy J. Rhein(3)........ -- 3,000 3,000 * All directors and executive officers as a group (14 persons)(9).............. 10,622,839(10) 101,334 10,724,173 77.8 -------- * Less than 0.1% (1)Beneficial ownership of common stock includes 8,912,000 shares, or 64.7% before this offering and shares, or % after this offering, owned by Coyote Acquisition LLC ("Coyote I") and 478,000 shares, or 3.4% before this offering and shares, or % after this offering, owned by Coyote Acquisition II LLC ("Coyote II" and together with Coyote I, "Coyote"). Coyote I is a Delaware limited liability company, the sole member of which 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)Excludes the underwriters' over-allotment option. If the underwriter's over-allotment option is exercised in full, Coyote I and Coyote II would beneficially own and shares, respectively, of common stock. (3)The business address for Messrs. Orris, Angeli, Cross and Rhein is c/o Pacer International, Inc., 2300 Clayton Road, 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. 67 (4)Includes 232,925 shares of common stock issuable upon exchange of the Pacer Logistics 7.5% Exchangeable Preferred Stock prior to the consummation of this offering. (5)Includes 226,416 shares of common stock issuable upon exchange of the Pacer Logistics 7.5% Exchangeable Preferred Stock prior to the consummation of this offering. (6)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. (7)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. See "Description of Capital Stock--Other Agreements--Shareholders Agreements." (8)The business address for Mr. Finkbiner is 3802 Corporex Park Drive, Tampa, Florida 33619. (9)Includes all shares held by entities affiliated with specific directors as described in note (7) above. (10)Includes 685,757 shares of common stock issuable upon exchange of the Pacer Logistics 7.5% exchangeable preferred stock prior to the consummation of this offering. 68 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OUR 1999 RECAPITALIZATION On May 28, 1999, we consummated a recapitalization through the purchase by entities formed by affiliates of Apollo Management, L.P., and two other investors of shares of our outstanding common stock from APL Limited for $292.5 million and our redemption of shares of our common stock held by APL Limited for a total purchase price of $300.0 million. Immediately following our recapitalization, we acquired Pacer Logistics, Inc. In connection with the acquisition, members of Pacer Logistics management received shares (valued at $24.3 million) of a series of Pacer Logistics preferred stock exchangeable for our common stock. In connection with the acquisition of Pacer Logistics, we used cash to refinance the existing debt of Pacer Logistics, redeem outstanding Pacer Logistics preferred stock from its former stockholders and made payments in connection with other Pacer Logistics transactions. Our recapitalization and the acquisition of Pacer Logistics was financed by senior subordinated notes, borrowings under our credit agreement, the sale and leaseback of 199 doublestack rail cars, and equity investments by affiliates of Apollo Management, Deutsche Bank Securities Inc. and Credit Suisse First Boston Corporation. RELATED PARTY 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 international freight 17.4 16.2 21.0 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: APL Limited Lease, maintenance 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 $5.0 million subordinated Resources, LLC................... 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. 69 ARRANGEMENTS WITH APL LIMITED, ONE OF OUR STOCKHOLDERS, AND ITS AFFILIATES 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. Prior to the recapitalization, APL Land Transport Services Inc. 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, $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 and $4.4 million was receivable from APL Limited including related local trucking 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 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, provided various agency services to us with respect to its 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, respectively, was payable to APL Mexico. Effective in 2001, we began using Pacer de Mexico S.A. de C.V., a wholly owned Mexican subsidiary of our company, to handle the services previously provided by APL Mexico. ADMINISTRATIVE SERVICES AGREEMENT Pursuant to an administrative services agreement, APL Limited currently provides us with administrative and support services, including: . accounts payable, 70 . general ledger administration, and . office space and associated office services. 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. This agreement terminates on May 31, 2002 and may be renewed annually. 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 30 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 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 these services subject to increase after four years. In addition, for the first five years we will be 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 perforance 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: . an uncorrected material breach by APL Limited; . the occurrence of specified performance failures resulting from APL Limited's willful misconduct or gross negligence; or . the occurrence of any two performance failures within a 12-month period, regardless of the cause. 71 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 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. 72 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. 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 May 28, 1999, 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. 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 judgment or the judgment of Coyote Acquisition, do not prejudice 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 and guaranty agreement will terminate when all other agreements and all other guaranteed obligations are terminated or satisfied. TAX SHARING AGREEMENT WITH COYOTE We and our direct and indirect subsidiaries have entered into a tax sharing agreement with Coyote, 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, 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. MANAGEMENT AGREEMENT WITH APOLLO We have entered into a management agreement with Apollo Management, an affiliate of Coyote, 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 each of 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, we paid Apollo a fee of $1.5 million in 1999 in connection with the recapitalization. 73 ARRANGEMENTS WITH CURRENT AND FORMER DIRECTORS AND EXECUTIVE OFFICERS 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. 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. RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES Transactions between us and our officers, directors and affiliates are subject to the provisions of Tennessee law and to the provisions of our credit agreement and the indenture for our senior subordinated notes. The Tennessee Business Corporation Act provides that a transaction with the corporation in which a director or officer of the corporation has a direct or an indirect interest is not voidable by the corporation solely because of the director's or officer's interest if the material facts are disclosed or known to, and the transaction is approved or ratified by, the disinterested directors or stockholders, or if the transaction was fair to the corporation. The Tennessee Business Corporation Act also provides that a corporation may not lend money or guarantee the obligation of a director or officer, unless the arrangement is approved by the stockholders or the board of directors determines that the arrangement benefits the corporation and approves it. Under the indenture for our senior subordinated notes, we may not, subject to specified exceptions, enter into any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any of our affiliates except for transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a person that is not our affiliate; and . if the affiliate transaction involves aggregate payments or other property with a fair market value in excess of $2.0 million, the transaction must be approved by our Board of Directors, and . if the affiliate transaction involves an aggregate fair market value of more than $10.0 million, we have, prior to the consummation of the transaction, obtained a favorable opinion from an independent financial advisor as to the fairness of the transaction to us from a financial point of view. 74 Similarly under our credit facility, we may not, subject to specified exceptions, enter into any transaction or series of transactions with any of our affiliates other than on terms and conditions substantially as favorable to us as would be reasonably expected to be obtainable by us at the time in a comparable arm's-length transaction with a person that is not our affiliate. The foregoing restrictions of our indenture and credit agreement will continue to apply to us so long as the notes and borrowings under our credit agreement, respectively, are outstanding. 75 DESCRIPTION OF CERTAIN INDEBTEDNESS SENIOR SECURED CREDIT FACILITY We have entered into a credit agreement, as amended, with a syndicate of financial institutions. Our credit agreement provides for the following: . a seven-year term loan maturing in 2006 in an original principal amount of $135 million, of which $132.0 million was outstanding as of December 28, 2001, which was used to finance in part our recapitalization and certain related costs and expenses, and to refinance certain indebtedness of our company; . a seven-year $40.0 million term loan maturing in 2006, of which $39.7 million was outstanding as of December 28, 2001, which was used to finance, in part, our acquisition in 2000 of Rail Van and certain related costs and expenses, and to refinance certain indebtedness of Rail Van and its subsidiaries; and . a five-year $100.0 million revolving credit facility maturing in 2004, of which up to $25 million may include letters of credit, to be used for, among other things, working capital and general corporate purposes of our company and its subsidiaries, including, without limitation, effecting acquisitions having an aggregate consideration not exceeding $25 million and satisfying other specified conditions, including pro forma ratios relating to interest coverage, total debt to EBITDA and senior debt to EBITDA. We intend to use the net proceeds of this offering to repay the remaining outstanding portion of the $40.0 million term loan, approximately $29 million of the outstanding portion of the $135 million term loan and approximately $68 million of borrowings under the revolving credit facility. See "Use of Proceeds." The term loans are required to be prepaid with, and after the repayment in full of such loans, permanent reductions to the revolving credit facility are required in an amount equal to: . 100.0%, or 75% if our ratio of total debt to EBITDA is less than 3.50 to 1, of the net cash proceeds of all asset sales and dispositions by our company and its subsidiaries, subject to exceptions; . 100.0%, or 75% if our ratio of total debt to EBITDA is less than 3.50 to 1, of the net cash proceeds of issuances of certain debt obligations and certain preferred stock by our company and its subsidiaries, subject to exceptions; . 50.0%, or 0% if our ratio of total debt to EBITDA is less than 3.50 to 1, of the net cash proceeds from common equity and specified preferred stock issuances by our company and its subsidiaries, subject to exceptions, including in connection with acquisitions described above; . a specified percentage, ranging from 75% if our ratio of total debt to EBITDA is greater than 3.50 to 1 to 0% if such ratio is less than 2.5% to 1, of annual excess cash flow, determined generally as the amount by which our operating cash flow exceeds the sum of our capital expenditures, repayments of indebtedness and certain other amounts; and . 100.0% of certain insurance proceeds, subject to the exceptions. Such mandatory prepayments and permanent reductions will be allocated first, to the term loans and second, to permanently reduce the revolving credit facility. With respect to the term loans, in the case of proceeds received as a result of the occurrence of an event described in the first, fourth and fifth bullets of the immediately preceding paragraph, the proceeds shall be applied among the term loans on a pro rata basis and, in the case of proceeds received as a result of the occurrence of an event described in second and third bullets of the immediately preceding paragraph, the proceeds shall be applied first, to the $40.0 million term loan and, after the repayment in full of the $40.0 million term loan, to the $135.0 million term loan. Our credit agreement requires that we make annual amortization payments of $1.35 million in the years 2002 to 2005, in the case of the 76 $135.0 million term loan, and $0.4 million in the years 2002 to 2005, in the case of the $40.0 million term loan, in each case payable in quarterly installments. Voluntary prepayments and commitment reductions are permitted in whole or in part, subject to minimum prepayment or reduction requirements, without premium or penalty, provided that voluntary prepayments of loans bearing interest based on the Eurodollar rate on a date other than the last day of the relevant interest period are subject to payment of customary breakage costs, if any, which are intended to compensate the lender for all costs and liabilities resulting from the need to liquidate or reemploy deposits used by the lender to fund its loan to us. Borrowings under our credit agreement bear interest at our option at the Eurodollar rate or a base rate equal to the highest of the prime lending rate as determined by the agent, 1/2 of 1% in excess of the federal funds rate and 1/2 of 1% in excess of an adjusted certificate of deposit rate, plus in each case an applicable margin, determined by reference to our ratio of total debt to EBITDA, ranging from 2.75% to 2% in the case of revolving credit loans bearing interest at the Eurodollar rate, 1.75% to 1.0% in the case of revolving credit loans bearing interest at the base rate, 3.0% to 2.5% in the case of term loans bearing interest at the Eurodollar rate and 2.0% to 1.5% in the case of term loans bearing interest at the base rate. We may elect interest periods of 1, 2, 3 or 6 months, or to the extent available to each lender with loans and/or commitments under the relevant facility, 9 or 12 months for loans bearing interest at the Eurodollar rate. With respect to loans bearing interest at the Eurodollar rate, interest is payable at the end of each interest period and, in any event, at least every 3 months. With respect to loans bearing interest based on the base rate, interest is payable quarterly on the last business day of each fiscal quarter. In each case, calculations of interest are based on a 360-day year and actual days elapsed. Our credit agreement provides for payment by our company in respect of outstanding letters of credit of: . an annual fee equal to the applicable margin from time to time in effect for loans bearing interest at the Eurodollar rate on the aggregate outstanding stated amounts of such letters of credit; . a fronting fee equal to 1/4 of 1.0% per annum on the aggregate outstanding stated amounts of such letters of credit; and . customary administrative charges. We pay a commitment fee equal to a percentage equal to 1/2 of 1.0% per annum on the undrawn portion of the available commitment under the revolving credit facility, subject to decrease based on our ratio of total debt to EBITDA and subject to increases based on the amount of unused commitments under the revolving credit facility. The loans, letters of credit and other obligations under our credit agreement are guaranteed by all of our existing and future direct and indirect wholly-owned domestic subsidiaries. Our obligations and the obligations of such subsidiaries are secured by a first priority perfected lien on substantially all of our properties and assets and substantially all of the properties and assets of such subsidiaries, whether such properties and assets are now owned or subsequently acquired, subject to exceptions. The security includes a pledge of all capital stock and notes owned by us and such subsidiaries, provided that, generally no more than 66 2/3% of the stock of our foreign subsidiaries is required to be pledged. Our credit agreement and related documentation contains customary representations and warranties by our company and its subsidiaries. In addition, our credit agreement contains customary covenants restricting our ability and the ability of certain of our subsidiaries to, among other things: . declare dividends; 77 . prepay debt; . incur liens; . make investments; . incur additional indebtedness; . amend our organizational, corporate and other specified documents; . make capital expenditures; . engage in mergers, acquisitions and asset sales; . engage in transactions with affiliates and formation of subsidiaries; and . issue redeemable common stock and preferred stock. In addition, we are required to comply with customary affirmative covenants and maintain financial ratios relating to interest coverage and total debt for EBITDA. Events of default under our credit agreement include: . our failure to pay principal or interest when due or pay a reimbursement obligation on a letter of credit; . a material breach of any representation or warranty; . covenant defaults; . events of bankruptcy; . a change of control of our company; and . other customary events of default. SENIOR SUBORDINATED NOTES On May 28, 1999 we issued $150.0 million aggregate principal amount of 11 3/4% Senior Subordinated Notes due 2009. On December 9, 1999, we exchanged those notes for $150.0 million aggregate principal amount of notes that had been registered under the Securities Act. Interest on the senior subordinated notes is payable semi-annually in cash on June 1 and December 1 of each year, beginning December 1, 1999. The senior subordinated notes are guaranteed by all of our subsidiaries. The senior subordinated notes are our unsecured obligations and rank behind all our existing and future senior indebtedness. The indenture pursuant to which our senior subordinated notes were issued contains covenants that, among other things limit our ability to: . incur additional indebtedness; . engage in sale-leaseback transactions; . pay dividends or make certain other distributions; . sell assets; . redeem capital stock; . effect a consolidation or merger; . enter into transactions with stockholders and affiliates; and . create liens on our assets. 78 We have the option to redeem the senior subordinated notes at any time after June 1, 2003, at redemption prices declining from 105.875% to 100% on or after June 1, 2005 of their principal amount, plus any accrued and unpaid interest. Before June 1, 2002, we may also redeem up to 35% of the aggregate principal amount of the senior subordinated notes with the proceeds from sales of our common equity at a redemption price equal to 111.750% of their principal amount on such date plus accrued and unpaid interest. Upon a change of control, we are required to make an offer to purchase the senior subordinated notes at a purchase price equal to 101% of their principal amount, plus accrued interest. In addition, upon a change of control prior to June 1, 2003, we may redeem the notes at a redemption price equal to the principal amount thereof plus a make-whole premium, plus accrued interest. The make-whole amount is equal to the greater of 1% of the then outstanding principal amount of the notes, and an amount equal to the sum of the present values of all remaining interest and principal payments due on the notes and the premium payment due assuming a redemption on June 1, 2003, computed by using a discount rate equal to the yield to maturity at the time of determination plus 50 basis points of United States Government Treasury securities with a constant maturity most nearly equal to the period from the date of redemption to June 1, 2003 minus the then outstanding principal amount of the notes and accrued interest paid on the date of redemption. 79 DESCRIPTION OF CAPITAL STOCK Under our second amended and restated charter which will be effective upon the completion of this offering, our capital stock will consist of 150,000,000 shares of common stock, $0.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. As of December 28, 2001 and after giving effect to the exchange of all outstanding shares of Pacer Logistics exchangeable preferred stock for 2,234,844 shares of our common stock prior to the consummation of this offering, there were outstanding 13,779,591 shares of common stock held by 24 stockholders of record and no shares of preferred stock were outstanding. In addition, there were outstanding options to purchase an aggregate of 1,202,114 shares of common stock at December 28, 2001. The following description of our capital stock, provisions of our second amended and restated charter and our amended bylaws and specific provisions of Tennessee laws are summaries thereof and are qualified in their entirety by reference to the Tennessee Business Corporation Act ("TBCA"), and our second amended and restated charter and amended bylaws. Copies of our second amended and restated charter and amended bylaws have been filed with the Commission as exhibits to our registration statement, of which this prospectus forms a part. COMMON STOCK The holders of our common stock are entitled to dividends as our board of directors may declare from time to time from funds legally available therefor, subject to the preferential rights of the holders of any shares of our preferred stock that we may issue in the future. The holders of our common stock are entitled to one vote for each share held of record on any matter to be voted upon by stockholders. Our amended and restated charter does not provide for cumulative voting in connection with the election of directors, and, accordingly, holders of more than 50% of the shares voting will be able to elect all of the directors. There are no preemptive, conversion, redemption or sinking fund provisions applicable to our common stock. Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock are entitled to share ratably in all assets remaining after payment to creditors and subject to prior distribution rights of any shares of preferred stock that we may issue in the future. All of the outstanding shares of common stock are, and the shares offered by us will be, fully paid and non-assessable. PREFERRED STOCK As of the closing of this offering, no shares of our preferred stock will be outstanding. Under our second amended and restated charter, our board of directors, without further action by our stockholders, will be authorized to issue 50,000,000 shares of preferred stock in one or more classes or series. The board may fix the rights, preferences and privileges of the preferred stock, along with any limitations or restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and preferences on liquidation or dissolution of each class or series of preferred stock. The preferred stock could have voting or conversion rights that could adversely affect the voting power or other rights of holders of our common stock. The issuance of preferred stock could also have the effect, under certain circumstances, of delaying, deferring or preventing a change of control of our company. OTHER CHARTER AND BY-LAW PROVISIONS Some provisions of our second amended and restated charter and amended bylaws could have anti-takeover effects. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the corporate policies formulated by our board of directors. In addition, these provisions also are intended to ensure that our board of directors will have sufficient time to act in what the board of directors believes to be in our best interests and the best interests of our stockholders. These provisions also are designed to reduce our vulnerability to an unsolicited proposal for our takeover that does not contemplate the acquisition of all of our 80 outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of Pacer International. The provisions are also intended to discourage some tactics that may be used in proxy fights. However, these provisions could delay or frustrate the removal of incumbent directors or the assumption of control of us by the holder of a large block of common stock, and could also discourage or make more difficult a merger, tender offer, or proxy contest, even if the event would be favorable to the interests of our stockholders. CLASSIFIED BOARD OF DIRECTORS Our second amended and restated charter will provide for our board of directors to be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three-year terms, other than directors who may be elected by holders of any preferred stock we may issue in the future. As a result, approximately one-third of our board of directors will be elected each year. The classified board provision will promote the continuity and stability of our board of directors and our business strategies and policies as determined by our board of directors. The classified board provision could have the effect of discouraging a third-party from making an unsolicited tender offer or otherwise attempting to obtain control of us without the approval of our board of directors. In addition, the classified board provision could delay stockholders who do not like the policies of our board of directors from electing a majority of our board of directors for two years. NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS Our second amended and restated charter will provide that stockholder action can only be taken at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. Our amended and restated charter also provides that special meetings of stockholders may be called only by our board of directors or our Chairman or Chief Executive Officer. Our stockholders are not permitted to call a special meeting of stockholders or to require that our board of directors call a special meeting. Our amended bylaws provide that only those matters included in the notice of special meeting may be considered or acted upon at the special meeting unless otherwise provided by law. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINEES Our second amended bylaws will establish an advance notice procedure for our stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of our stockholders. The stockholder notice procedure provides that only persons who are nominated by, or at the direction of, our board of directors or by a stockholder who has given timely written notice to our Secretary prior to the meeting at which directors are to be elected will be eligible for election as our directors. The stockholder notice procedure also provides that at an annual meeting only business properly brought before the meeting by, or at the direction of, our board of directors or by a stockholder who has given timely written notice to our Secretary of that stockholder's intention to bring the business before the meeting. Under the stockholder notice procedure, if a stockholder desires to submit a proposal or nominate persons for election as directors at an annual meeting, the stockholder's written notice must be delivered to or mailed and received not less than 90 days nor more than 120 days prior to the first anniversary of the previous year's annual meeting. In addition, under the stockholder notice procedure, a stockholder's notice proposing to nominate a person for election as a director or relating to the conduct of business other than the nomination of directors must contain specified information. If the chairman of a meeting determines that business was not properly brought before the meeting in accordance with the stockholder notice procedure, the business will not be discussed or transacted. NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES Our second amended and restated charter and amended bylaws will provide that our board of directors will consist of not less than 3 nor more than 18 directors, other than directors elected by holders of our preferred stock, the exact number to be fixed from time to time by resolution adopted by our directors. Further, subject to the rights of the holders of any series of our preferred stock, if any, our second amended and restated charter and 81 amended bylaws will authorize our board of directors to elect additional directors under specified circumstances and fill any vacancies that occur in our board of directors by reason of death, resignation, removal or otherwise. A director so elected by our board of directors to fill a vacancy or a newly created directorship holds office until the next annual meeting of stockholders and until his successor is elected and qualified. Subject to the rights of the holders of any series of our preferred stock, if any, our second amended and restated charter and amended bylaws will also provide that directors may be removed only for cause and only by the affirmative vote of holders of 66 2/3% of the voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. The effect of these provisions is to preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of our board of directors by filling the vacancies created by a director's removal with its own nominees. BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS Our second amended and restated charter will provide that a "related person" cannot engage in a "business combination" with us unless the combination: . takes place at least five years after the related person became a related person; and . either is approved by at least two-thirds of the outstanding voting stock not beneficially owned by the related person or satisfies specified fairness conditions including, among others, the requirement that the per share consideration received in any such business combination by each of our stockholders is not less than the higher of -- the highest per share price paid by the related person during the preceding five year period for shares of the same class or series plus interest thereon from such date at a treasury bill rate less the aggregate amount of any cash dividends paid and the market value of any dividends paid other than in cash since such earliest date, up to the amount of such interest, -- the highest preferential amount, if any, such class or series is entitled to receive on liquidation, or -- the market value of the shares on either the date the business combination is announced or the date when the related person reaches the 10% threshold, whichever is higher, plus interest thereon less dividends as noted above. These provisions apply unless the business combination is with an entity approved by our board of directors before that entity becomes a related person. Our second amended and restated charter will define "business combination," generally to mean any: . merger or consolidation; . share exchange; . sale, lease, exchange, pledge, mortgage or other transfer (in one transaction or a series of transactions) of assets representing 10% or more of -- the market value of consolidated assets, -- the market value of the corporation's outstanding shares or -- the corporation's consolidated net income; . issuance or transfer of shares from the corporation to the interested shareholder; . plan of liquidation; . transaction in which the interested shareholder's proportionate share of the outstanding shares of any class of securities is increased; or 82 . financing arrangements pursuant to which the interested shareholder, directly or indirectly, receives a benefit except proportionately as a shareholder. Our second amended and restated charter will define "related person" generally to mean any person, other than Apollo Management and its affiliates, who is the beneficial owner, either directly or indirectly, of 10% or more of any class or series of the outstanding voting stock or any affiliate or associate of the corporation who has been the beneficial owner, either directly or indirectly, of 10% or more of the voting power of any class or series of the corporation's stock at any time within the five-year period preceding the date in question. The effect of the above may make a change of control of us harder by delaying, deferring or preventing a tender offer or takeover attempt that you might consider to be in your best interest, including those attempts that might result in the payment of a premium over the market price for your shares. They may also promote the continuity of our management by making it more difficult for shareholders to remove or change the incumbent members of the board of directors. The foregoing provisions of our second amended and restated charter are substantially similar to the provisions of the Tennessee Business Combination Act. We have included these provisions in our second amended and restated charter because we are not currently subject to the Combination Act. In order for a corporation to be governed by the provisions of the Combination Act, the corporation must satisfy two of five specified tests and we currently satisfy only one of the five tests. If in the future we satisfy any two of the five tests, we would also become subject to the provisions of the Combination Act as well as the provisions of our charter. AMENDMENT OF CHARTER The provisions of our second amended and restated charter that would have anti-takeover effects as described above will be subject to amendment, alteration or repeal at a meeting of the stockholders by the affirmative vote of the holders of not less than two-thirds (66 2/3%) of the outstanding shares of voting securities. This requirement will make it more difficult for stockholders to make changes to the provisions in our second amended and restated charter which could have anti-takeover effects by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending these provisions of our amended and restated charter. AMENDMENT OF BYLAWS Our second amended and restated charter will provide that our amended bylaws are subject to adoption, amendment, alteration or repeal either by our board of directors without the assent or vote of our stockholders, or by the affirmative vote of the holders of not less than two-thirds (66 2/3%) of the outstanding shares of voting securities. This provision makes it more difficult for stockholders to make changes in our amended bylaws by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending our amended bylaws. TENNESSEE GREENMAIL ACT The Tennessee Greenmail Act prohibits us from purchasing or agreeing to purchase any of our securities, at a price higher than fair market value, from a holder of 3% or more of any class of our securities who has beneficially owned the securities for less than two years. We can make this purchase if the majority of the outstanding shares of each class of voting stock issued by us approves the purchase or if we make an offer of at least equal value per share to all holders of shares of that class. 83 LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Our second amended and restated charter provides that, to the fullest extent permitted by the TBCA, a director will not be liable to us or our shareholders for monetary damages resulting from a breach of his or her fiduciary duty as a director. Under the TBCA, directors have a fiduciary duty which is not eliminated by this provision in our charter. In some circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under the TBCA for breach of the director's duty of loyalty, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends that are prohibited by the TBCA. This charter provision does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The TBCA provides that a corporation may indemnify any director or officer against liability incurred in connection with a proceeding if the director or officer acted in good faith or reasonably believed, in the case of conduct in his or her official capacity with the corporation, that the conduct was in the corporation's best interest. In all other civil cases, a corporation may indemnify a director or officer who reasonably believed that his or her conduct was not opposed to the best interest of the corporation. In connection with any criminal proceeding, a corporation may indemnify any director or officer who had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA does not allow indemnification if the director or officer was adjudged to be liable to the corporation. Similarly, the TBCA prohibits indemnification in connection with any proceeding charging improper personal benefit to a director or officer in which the director or officer was adjudged liable because a personal benefit was improperly received. In cases when the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court may order a corporation to indemnify a director or officer for reasonable expense if, in consideration of all relevant circumstances, the court determines that the individual is fairly and reasonably entitled to indemnification, whether or not the standard of conduct set forth above was met. Our amended bylaws provide that we shall indemnify and advance expenses to our directors and officers to the fullest extent permitted by the TBCA. We also maintain insurance to protect any director or officer against any liability and will enter into indemnification agreements to indemnify our directors in addition to the indemnification provided in our amended and restated charter and amended bylaws. OTHER AGREEMENTS SHAREHOLDERS' AGREEMENTS APL SHAREHOLDERS AGREEMENT. We are a party to a shareholders agreement with Coyote I and Coyote II, both of which are affiliates of and controlled by Apollo Management, and APL Limited (the "APL Shareholders Agreement") which governs aspects of the relationship between ourselves and our currently existing shareholders. The APL Shareholders Agreement contains, among other matters: . a provision restricting the rights of APL Limited to transfer its shares of our common stock, subject to permitted or required transfers and a right of first refusal in favor of us and Coyote. Such transfer restrictions include, -- the right of our board of directors to prohibit the proposed transfer if they determine that the proposed transferee is engaged in any competitive business or such transfer would be materially detrimental to our interests; and 84 -- a prohibition on the transfer of our common stock by APL Limited prior to 30 months after the closing of our acquisition of Pacer Logistics, provided that this restriction does not apply to an initial public offering; . incidental registration rights in the event we effect a registration of our common stock other than in connection with an initial public offering; . participation rights, triggered by the sale of more than 25% of our common stock held by Coyote, that permit APL Limited to participate in the sale on a pro rata basis; provided that the participation rights are not triggered by a public offering; and . bring along rights, triggered in the event that Coyote shall transfer to any person other than us an amount greater than 25% of the number of shares of our common stock outstanding at the time of the proposed transfer, that permit Coyote to require APL Limited to transfer an equivalent portion of our common stock held by it. The APL Shareholders Agreement will terminate upon the earlier of: . the tenth anniversary thereof; or . such time as we are a public company with equity securities listed on a national securities exchange or publicly traded in the over-the-counter market and Coyote shall have sold, in the aggregate, pursuant to one or more public offerings a total of fifty percent of the total shares of our common stock held by them as of the effective time of our recapitalization. MANAGEMENT SHAREHOLDERS AGREEMENT. We are party to a shareholders' agreement (the "Management Shareholders' Agreement") with Coyote and Donald C. Orris, Gerry Angeli, Robert L. Cross, Gary I. Goldfein, Allen E. Steiner, John W. Hein and Richard P. Hyland, all of whom were members of Pacer Logistics management at the time of our recapitalization (the "Management Shareholders"). As of December 28, 2001 after giving effect to the shares of our common stock to be issued in exchange for the Pacer Logistics exchangeable preferred stock, the Management Shareholders would have owned shares, or %, of our outstanding common stock (or % of our common stock upon consummation of this offering). The terms of the Management Shareholders Agreement, including termination provisions, are substantially similar to those of the APL Shareholders' Agreement set forth above and contain, among other matters, . the grant of an irrevocable voting proxy by each of the Management Shareholders to the other Management Shareholders upon the happening of certain events such as death or change in marital status; . the appointment of Donald C. Orris as our chief executive officer; . a provision restricting our right to engage in specified material transactions with Apollo Management, or any affiliates of Apollo unless such transactions are on an "arms-length basis" and receive the consent of our chief executive officer; and . a non-compete covenant restricting the Management Shareholders from participating directly or indirectly in any business which may deemed competitive with ours. INVESTORS SHAREHOLDERS AGREEMENT. We are party to a shareholders' agreement (the "Investors Shareholders' Agreement") with affiliates of Credit Suisse First Boston Corporation, and Deutsche Bank Securities Inc., two of the representatives of the underwriters (collectively, the "Investors"), and Coyote. The terms of the Investors Shareholders Agreement are substantially similar to those of the APL Shareholders Agreement set forth above and contain, among other matters, . participation rights, triggered by the sale of more than $16 million of our common stock by Coyote, that permit the Investors to participate in the sale on a pro rata basis; 85 . bring along rights, triggered in the event that Coyote transfers any of its shares of our common stock to a third-party, that permit Coyote to require the Investors to transfer an equivalent portion of their common stock; . a grant of a voting proxy with respect to 300,000 shares, or % of the shares of common stock to be outstanding after the offering, by the Investors to Joshua J. Harris and any additional successor proxyholder as may be appointed by Coyote, coupled with the exclusive right to take all actions in such proxyholder's sole and absolute discretion; provided that the voting proxy shall terminate upon the earlier of: -- 10 years; and -- at such time that Coyote shall own less than 10% of our outstanding common stock on a fully diluted basis; and . an automatic termination provision providing for the termination of the Investors Shareholders Agreement at such time that Coyote shall own less than 10% of our outstanding common stock on a fully diluted basis. COYOTE REGISTRATION RIGHTS AGREEMENT In addition to the shareholders' agreements, we entered into a separate registration rights agreement with Coyote pursuant to which such affiliates obtained demand and incidental registration rights. As a result, at Apollo's written request, we are obliged to prepare and file a registration statement covering the shares so requested to be registered by Coyote. All of the shares of common stock owned by Coyote after this offering ( if the underwriters exercise the over-allotment option in full) have registration rights under this agreement. In addition, should we propose to register any of our own common stock for sale to the public, Coyote has the opportunity to include its common stock in the same or concurrent registration statement filed by us. We will bear all expenses, with the exception of selling expenses, incurred in the registration process. NASDAQ TRADING We have applied to have our common stock quoted on The Nasdaq Stock Market's National Market under the symbol "PACR." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . 86 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, shares of common stock will be outstanding, excluding 1,202,114 shares reserved at December 28, 2001 for issuance upon exercise of options that have been granted under our stock option plan (257,781 of which were exercisable at such date). Of these shares, shares of common stock sold in the offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares which may be acquired by an affiliate of ours as that term is defined in Rule 144 under the Securities Act, which will be subject to the resale limitations of Rule 144. The remaining shares of common stock outstanding will be restricted securities, as that term is defined in Rule 144, and may in the future be sold without restriction under the Securities Act to the extent permitted by Rule 144 or any applicable exemption under the Securities Act. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned its, his or her shares of common stock for at least one year from the date such securities were acquired from us or an affiliate of ours would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of the common stock (approximately shares immediately after this offering) and the average weekly trading volume of the common stock during the four calendar weeks preceding a sale by such person. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about us. Under Rule 144, however, a person who has held restricted securities for a minimum of two years from the later of the date of such securities were acquired from us or an affiliate of ours and who is not, and for the three months prior to the sale of such restricted securities has not been, an affiliate of ours, is free to sell such shares of common stock without regard to the volume, manner-of-sale and the other limitations contained in Rule 144. The foregoing summary of Rule 144 is not intended to be a complete discussion thereof. Commencing 180 days after the date of this prospectus, approximately outstanding restricted securities will be eligible for sale under Rule 144 subject to applicable holding period, volume limitations, manner of sale and notice requirements set forth in applicable SEC rules and of the restricted securities will be saleable without regard to these restrictions under Rule 144(k). We and our directors and executive officers and substantially all of our shareholders who will beneficially own, as of the completion of this offering, an aggregate of shares of common stock (or presently exercisable options) have each agreed, subject to certain limited exceptions, not to offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, any shares of capital stock or any securities convertible into, or exchangeable for, shares of capital stock for a period of 180 days from the date of this prospectus, without the prior written consent of Credit Suisse First Boston Corporation and Bear, Stearns & Co. Inc. Promptly upon completion of the offering, we intend to file a registration statement on Form S-8 with the SEC to register 1,269,000 shares of our common stock reserved for issuance or sale under our stock option plan. As of December 28, 2001, there were outstanding options to purchase a total of 1,202,114 shares of common stock, 257,781 of which were vested. Shares of common stock issuable upon the exercise of options granted or to be granted under our stock option plan will be freely tradable without restriction under the Securities Act, unless such shares are held by an affiliate of ours. We have granted Coyote demand and incidental registration rights with respect to the shares of common stock owned by Coyote after this offering ( shares assuming the underwriters exercise the over-allotment option in full). In addition, stockholders holding approximately outstanding shares of our common stock after this offering have been granted incidental registration rights in the event we effect a registration of our common stock under the Securities Act. See "Description of Capital Stock--Other Agreements--Shareholders' Agreements" and "--Coyote Registration Rights Agreement." Prior to the offering, there has been no established market for our common stock, and no predictions can be made about the effect, if any, that market sales of shares of common stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, the actual sale of, or the perceived potential for the sale of, common stock in the public market may have an adverse effect on the market price for the common stock. 87 MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK GENERAL The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock that may be relevant to you if you are a non-U.S. holder that acquires our common stock pursuant to this offering. This discussion is limited to non-U.S. holders who hold our common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code (the "Code"). For purposes of this discussion, a non-U.S. holder is a beneficial owner of common stock that is any of the following for U.S. federal income tax purposes: . a nonresident alien individual within the meaning of Section 7701(b) of the Code, . a foreign corporation or other foreign entity taxable as a corporation under U.S. federal income tax law, or . a foreign estate or trust within the meaning of Section 7701(a) of the Code. If an entity treated as a partnership for U.S. federal income tax purposes holds shares of common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activity of the partnership. If you are a partner of a partnership holding shares of common stock, we suggest you consult your own tax advisor. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to you in light of your particular circumstances, and does not address any foreign, state or local tax consequences. Furthermore, this discussion does not consider specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, specific rules that may apply to certain non-U.S. holders, including banks, insurance companies, dealers and traders in securities, or special tax rules that may apply to a non-U.S. holder that holds our common stock as part of a straddle, hedge or conversion transaction. This discussion is based on provisions of the Code, Treasury regulations and administrative and judicial interpretations as of the date of this prospectus. All of these are subject to change, possibly with retroactive effect, or different interpretations. If you are considering buying common stock, you should consult your own tax advisor about current and possible future tax consequences of holding and disposing of common stock in your particular situation. DISTRIBUTIONS If distributions are paid on the shares of our common stock, these distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, and then will constitute a return of capital that is applied against your tax basis in the common stock to the extent these distributions exceed those earnings and profits. Distributions in excess of our current and accumulated earnings and profits and your tax basis in the common stock will be treated as a gain from the sale or exchange of the common stock, the treatment of which is discussed below. Dividends paid to a non-U.S. holder that are not effectively connected with the conduct of a U.S. trade or business of the non-U.S. holder will be subject to U.S. federal withholding tax at a 30% rate or, if an income tax treaty applies and the information reporting requirements described below are satisfied, a lower rate specified by the treaty. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant tax treaty. Withholding generally is imposed on the gross amount of a distribution, regardless of whether we have sufficient earnings and profits to cause the distribution to be a dividend for U.S. federal income tax purposes. However, we may elect to withhold less than the gross amount of the distribution if we determine that the distribution is not paid out of our current or accumulated earnings and profits, based on our reasonable estimates. 88 A non-U.S. holder eligible for a reduced rate of U.S. federal withholding tax under a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for a refund together with the required information with the Internal Revenue Service. Dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business within the U.S. and, if a tax treaty applies, attributable to a non-U.S. holder's U.S. permanent establishment, are exempt from U.S. federal withholding tax if the non-U.S. holder furnishes to us or our paying agent the appropriate Internal Revenue Service form. However, dividends exempt from U.S. federal withholding tax because they are "effectively connected" or attributable to a U.S. permanent establishment under an applicable tax treaty are subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate specified by an applicable tax treaty. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of our common stock unless one of the following applies: . The gain is effectively connected with a non-U.S. holder's conduct of a trade or business within the United States and, if a tax treaty applies, the gain is attributable to a non-U.S holder's U.S. permanent establishment. In such a case, the non-U.S. holder will, unless an applicable tax treaty provides otherwise, generally be taxed on its net gain derived from the sale at regular graduated U.S. federal income tax rates, and in the case of a foreign corporation, may also be subject to the branch profits tax described above. . A non-U.S. holder who is an individual, holds our common stock as a capital asset and is present in the United States for 183 or more days in the taxable year of the sale or other disposition, and certain other conditions are met. In such a case, the non-U.S. holder will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by certain U.S. capital losses. . A non-U.S. holder is subject to tax pursuant to the provisions of U.S. tax law applicable to some U.S. expatriates. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX We must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to that holder and the tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required. Pursuant to an applicable tax treaty, copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides. Under certain circumstances, Treasury regulations require information reporting and backup withholding currently at a rate of 30%, but subject to reduction, on certain payments on common stock. A non-U.S. holder of common stock that fails to certify its non-U.S. holder status in accordance with applicable Treasury regulations or otherwise establish an exemption may be subject to information reporting and this backup withholding tax on payments of dividends. Payment of the proceeds of a sale of our common stock by or through a U.S. office of a broker is subject to both information reporting and backup withholding unless the holder certifies to the payor in the manner required as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption. As a general matter, information reporting and backup withholding will not apply to a payment of the proceeds of a sale of our common stock by or through a foreign office of a foreign broker effected outside the United States. However, information reporting requirements, but not backup withholding, will apply to payment of the proceeds of a sale 89 of our common stock by or through a foreign office of a broker effected outside the United States if that broker is: . a U.S. person, . a foreign person that derives 50% or more of its gross income for specified periods from the conduct of a trade or business in the United States, . a "controlled foreign corporation" as defined in the Code, or . a foreign partnership that at any time during its tax year either (i) has one or more U.S. persons that, in the aggregate, own more than 50% of the income or capital interests in the partnership or (ii) is engaged in the conduct of a trade or business in the United States. Information reporting requirements will not apply to the payment of the proceeds of a sale of our common stock if the broker receives a statement from the owner, signed under penalty of perjury, certifying such owner's non-U.S. status or an exemption is otherwise established. Backup withholding may apply to the payment of the proceeds of a sale of our common stock by or through a non-U.S. office of a broker described above unless certification requirements are satisfied or an exemption is otherwise established. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them. Amounts withheld under the backup withholding rules do not constitute a separate U.S. federal income tax. Rather, any amounts withheld under the backup withholding rules will be refunded or allowed as a credit against the holder's U.S. federal income tax liability, if any, provided the required information and appropriate claim for refund is filed with the Internal Revenue Service. FEDERAL ESTATE TAX Common stock owned or treated as owned by an individual who is not a citizen or resident, as defined for U.S. federal estate tax purposes, of the United States at the time of death will be included in that individual's gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise. The foregoing discussion is a summary of the material federal tax consequences of the ownership, sale or other disposition of our common stock by non-U.S. holders for U.S. federal income and estate tax purposes. You are urged to consult your own tax advisor with respect to the particular tax consequences to you of ownership and disposition of our common stock, including the effect of any state, local, non-U.S. or other tax laws. 90 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2002, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and UBS Warburg LLC are acting as representatives, the following respective numbers of shares of common stock: NUMBER UNDERWRITER OF SHARES ----------- --------- Credit Suisse First Boston Corporation Bear, Stearns & Co. Inc............... Deutsche Bank Securities Inc.......... J.P. Morgan Securities Inc............ UBS Warburg LLC....................... ------- Total.............................. ======= The underwriting agreement provides that the underwriters are severally obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. The selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers. The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay: PER SHARE TOTAL ----------------------------- ----------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us..................................... $ $ $ $ Expenses payable by us...................... $ $ $ $ Underwriting Discounts and Commissions paid by the selling stockholders............... $ $ $ $ Expenses payable by the selling stockholders $ $ $ $ The representatives have informed us that the underwriters do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We intend to use more than 10% of the net proceeds from the sale of the common stock to repay indebtedness owed by us to affiliates of Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. Accordingly, the offering is being made in compliance with the requirements of Rule 2710(c)(8) of the National Association of Securities Dealers, Inc. Conduct Rules. This rule provides generally that if more than 10% of the net proceeds from the sale of stock, not including underwriting compensation, is paid to the 91 underwriters or their affiliates, the initial public offering price of the stock may not be higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, Bear, Stearns & Co. Inc. is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public offering price of the shares of common stock will be no higher than the price recommended by Bear, Stearns & Co. Inc. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the "Securities Act") relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation and Bear, Stearns & Co. Inc. for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of an option or warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing, the issuance of options under our existing stock plans and the issuance of common stock (or options, warrants or convertible securities in respect thereof) in connection with a bona fide merger or acquisition transaction, provided that the common stock (or such options, warrants and convertible securities) so issued is subject to the terms of a lock-up agreement having provisions that are substantially the same as the agreements described in the following paragraph. Our executive officers, directors and stockholders named in this prospectus, together with other stockholders that collectively hold most of the shares of common stock and common stock issuable upon exercise of options have agreed, subject to specified exceptions, that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation and Bear, Stearns & Co. Inc. for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale at the initial public offering price up to shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect. The underwriters have agreed to indemnify us, our directors, our officers who sign the registration statements of which this prospectus is a part and our controlling persons against liabilities under the Securities Act, or contribute to payments that we and our controlling persons may be required to make in that respect. We have applied to list the shares of common stock on The Nasdaq Stock Market's National Market. From time to time, certain of the underwriters have provided, and will continue to provide, investment banking and other services to us and certain existing stockholders, for which they receive customary fees and commissions. Affiliates of Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. beneficially own directly, and indirectly through funds affiliated with Apollo Management, Inc., shares of our common stock. Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiations among us and the representatives. Among the factors to be considered in 92 determining the initial public offering price will be our future prospects and those of our industry in general, our sales, earnings, and certain other financial operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated public offering price range listed on the cover page of this preliminary prospectus may change as a result of market conditions and other factors. In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids and passive market making in accordance with Regulation M under the Exchange Act. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. . In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq National Market and, if commenced, may be discontinued at any time. A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. 93 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling shareholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling shareholders and the dealer from whom the purchase confirmation is received that . the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws, . where required by law, that the purchaser is purchasing as principal and not as agent, and . the purchaser has reviewed the text above under Resale Restrictions. RIGHTS OF ACTION--ONTARIO PURCHASERS ONLY Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us and the selling shareholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling shareholders. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling shareholders will have no liability. In the case of an action for damages, we and the selling shareholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions. ENFORCEMENT OF LEGAL RIGHTS All of our directors and officers as well as the experts named herein and the selling shareholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 94 RELATIONSHIP WITH AFFILIATES OF CERTAIN UNDERWRITERS We are in compliance with the terms of the indebtedness owed by us to affiliates of Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. The decision of Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. to distribute our shares of common stock was not influenced by their respective affiliates that are our lenders and those affiliates had no involvement in determining whether or when to distribute our shares of common stock under this offering or the terms of this offering. Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. will not receive any benefit from this offering other than the underwriting discounts and commissions paid by us and the selling shareholders. LEGAL MATTERS The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Bass Berry Sims PLC, Nashville, Tennessee. Certain legal matters relating to this offering will be passed upon for us by O'Sullivan LLP, New York, New York and for the underwriters by Cahill Gordon & Reindel, New York, New York. EXPERTS The consolidated financial statements of Pacer International, Inc. as of December 28, 2001 and December 29, 2000 and for the years ended December 28, 2001, December 29, 2000 and December 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed a registration statement on Form S-1 under the Securities Act to register with the SEC the shares offered by this prospectus. The term "registration statement" means the original registration statement and any and all amendments thereto, including the schedules and exhibits to the original registration statement or any amendment. This prospectus is part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement or the exhibits to the registration statement. We are currently subject to some of the informational requirements of the Securities Exchange Act of 1934, as amended, and file periodic reports, and other information relating to our business, financial statements and other matters with the SEC. We are not yet, however, subject to the SEC's proxy rules and do not currently file a proxy statement with the SEC. Upon completion of this offering, we will become subject to the SEC's proxy rules. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the regional offices of the SEC located at Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. We intend to distribute to all holders of the shares of common stock offered in the offering annual reports containing audited consolidated financial statements together with a report by our independent certified public accountants. 95 PACER INTERNATIONAL INC. AND SUBSIDIARY COMPANIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements 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. /S/ PRICEWATERHOUSECOOPERS LLP San Francisco, California March 1, 2002 F-2 PACER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 28, DECEMBER 29, 2001 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 OTHER --------------- ----------------- ADDITIONAL DIVISIONAL CUMULATIVE NO. OF NO. OF PAID-IN- ACCUMULATED CONTROL UNEARNED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ACCOUNT COMPENSATION INCOME (LOSS) ------- ------ ---------- ------ ---------- ----------- ---------- ------------ ------------- (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..... -- -- -- -- -- -- -- -- 0.1 ------- ---- ---------- ---- ------ ------- -------- ----- ----- Total Comprehensive Income..... -- -- -- -- -- 14.8 -- -- 0.1 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) $ 0.1 ======= ==== ========== ==== ====== ======= ======== ===== ===== Net Income..................... -- -- -- -- -- 7.0 -- -- -- Other Comprehensive Loss....... -- -- -- -- -- -- -- -- (1.2) ------- ---- ---------- ---- ------ ------- -------- ----- ----- Total Comprehensive Income..... -- -- -- -- -- 7.0 -- -- (1.2) 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) $(1.1) ======= ==== ========== ==== ====== ======= ======== ===== ===== TOTAL STOCKHOLDERS' 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 ------- Total Comprehensive Income..... 14.9 Issuance of Preferred Stock for Exercise of Options........... 0.2 Repurchase and Retirement 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...... $ (2.9) ======= Net Income..................... 7.0 Other Comprehensive Loss....... (1.2) ------- Total Comprehensive Income..... 5.8 Issuance of Preferred Stock for Exercise of Options........... 0.2 Repurchase and Retirement of Preferred Stock............... (0.2) Amort--Unearned Compensation (Note 7)...................... -- Issuance of Common Stock for Exercise of Options........... 0.1 ------- Balance December 28, 2001...... $ 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 displays 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. 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 F-10 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $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. 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 its 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 its 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 F-11 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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. F-12 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 ===== ===== ===== 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. F-13 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 F-14 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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%. F-15 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 limit 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. F-16 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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. F-17 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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. F-18 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 ===== ===== ===== 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 ===== ===== F-19 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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. F-20 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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-21 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 AVERAGE RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING LIFE (MONTHS) EXERCISE PRICE EXERCISABLE EXERCISE 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 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 F-22 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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). 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: APL Limited............................ Lease, maintenance 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. 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 F-23 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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. F-24 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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-25 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-26 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-27 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. 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 F-28 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 F-29 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 equal to a percentage of common stock dividends paid, if any by Pacer Logistics to the Company. 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, DECEMBER 29, DECEMBER 31, 2001 2000 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 =========== =========== =========== -------- (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, F-30 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 Issuers of Guaranteed Securities 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-31 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-32 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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-33 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........................ $ -- $ -- $-- $ -- ===== ===== === ====== 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-34 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 ======= ===== === ======= F-35 PACER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 anti-dilutive. F-36 [PHOTOS/GRAPHICS] [PACER LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of common stock being registered. All of the amount shown are estimated except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. ("NASD") filing fee and the Nasdaq National Market listing fee. AMOUNT TO BE PAID ---------- SEC registration fee.............. $37,500.00 NASD filing fee................... $23,000.00 Nasdaq National Market listing fee * Printing and engraving expenses... * Legal fees and expenses........... * Accounting fees and expenses...... * Blue Sky fees and expenses........ * Transfer agent and registrar fees. * Miscellaneous fees and expenses... * ---------- Total.......................... $ * ========== -------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the Tennessee Business Corporation Act ("TBCA"), there is no specific provision either expressly permitting or prohibiting a corporation from limiting the liability of its directors for monetary damages. Our amended and restated charter provides that, to the fullest extent permitted by the TBCA, a director will not be liable to the corporation or its shareholders for monetary damages for breach of his or her fiduciary duty as a director. The TBCA provides that a corporation may indemnify any director or officer against liability incurred in connection with a proceeding if the director or officer acted in good faith or reasonably believed, in the case of conduct in his or her official capacity with the corporation, that the conduct was in the corporation's best interest. In all other civil cases, a corporation may indemnify a director or officer who reasonably believed that his or her conduct was not opposed to the best interest of the corporation. In connection with any criminal proceeding, a corporation may indemnify any director or officer who had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA does not allow indemnification if the director or officer is adjudged to be liable to the corporation. Similarly, the TBCA prohibits indemnification in connection with any proceeding charging improper personal benefit to a director or officer if the director or officer is adjudged liable because a personal benefit was improperly received. In cases when the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director or officer of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court may order a corporation to indemnify a director or officer for reasonable expense if, in consideration of all relevant circumstances, the court determines that the individual is fairly and reasonably entitled to indemnification, whether or not the standard of conduct set forth above was met. II-1 Our amended bylaws provide that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted by the TBCA. We also maintain insurance to protect any director or officer against any liability and will enter into indemnification agreements with each of our directors. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under our charter. We are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. COMMON STOCK, PREFERRED STOCK AND SENIOR SUBORDINATED NOTES. Set forth in chronological order is information regarding shares of common stock and preferred stock issued by the Registrant or its subsidiary, Pacer Logistics Inc., since January 1, 1999 which were not registered under the Securities Act of 1933 as amended (the "Securities Act"). All common stock share numbers have been adjusted to reflect a 30,000 for 1 stock split effected in May 1999 and a for stock split to be effected prior to the effectiveness of this Registration Statement. Further included is the consideration, if any, received by the Registrant for such shares and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission under which exemption from registration was claimed. 1.In May 1999, the Registrant issued 750,000 shares of common stock to APL Limited as consideration for the acquisition of all of the issued and outstanding capital stock of APL Land Transport Services, Inc. 2.In May 1999, the Registrant issued 9,690,000 shares of common stock to four accredited investors for an aggregate purchase price of $96.9 million, for $10.00 per share. 3.In May 1999, in connection with the acquisition of Pacer Logistics, Pacer Logistics, a subsidiary of the Registrant, issued 24,333.94 shares of its Series B 7.5% Exchangeable Preferred Stock (1,985.5 of which were subsequently redeemed by Pacer Logistics) to certain members of management, which shares are exchangeable for shares of the Registrant's common stock. 4.In May 1999, the Registrant issued $150 million principal amount of 11 3/4% Senior Subordinated Notes due 2009 to Morgan Stanley & Co. Incorporated and Credit Suisse First Boston Corporation as initial purchasers, which notes were resold to qualified institutional buyers pursuant to Rule 144A. These notes were subsequently exchanged for substantially similar notes registered under the Securities Act pursuant to a registration statement on Form S-4. 5.In January 2000, the Registrant issued 300,000 shares of common stock (valued at $6.0 million) to the former shareholders of Conex Global Logistics Services in connection with the acquisition of substantially all the assets of Conex and its subsidiaries. 6.In April 2000, the Registrant issued 287,373 shares of common stock to three employees upon exercise of options for an aggregate purchase price of $349,549.32. 7.In April 2000, the Registrant issued 10,000 shares of common stock to a trust for the benefit of the family of an employee upon the exercise of an option for an aggregate purchase price of $100,000. 8.In August 2000, the Registrant issued 20,000 shares of common stock to an employee upon the exercise of an option for the aggregate purchase price of $200,000. 9.In September 2000, the Registrant issued 20,000 shares of common stock to a trust for the benefit of an employee upon the exercise of an option for the aggregate purchase price of $200,000. 10.In November 2000, the Registrant issued 4,000 shares of common stock to a former employee upon the exercise of an option for the aggregate purchase price of $40,000. 11.In December 2000, the Registrant issued 280,000 shares of common stock (valued at $7.0 million) to the former shareholders of Rail Van, Inc. in connection with the purchase of all the capital stock of Rail Van, Inc. 12.In April 2001, the Registrant issued 182,874 shares of common stock to three employees upon exercise of options for an aggregate purchase price of $40,232.28. 13.In May 2001, the Registrant issued 500 shares of common stock to one employee upon exercise of options for an aggregate purchase price of $5,000. 14.In March 2002, the Registrant issued 1,330 shares of common stock to one employee upon exercise of options for an aggregate purchase price of $13,330. II-2 OPTIONS. The Registrant from time to time has granted stock options to employees, directors and consultants. The following table sets forth certain information regarding such grants. NUMBER OF EXERCISE SHARES PRICE --------- -------- January 1, 1999 to May 27, 1999..... 63,250 $10.00 May 28, 1999 to December 31, 1999... 1,060,500 $10.71 January 1, 2000 to December 31, 2000 381,500 $22.95 January 1, 2001 to December 31, 2001 279,000 $25.00 All of the above-described issuances were exempt from registration (i) pursuant to Section 4(2) of the Securities Act, or Regulation D or Rule 144A promulgated thereunder, as transactions not involving a public offering or (ii) Rule 701 promulgated under the Securities Act or (iii) as transactions not involving a sale of securities. With respect to each transaction listed above, no general solicitation was made by either the Registrant or any person acting on its behalf; the securities sold are subject to transfer restrictions; and the certificates for the shares contained an appropriate legend stating such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. Except with respect to item 4 above, no underwriters were involved in connection with the sales of securities referred to in this Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 1.1 Form of Underwriting Agreement.* 3.1 Amended and Restated Charter of Pacer International, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant'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 Articles of Amendment of Charter.* 3.3 Form of Second Amended and Restated Charter of Pacer International, Inc.* 3.4 Amended and Restated Bylaws of Pacer International, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). 3.5 Form of Second Amended and Restated Bylaws of Pacer International, Inc.* 3.6 Form of Certificate for Common Stock.* 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 Registrant'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 Registrant'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.*** 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.*** II-3 EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 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 Registrant's Current Report on Form 8-K dated January 8, 2001). 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 Registrant'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 Registrant'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 Registrant'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 Registrant'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.*** 5.1 Opinion of Bass Berry & Sims PLC.* 10.1 Employment Agreement for Donald C. Orris. (Incorporated by reference to Exhibit No. 10.1 to the Registrant'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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.3 [Intentionally Omitted] 10.4 Employment Agreement for Robert L. Cross. (Incorporated by reference to Exhibit No. 10.4 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.5 [Intentionally Omitted] 10.6 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.7 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 Corporation, Morgan Stanley Senior Funding, Inc., and Bankers Trust Company. (Incorporated by reference to Exhibit No. 10.26 to the Annual Report on Form 10-K for the year ended December 31, 1999). 10.8 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 Corporation, Morgan Stanley Senior Funding, Inc., and Bankers Trust Company. (Incorporated by reference to Exhibit No. 10.27 to the Annual Report on Form 10-K for the year ended December 31, 1999 ). II-4 EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.9 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 Corporation, Morgan Stanley Senior Funding, Inc. and Bankers Trust Company. (Incorporated by reference to Exhibit No. 10.1 to the Registrant's Current Report on Form 8-K dated January 8, 2001). 10.10 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 Registration Statement on Form S-4 dated August 12, 1999). 10.11 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.12 Administrative Services Agreement, dated as of May 29, 2000, between APL Limited and Pacer International, Inc. *** 10.13 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 10.10 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.14 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.15 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 Registration Statement on Form S-4 dated August 12, 1999). 10.16 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.17 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 Registration Statement on Form S-4 dated August 12, 1999). 10.18 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.19 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.20 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.21 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). II-5 EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.22 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.23 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 Registrant's Current Report on Form 8-K dated January 13, 2000). 10.24 Amendment dated January 12, 2000 to Conex Asset Purchase Agreement dated December 31, 1999 (Incorporated by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated January 13, 2000). 10.25 [Intentionally Omitted] 10.26 [Intentionally Omitted] 10.27 [Intentionally Omitted] 10.28 Rail Car Lease Agreement dated September 1, 2000 among GATX Third Aircraft Corporation and the Registrant (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 22, 2000). 10.29 Pacer International, Inc. 1999 Stock Option Plan.*** 10.30 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.*** 10.31 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.*** 10.32 [Intentionally Omitted] 10.33 [Intentionally Omitted] 10.34 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 Registrant's Current Report on Form 8-K dated January 8, 2001) 10.35 Equipment Use Agreement, dated May 28, 1999, between PAMC UC and Pacer International, Inc.*** 10.36 Stock Exchange Agreement and Plan of Reorganization, dated , 2002 among Pacer International, Inc., Pacer Logistics, Inc., Donald C. Orris, Gerry Angeli, Robert L. Cross, Allen E. Steiner, John W. Hein and Richard P. Hyland.* 10.37 Contribution Agreement dated , 2002 between Pacer International, Inc. and Coyote Acquisition, LLC.* II-6 EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.38 Amendment to the Pacer International, Inc. 1999 Stock Option Plan.* 10.39 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 Registrants' Annual Report on Form 10-K for the year ended December 29, 2000). 10.40 Employment Agreement dated as of April 12, 2000 between Pacer International, Inc. and Charles T. Shurstad. (Incorporated by reference to Exhibit 10.35 to the Registrants' Annual Report on Form 10-K for the year ended December 28, 2001). 10.41 Employment Agreement dated as of December 22, 2000 between Pacer International, Inc. and Jeffrey R. Brashares. (Incorporated by reference to Exhibit B to the Registrant's Current Report on Form 8-K dated January 8, 2001). 10.42 Employment Agreement dated as of December 22, 2000 between Pacer International, Inc. and Denis M. Bruncak. (Incorporated by reference to Exhibit C to the Registrant's Current Report on Form 8-K dated January 8, 2001). 10.43 Employment Agreement dated as of August 22, 2001 between Pacer International, Inc. and Michael Killea. (Incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.44 Amendment No. 1 to Domestic Incentive Agreement between CSX Intermodal, Inc. and Pacer International, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended April 6, 2001). 10.45 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 Registrant's Quarterly Report on Form 10-Q for the Quarter Ended April 6, 2001). 10.46 Rail Car Lease Agreement dated September 25, 2001 by and between General Electric Railcar Services Corporation and Pacer International, Inc. (Incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.47 Rail Car Lease Agreement dated January, 2001 by and between LaSalle National Leasing Corporation and the Company. (Incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.48 Rail Car Lease Agreement dated February 14, 2001 by and between Greenbrier Leasing Corporation and the Company. (Incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.49 Separation and Release Agreement dated as of December 31, 2001 between Pacer International, Inc. and Robert L. Cross. (Incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 21.1 Subsidiaries of Registrant (Incorporated by reference to the Exhibit 21.1 to the Registrant's Form 10-K for the year ending December 28, 2001). 23.1 Consent of Bass Berry & Sims PLC (included in Exhibit 5.1).* 23.2 Consent of PricewaterhouseCoopers LLP.** 24.1 Powers of Attorney.*** -------- * To be filed by amendment ** Filed herewith *** Previously filed II-7 (b) FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore have been omitted. UNDERTAKINGS. The Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant undertakes that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 FOR THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF COLORADO, ON APRIL 11, 2002. PACER INTERNATIONAL, INC. By: /S/ LAWRENCE C. YARBERRY ----------------------------- LAWRENCE C. YARBERRY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 FOR THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- * Chairman, President and Chief April 11, 2002 ------------------------------- Executive Officer DONALD C. ORRIS * Executive Vice President and Chief April 11, 2002 ------------------------------- Financial Officer (Principal LAWRENCE C. YARBERRY Financial and Accounting Officer) * Director April 11, 2002 ------------------------------- JOSHUA J. HARRIS * Director April 11, 2002 ------------------------------- BRUCE H. SPECTOR * Director April 11, 2002 ------------------------------- MARC E. BECKER * Director April 11, 2002 ------------------------------- TIMOTHY J. RHEIN * Director April 11, 2002 ------------------------------- MICHAEL S. GROSS * Director April 11, 2002 ------------------------------- THOMAS L. FINKBINER *BY: /S/ LAWRENCE C. YARBERRY ------------------------------- ATTORNEY-IN-FACT II-9 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Pacer International, Inc.: Our audit of the consolidated financial statements referred to in our report dated March 1, 2002 appearing in Amendment No. 1 to this Registration Statement on Form S-1 of Pacer International, Inc. also included an audit of the financial statement schedule listed in Item 16 of this Registration Statement. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California March 1, 2002 S-1 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-2 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 1.1 Form of Underwriting Agreement.* 3.1 Amended and Restated Charter of Pacer International, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant'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 Articles of Amendment of Charter.* 3.3 Form of Second Amended and Restated Charter of Pacer International, Inc.* 3.4 Amended and Restated Bylaws of Pacer International, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). 3.5 Form of Second Amended and Restated Bylaws of Pacer International, Inc.* 3.6 Form of Certificate for Common Stock.* 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 Registrant'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 Registrant'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.*** 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.*** 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.*** 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 Registrant'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 Registrant'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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 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 Registrant'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.*** 5.1 Opinion of Bass Berry & Sims PLC.* 10.1 Employment Agreement for Donald C. Orris. (Incorporated by reference to Exhibit No. 10.1 to the Registrant'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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.3 [Intentionally Omitted] 10.4 Employment Agreement for Robert L. Cross. (Incorporated by reference to Exhibit No. 10.4 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.5 [Intentionally Omitted] 10.6 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.7 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 Corporation, Morgan Stanley Senior Funding, Inc., and Bankers Trust Company. (Incorporated by reference to Exhibit No. 10.26 to the Annual Report on Form 10-K for the year ended December 31, 1999). 10.8 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 Corporation, Morgan Stanley Senior Funding, Inc., and Bankers Trust Company. (Incorporated by reference to Exhibit No. 10.27 to the Annual Report on Form 10-K for the year ended December 31, 1999). 10.9 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 Corporation, Morgan Stanley Senior Funding, Inc. and Bankers Trust Company.* 10.10 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.11 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.12 Administrative Services Agreement, dated as of May 29, 1999, between APL Limited and Pacer International, Inc.*** 10.13 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 10.10 to the Registrant's Registration Statement on Form S-4 dated November 5, 1999). EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.14 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.15 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.16 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 Registrant's Registration Statement on Form S-4 dated August 12, 1999). 10.17 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 Registration Statement on Form S-4 dated August 12, 1999). 10.18 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 Registration Statement on Form S-4 dated August 12, 1999). 10.19 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 Registration Statement on Form S-4 dated August 12, 1999). 10.20 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.21 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.22 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 Registrant's Registration Statement on Form S-4 dated November 5, 1999). 10.23 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 Registrants' Current Report on Form 8-K dated January 13, 2000). 10.24 Amendment dated January 12, 2000 to Conex Asset Purchase Agreement dated December 31, 1999 (Incorporated by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated January 13, 2000). 10.25 [Intentionally Omitted] 10.26 [Intentionally Omitted] 10.27 [Intentionally Omitted] EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.28 Rail Car Lease Agreement dated September 1, 2000 among GATX Third Aircraft Corporation and the Registrant (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended September 22, 2000). 10.29 Pacer International, Inc. 1999 Stock Option Plan.*** 10.30 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.*** 10.31 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.*** 10.32 [Intentionally Omitted] 10.33 [Intentionally Omitted] 10.34 Stock Purchase Agreement, dated December 22, 2000 by and among Pacer International, Inc., Rail Van, Inc. and all of the Stockholders of Rail Van, Inc.*** 10.35 Equipment Use Agreement, dated May 28, 1999, between PAMC UC and Pacer International, Inc.*** 10.36 Stock Exchange Agreement and Plan of Reorganization, dated , 2002 among Pacer International, Inc., Pacer Logistics, Inc., Donald C. Orris, Gerry Angeli, Robert L. Cross, Allen E. Steiner, Gary Goldfein, John W. Hein and Richard P. Hyland.* 10.37 Contribution Agreement dated , 2002 between Pacer International, Inc. Coyote Acquisition, LLC.* 10.38 Amendment to the Pacer International, Inc. 1999 Stock Option Plan.* 10.39 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 Registrants' Annual Report on Form 10-K for the year ended December 29, 2000). 10.40 Employment Agreement dated as of April 12, 2000 between Pacer International, Inc. and Charles T. Shurstad. (Incorporated by reference to Exhibit 10.35 to the Registrants' Annual Report on Form 10-K for the year ended December 28, 2001). 10.41 Employment Agreement dated as of December 22, 2000 between Pacer International, Inc. and Jeffrey R. Brashares. (Incorporated by reference to Exhibit B to the Registrant's Current Report on Form 8-K dated January 8, 2001). 10.42 Employment Agreement dated as of December 22, 2000 between Pacer International, Inc. and Denis M. Bruncak. (Incorporated by reference to Exhibit C to the Registrant's Current Report on Form 8-K dated January 8, 2001). 10.43 Employment Agreement dated as of August 22, 2001 between Pacer International, Inc. and Michael Killea. (Incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.44 Amendment No. 1 to Domestic Incentive Agreement between CSX Intermodal, Inc. and Pacer International, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended April 6, 2001). EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ ------------------- 10.45 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 Registrant's Quarterly Report on Form 10-Q for the Quarter Ended April 6, 2001). 10.46 Rail Car Lease Agreement dated September 25, 2001 by and between General Electric Railcar Services Corporation and Pacer International, Inc. (Incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.47 Rail Car Lease Agreement dated January, 2001 by and between LaSalle National Leasing Corporation and the Company. (Incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.48 Rail Car Lease Agreement dated February 14, 2001 by and between Greenbrier Leasing Corporation and the Company. (Incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 10.49 Separation and Release Agreement dated as of December 31, 2001 between Pacer International, Inc. and Robert L. Cross. (Incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2001). 21.1 Subsidiaries of Registrant (Incorporated by reference to the Exhibit 21.1 to the Registrants' Form 10-K for the year ending December 28, 2001). 23.1 Consent of Bass Berry & Sims PLC (included in Exhibit 5.1).* 23.2 Consent of PricewaterhouseCoopers LLP.** 24.1 Powers of Attorney.*** -------- * To be filed by amendment ** Filed herewith *** Previously filed