<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 17,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-85041
PACER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-0935669
- - ---------------------------- ----------------
(State or other jurisdiction (I.R.S. employer
of organization) identification no.)
1340 Treat Blvd., Suite 200
Walnut Creek, CA 94596
Telephone Number (800) 225-4222
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___ No X
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding
Class at October 30, 1999
- - -------------------------------------- -------------------
Common stock, $.01 par value per share 10,440,000 shares
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 17, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part 1. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet......................................... 3
Condensed Consolidated Income Statement...................................... 4
Condensed Consolidated Statements of Stockholders' Equity.................... 5
Condensed Consolidated Statements of Cash Flows.............................. 6
Notes to Condensed Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................... 13
Part 2. Other Information
Item 1. Legal Proceedings............................................................ 21
Item 6. Exhibits and Reports on Form 8-K ............................................ 21
Signatures............................................................................ 22
Exhibit Index......................................................................... 23
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 17, 1999
AND
AMERICAN PRESIDENT LINES STACKTRAIN SERVICES,
a division of APL Land Transport Services, Inc.
STATEMENT OF ASSETS, LIABILITIES AND DIVISIONAL CONTROL ACCOUNT AS OF DECEMBER
25, 1998
(SEE NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
September 17, 1999 December 25, 1998
------------------ -----------------
(In millions)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................. $ 10.1 $ -
Accounts receivable, net of allowances of $3.0 million and $0.7
million, respectively........................................... 152.3 43.9
Intercompany trade receivables........................................ - 3.4
Prepaid expenses and other............................................ 2.7 0.1
Deferred income taxes................................................. 0.6 -
------------------ -----------------
Total current assets................................................ 165.7 47.4
------------------ -----------------
Property and equipment
Property and equipment at cost........................................ 61.8 95.4
Accumulated depreciation.............................................. (9.9) (6.6)
------------------ -----------------
Property and equipment, net......................................... 51.9 88.8
------------------ -----------------
Other assets
Goodwill and other intangible assets, net............................. 140.7 19.2
Deferred income taxes................................................. 83.3 -
Other assets.......................................................... 12.7 0.7
------------------ -----------------
Total other assets.................................................. 236.7 19.9
------------------ -----------------
Total assets............................................................ $ 454.3 $ 156.1
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
OR DIVISIONAL CONTROL ACCOUNT
Current liabilities
Current maturities of long-term debt and capital leases............... $ 1.8 $ -
Accounts payable and accrued liabilities.............................. 178.2 84.6
------------------ -----------------
Total current liabilities........................................... 180.0 84.6
------------------ -----------------
Long-term liabilities
Deferred income taxes................................................. - 15.4
Long-term debt and capital leases..................................... 283.3 -
Other................................................................. 2.9 0.5
------------------ -----------------
Total long-term liabilities......................................... 286.2 15.9
------------------ -----------------
Total liabilities....................................................... 466.2 100.5
------------------ -----------------
Minority interest - exchangeable preferred stock........................ 22.9 -
------------------ -----------------
Commitments and contingencies (Note 7).................................. - -
------------------ -----------------
Stockholders' equity or divisional control account
Divisional control account............................................ - 55.6
Preferred stock at September 17, 1999: $0.01 par value,
1,000,000 shares authorized, none outstanding....................... - -
Common stock at September 17, 1999: $0.01 par value,
20,000,000 shares authorized, 10,440,000 issued and outstanding..... 0.1 -
Additional paid in capital............................................ 104.3 -
Retained earnings (accumulated deficit)............................... (139.2) -
------------------ -----------------
Total stockholders' equity (deficit) or divisional control account.. (34.8) 55.6
------------------ -----------------
Total liabilities and equity or divisional control account.............. $ 454.3 $ 156.1
================== =================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 17, September 18, September 17, September 18,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Gross revenues..................................... $ 258.3 $ 130.8 $ 616.9 $ 416.2
Cost of purchased transportation and
services......................................... 207.5 102.2 494.0 330.4
-------------- ------------- -------------- -------------
Net revenues..................................... 50.8 28.6 122.9 85.8
-------------- ------------- -------------- -------------
Operating expenses:
Direct operating expenses........................ 15.0 8.9 46.0 39.7
Selling, general and administrative
expenses......................................... 18.5 7.3 37.1 21.9
Depreciation and amortization.................... 2.3 1.5 5.9 4.8
-------------- ------------- -------------- -------------
Total operating expenses......................... 35.8 17.7 89.0 66.4
-------------- ------------- -------------- -------------
Income from operations............................. 15.0 10.9 33.9 19.4
-------------- ------------- -------------- -------------
Interest expense (income), net..................... 7.2 (0.3) 9.6 -
-------------- ------------- -------------- -------------
Income before income taxes and minority
Interest......................................... 7.8 11.2 24.3 19.4
-------------- ------------- -------------- -------------
Income taxes or charge in lieu of income taxes..... 3.3 4.1 9.5 7.3
Minority interest.................................. 0.4 - 0.6 -
-------------- ------------- -------------- -------------
Net income......................................... $ 4.1 $ 7.1 $ 14.2 $ 12.1
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 17, 1999
(Unaudited)
(dollars in millions)
<TABLE>
<CAPTION>
Common Stock
----------------- Additional Divisional Total
No. of Paid-in Accumulated Control Stockholders'
Shares Amount Capital Deficit Account Equity(Deficit)
------ ------ ---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 25, 1998 .................... $ - $ - $ - $ 55.6 $ 55.6
Distribution to Shareholders ......... (300.0) - (300.0)
Effects of Recapitalization .......... 146.6 (55.6) 91.0
Issuance of Common Stock.............. 10.4 0.1 104.3 - - 104.4
Net Income ........................... 14.2 - 14.2
------ ------ ---------- ----------- ---------- ---------------
September 17, 1999 ................... 10.4 $ 0.1 $ 104.3 $ (139.2) $ - $ (34.8)
====== ====== ========== =========== ========== ===============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 17, September 18,
1999 1998
----------------- -----------------
(in millions)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income..................................................... $ 14.2 $ 12.1
Adjustments to reconcile net income to net cash provided ----------------- -----------------
by (used in) operating activities:
Depreciation and amortization................................ 5.9 4.8
Deferred income taxes........................................ 1.7 -
Changes in current assets and liabilities:
Trade and other receivables................................. (59.1) (28.5)
Prepaid expenses and other assets........................... (0.5) -
Accounts payable and accrued liabilities.................... 55.0 19.6
Other....................................................... 0.4 -
----------------- -----------------
Net cash provided by (used for) operating
activities.............................................. 17.6 8.0
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of business, net of cash acquired..................... (111.3) -
Capital expenditures........................................... (1.5) (39.7)
Proceeds from sales of property and equipment.................. 39.6 -
----------------- -----------------
Net cash provided by (used for) investing
activities.............................................. (73.2) (39.7)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdrafts................................................ (1.9) -
Proceeds of long-term debt, net of costs....................... 277.5 -
Proceeds from issuance of common stock......................... 104.4 -
Distribution to shareholders and recap costs................... (310.2) -
Redemption of preferred stock of subsidiary.................... (2.0) -
Intercompany funding, net...................................... - 31.7
Debt, revolver and capital lease obligation repayment.......... (2.1) -
----------------- -----------------
Net cash provided by (used for ) financing
activities.............................................. 65.7 31.7
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ $ 10.1 $ -
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD...................................................... $ - $ -
----------------- -----------------
CASH AND CASH EQUIVALENTS - END OF
PERIOD...................................................... $ 10.1 $ -
================= =================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Prior to November 1998 APL Land Transport Services, Inc. consisted of two
operating divisions: Stacktrain Services Division and the Automotive Division.
However, on November 20, 1998, APL Land Transport Services, Inc. transferred all
of its assets, except those of the Stacktrain Services Division, to its parent,
APL Limited. As of May 28, 1999 APL Land Transport Services, Inc. ("the
Company") was recapitalized through (1) the purchase by a group led by entities
formed by affiliates of Apollo Management, L.P of shares of the Company's common
stock from APL Limited and (2) the Company's redemption of shares of its common
stock held by APL Limited. 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.
See Note 4. Immediately following its recapitalization, the Company acquired
Pacer Logistics, Inc. through the merger of a transitory subsidiary with and
into Pacer Logistics, Inc., resulting in Pacer Logistics becoming a subsidiary
of the Company. The acquisition of Pacer Logistics was accounted for using the
purchase method of accounting. See Note 2. In connection with the completion of
these transactions, APL Land Transport Services, Inc. was renamed Pacer
International, Inc.
Basis of Presentation
The unaudited interim financial statements as of September 17, 1999 and for
the three and nine months ended September 17, 1999 and September 18, 1998 are
condensed and do not contain all information required by generally accepted
accounting principles to be included in a full set of financial statements. In
the opinion of management, all adjustments, consisting of only normal recurring
adjustments, that are necessary for fair presentation have been included. The
results of operations for any interim period are not necessarily indicative of
the results of operations to be expected for any full fiscal year. The amounts
for the Statement of Assets, Liabilities and Divisional Control Account as of
December 25, 1998 were derived from the audited financial statements of the
Company, formerly known as American President Lines Stacktrain Services, a
division of APL Land Transport Services, Inc. These unaudited interim financial
statements and footnotes should be read in conjunction with the audited
financial statements for the fiscal year ended December 25, 1998 included in the
Company's Registration Statement on Form S-4 (Registration No. 333-85041) as
filed with the Securities and Exchange Commission.
Principles of Consolidation
The consolidated financial statements as of and for the nine months ending
September 17, 1999 include the accounts of the Company and its subsidiary, Pacer
Logistics, Inc., 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 services and providing logistic services in North America.
Goodwill
Goodwill represents the excess of cost over the estimated fair value of
the net tangible and intangible assets acquired and is being amortized over 40
years on a straight-line basis. 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
7
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 the sum of the undiscounted cash flows from those related
assets.
Deferred Financing Costs
The deferred financing costs 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.
Reclassification
Certain classifications have been made to the 1998 balances to conform with
the 1999 presentation. These reclassifications had no effect on the Company's
financial position or net income.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," modifying accounting and reporting standards for
derivative instruments. The Company does not expect the effect of
implementation of this standard to be significant.
NOTE 2. THE RECAPITALIZATION AND PURCHASE TRANSACTIONS
The recapitalization of the Company and acquisition of Pacer Logistics,
financed primarily with the issuance of $150 million in senior subordinated
notes, $135 million in term loans, $133 million in issued, rolled or exchanged
equity and $40 million in proceeds from the sale and leaseback of 199 railcars
purchased in 1998, resulted in affiliates of Apollo Management, LP holding
89.9%, APL Limited holding 7.2% and affiliates of Deutsche Bank Securities, Inc.
and Credit Suisse First Boston holding 2.9% of the Company's outstanding common
stock as of May 28, 1999.
As discussed in Note 1, on May 28, 1999, the Company acquired the common
stock of Pacer Logistics, Inc. (formerly known as Pacer International, Inc.), a
privately-held third party logistics provider pursuant to a stock purchase
agreement (the "Purchase Agreement"), dated as of March 15, 1999 between APL
Limited (the Company's former parent) and Coyote Acquisition LLC (a transitory
subsidiary which was merged with and into Pacer Logistics, Inc. after the
acquisition).
The Company paid approximately $137.5 million for the acquisition of Pacer
Logistics, Inc., 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 raised in the note offering and with funds under the
Credit Facility as discussed in Note 3. The acquisition of Pacer Logistics has
been accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations". The aggregate purchase price has been
allocated to the underlying assets and liabilities based upon preliminary
estimates of fair values at the date of acquisition, which may be updated based
on final appraisals, with the remainder allocated to goodwill to be amortized
over 40 years. The Company determined a 40-year amortization period was
appropriate after considering that there are no legal, regulatory or contractual
provisions
8
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
associated with the logistics segment that may limit the useful life of the
goodwill, the service provided by the logistics segment is not subject to
obsolescence, the Company is not aware of any expected actions of competitors
and others that may restrict the logistics segment's ability to successfully
compete in the industry and the predecessor company of the logistics segment has
successfully operated since 1928. Though the fair value estimates are
preliminary, management does not believe there will be a material change to
goodwill when these estimates are finalized. The results of operations for the
acquired business are included in the Company's consolidated financial
statements beginning May 28, 1999. The purchase price allocation, preliminary in
nature and subject to change, is as follows (in millions):
Accounts receivable, net .............................. $ 45.9
Prepaid expenses and other current assets ............. 2.9
Property and equipment, net ........................... 4.4
Other non-current assets .............................. 2.1
Goodwill .............................................. 122.8
Current liabilities ................................... (39.9)
Long-term liabilities ................................. (0.7)
------
Total purchase price ......................... $137.5
======
Pro forma results of operations, giving effect to the Company's
recapitalization and acquisition of Pacer Logistics at the beginning of each
period presented is as follows:
Nine Months Ended Nine Months Ended
September 17, September 18,
1999 1998
----------------- ----------------
(Unaudited) (Unaudited)
(in millions)
Gross revenues................................. $ 767.4 $ 708.4
Income before extraordinary items.............. $ 13.3 $ 7.9
Net income..................................... $ 13.3 $ 7.9
NOTE 3. NOTES PAYABLE
In conjunction with the transactions described above, the Company issued
$150 million aggregate principal amount of 11.75% senior subordinated notes due
June 1, 2007 under the indenture dated as of May 28, 1999. Interest on the
notes is payable semi-annually in cash on each June 1 and December 1, commencing
on December 1, 1999. The Company may redeem the notes, in whole at any time or
in part from time to time on and after June 1, 2003, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices: 2003 -105.875%;
2004 -102.938%; 2005 and thereafter -100.00%. The indenture provides that upon
the occurrence of a change of control, each holder of notes will have the right
to require that the Company purchase all or a portion of such holder's notes at
a purchase price equal to 101.0% of the principal amount thereof plus accrued
interest to the date of purchase.
The notes are fully and unconditionally guaranteed, on a senior
subordinated basis, jointly and severally, by each of the Company's
subsidiaries. The indenture contains covenants limiting the Company's ability
to incur additional indebtedness, and restricts the Company's ability to pay
dividends or make certain other restricted payments, consummate certain asset
sales, or otherwise dispose of all or substantially all of the assets of the
Company and its subsidiaries.
9
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The Company also entered into a credit agreement that provides for a seven-
year $135 million term loan (the "Term Loan") which was used to finance the
recapitalization and certain indebtedness of the company and a five-year $100
million revolving credit facility (the "Line of Credit"). 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 certain financial ratios. 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 certain financial ratios. At September 17,
1999, the interest rate on the Term Loan and the Line of Credit was 8.4% and
7.9%, respectively.
The Company must pay a commitment fee equal to 0.5% per annum on the unused
portion of the Line of Credit, subject to decreases based on the achievement of
certain financial ratios and subject to increases based on the amount of unused
commitments. In addition, the credit agreement contains customary covenants,
the most restrictive of which limits the Company's ability to declare dividends,
prepay debt, make investments, incur additional indebtedness, make capital
expenditures, engage in mergers, acquisitions and asset sales, and issue
redeemable common stock and preferred stock, subject to certain exceptions. The
Company is also required to comply with specified financial covenants. At
September 17, 1999, the Company had $100 million available under the Line of
Credit.
NOTE 4. 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.
Income taxes are recognized utilizing the asset and liability method, under
which deferred income taxes are recognized for the consequences of temporary
differences by applying currently enacted statutory rates to differences in the
financial statement carrying amounts and the tax basis of existing assets and
liabilities.
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. A preliminary allocation of the purchase price to the
tax basis of assets and liabilities based on their respective fair value at May
28, 1999 was made for income tax purposes and will be finalized during 1999.
In connection with the transaction, the Company recorded a deferred tax
asset of approximately $85 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. Realization of the deferred tax asset is dependant upon
the Company's ability to generate sufficient future taxable income which
management believes is more likely than not based on historical operating
results. Accordingly, no valuation allowance has been recorded.
NOTE 5. 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 plans.
10
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
On May 28, 1999, the Board of Directors authorized the creation of the
Pacer International, Inc. 1999 Stock Option Plan under which 1,348,500 options
for the Company's common stock were authorized, of which 1,078,114 options have
been granted at or above fair market value at the date of grant. Of the options
granted, 92,614 were part of the 1998 Pacer Logistics, Inc. Stock Option Plan
that were rolled over as part of the acquisition of Pacer Logistics.
In July 1999 the Company repurchased $2.0 million (1,985.5 shares) of the
outstanding exchangeable preferred stock of Pacer Logistics originally issued in
connection with the acquisition of Pacer Logistics.
NOTE 6. RELATED PARTY TRANSACTIONS
Prior to the recapitalization, APL Land Transport Services Inc. shared in
certain expenses of the former parent for services including systems support,
office space and other corporate services. Pursuant to the recapitalization,
the Company has signed long-term agreements with APL Limited for the domestic
transportation on the stacktrain network of APL Limited's international freight
for an annual management fee of $6.6 million and for administrative services
such as billing and accounts receivable and payable processing on a per
transaction basis. In addition, the information technology services of APL
Limited are currently being provided to the Company according to a term sheet
upon which negotiations for a long-term agreement are based. The annual fee for
these services is $10 million.
NOTE 7. CONTINGENCIES
The Company is party to various legal proceedings, claims and assessments
arising in the normal course of its business activities.
In June 1995, APL Limited, the Company's former parent, sold the assets of
its trucking company, American President Trucking ("APT") to Burlington Motor
Carriers ("BMC"). The sale included the sublease of terminal real estate to BMC
and the sublease of tractor units to Stoops Freightliner, which in turn entered
into a use agreement with BMC. BMC and the Company entered into a service
agreement whereby the Company guaranteed certain levels of traffic to BMC. Under
new ownership from a 1995 bankruptcy proceeding, BMC advised APL Limited and the
Company that it believed the Company breached the service agreement when APL
Limited sold its Distribution Services unit, and demanded $0.8 million in
compensation. The Company disputed the claim. BMC and Stoops Freightliner filed
subsequent complaints in BMC bankruptcy proceedings demanding unspecified
damages. APL Limited and the Company filed motions to dismiss both complaints.
On November 13, 1998, APL Limited and the Company's motions were granted; BMC
has filed an appeal; Stoops Freightliners has not. The Company does not believe
that the ultimate outcome, if unfavorable, will have a material adverse impact
on the financial position or results of operations of the Company, and has not
reserved for this contingency.
Two subsidiaries of Pacer Logistics, Interstate Consolidation, Inc. and
Intermodal Container Service, Inc., are 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. Plaintiffs
have demanded in excess of $8.8 million, together with unspecified punitive
damages, costs and interest, as well as equitable relief. The defendants have
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 and a
11
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
maximum judgement amount. A decision is expected in January of 2000. The
Company has defended and will continue to defend this action vigorously and
believes that its defenses are meritorious. 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 or results of operations.
NOTE 8. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which changes the way the Company reports
information about its reportable operating segments.
With the acquisition of Pacer Logistics on May 28, 1999, the Company has
two reportable segments, the stacktrain segment and the logistics segment, which
have separate management teams and offer different but related products and
services. The stacktrain segment provides intermodal rail service in North
America by selling intermodal service to shippers while buying space on
intermodal rail trains. The large majority of business is conducted
domestically, with minor services in Mexico and Canada. Customers include
intermodal marketers who serve customers in various industries as well as the
ocean carrier industry. The logistics segment supports the stacktrain segment
by offering marketing, freight handling, truck and local pickup and delivery
services. Prior to May 28, 1999, the Company had only one reportable segment,
the stacktrain segment.
The following table presents reportable segment information for the three and
nine months ended September 17, 1999 and September 18, 1998 (in millions).
<TABLE>
<CAPTION>
Stacktrain Logistics Other Consolidated
---------- --------- ------ ------------
<S> <C> <C> <C> <C>
3 Months ended September 17, 1999
Gross revenues....................... $ 165.3 $ 99.8 $ (6.8) $ 258.3
Net revenues......................... 34.6 16.2 - 50.8
Income from operations............... 10.7 4.3 - 15.0
Interest expense, net................ 6.5 0.7 - 7.2
Tax expense.......................... 1.7 1.6 - 3.3
Net income........................... 2.5 2.0 (0.4) 4.1
Depreciation and amortization........ 1.3 1.0 - 2.3
Capital expenditures................. - 1.4 - 1.4
Total assets......................... 388.0 133.4 (67.1) 454.3
3 Months ended September 18, 1998
Gross revenues....................... $ 130.8 $ - $ - $ 130.8
Net revenues......................... 28.6 - - 28.6
Income from operations............... 10.9 - - 10.9
Interest expense, net................ (0.3) - - (0.3)
Tax expense.......................... 4.1 - - 4.1
Net income........................... 7.1 - - 7.1
Depreciation and amortization........ 1.5 - - 1.5
Capital expenditures................. - - - -
Total assets......................... 175.2 - - 175.2
</TABLE>
12
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Stacktrain Logistics Other Consolidated
---------- --------- ----- ------------
<S> <C> <C> <C> <C>
9 Months ended September 17, 1999
Gross revenues........................ $ 492.1 $ 134.2 $(9.4) $ 616.9
Net revenues.......................... 101.2 21.7 - 122.9
Income from operations................ 28.1 5.8 - 33.9
Interest expense, net................. 8.4 1.2 - 9.6
Tax expense........................... 7.4 2.1 - 9.5
Net income............................ 12.3 2.5 (0.6) 14.2
Depreciation and amortization......... 4.5 1.4 - 5.9
Capital expenditures.................. - 1.5 - 1.5
Total assets.......................... 388.0 133.4 (67.1) 454.3
9 Months ended September 18, 1998
Gross revenues........................ $ 416.2 $ - $ - $ 416.2
Net revenues.......................... 85.8 - - 85.8
Income from operations................ 19.4 - - 19.4
Interest expense, net................. - - - -
Tax expense........................... 7.3 - - 7.3
Net income............................ 12.1 - - 12.1
Depreciation and amortization......... 4.8 - - 4.8
Capital expenditures.................. 39.7 - - 39.7
Total assets.......................... 175.2 - - 175.2
</TABLE>
Data in the "Other" column includes elimination of intercompany balances and
subsidiary investment.
For the three and nine month periods ended September 17, 1999, the Company
had one and two customers, respectively which contributed more than 10% of the
Company's total gross revenues. Total gross revenues of $29 million were
generated by the stacktrain segment from Hub City for the three months ended
September 17, 1999. Total gross revenues of $94 million were generated by the
stacktrain segment from Hub City and $69 million from Union Pacific (generated
by both reporting segments) for the nine months ended September 17, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain Forward-Looking Statements
- - ----------------------------------
This quarterly report on Form 10-Q contains certain forward looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) that involve substantial risks and uncertainties relating to the
Company that are based on the beliefs of management. When used in this Form
10-Q, the words "anticipate", "believe", "estimate", "expect", "intend", and
similar expressions, as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to the risks and uncertainties regarding the
operations and the results of operations of the Company as well as its customers
and suppliers, including as a result of the availability of consumer credit,
interest rates, employment trends, changes in levels of consumer confidence,
changes in consumer preferences, pricing pressures, shifts in market demand, and
general economic conditions. Certain risks and uncertainties relating
specifically to the Company's Year 2000 efforts include, but are not limited to,
the ability to identify and remediate all date sensitive lines of computer code
or to replace embedded computer chips in affected systems or equipment and the
actions of various third parties with respect to Year 2000 problems. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions or estimates prove
13
<PAGE>
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended.
Results of Operations
- - ---------------------
Three Months Ended September 17, 1999 Compared to Three Months Ended
- - --------------------------------------------------------------------
September18, 1998
- - -----------------
The following table sets forth historical financial data for the Company
comparing data for the three months ended September 17, 1999 and September 18,
1998.
Financial Data Comparison by Reportable Segment
Three Months Ended September 17, 1999 and September 18, 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998 Change % Change
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenues
Stacktrain...................................... $ 165.3 $ 130.8 $ 34.5 26.4%
Logistics....................................... 99.8 - 99.8 n/a
Inter-segment elimination....................... (6.8) - (6.8) n/a
------------ ------------ ------------ ------------
Total........................................ 258.3 130.8 127.5 97.5
Cost of purchased transportation and services
Stacktrain...................................... 130.7 102.2 28.5 27.9
Logistics....................................... 83.6 - 83.6 n/a
Inter-segment elimination....................... (6.8) - (6.8) n/a
------------ ------------ ------------ ------------
Total........................................ 207.5 102.2 105.3 103.0
Net revenues
Stacktrain...................................... 34.6 28.6 6.0 21.0
Logistics....................................... 16.2 - 16.2 n/a
------------ ------------ ------------ ------------
Total.......................................... 50.8 28.6 22.2 77.6
Direct operating expenses
Stacktrain...................................... 15.0 8.9 6.1 68.5
Logistics....................................... - - - n/a
------------ ------------ ------------ ------------
Total........................................ 15.0 8.9 6.1 68.5
Selling, general & administrative expenses
Stacktrain...................................... 7.6 7.3 0.3 4.1
Logistics....................................... 10.9 - 10.9 n/a
------------ ------------ ------------ ------------
Total.......................................... 18.5 7.3 11.2 153.4
Depreciation and amortization
Stacktrain...................................... 1.3 1.5 (0.2) (13.3)
Logistics....................................... 1.0 - 1.0 n/a
------------ ------------ ------------ ------------
Total........................................ 2.3 1.5 0.8 53.3
Income from operations
Stacktrain...................................... 10.7 10.9 (0.2) (1.8)
Logistics....................................... 4.3 - 4.3 n/a
------------ ------------ ------------ ------------
Total........................................ 15.0 10.9 4.1 37.6
Interest (income) expense, net.................... 7.2 (0.3) 7.5 n/a
Income tax expense ............................... 3.3 4.1 (0.8) (19.5)
Net income........................................ 4.1 7.1 (3.0) (42.3)
</TABLE>
Gross Revenues. Gross revenues increased $127.5 million, or 97.5%, for the
three months ended September 17, 1999 compared to the three months ended
September 18, 1998. Approximately $99.8 million, or 78.3%, of the increase was
due to the acquisition of the logistics segment on May 28, 1999. The stacktrain
segment increase of $34.5 million was due primarily to
14
<PAGE>
a $32.9 million, or 26.4%, increase in freight revenues driven by an overall
container volume increase of 33,165 containers or 28.5%. This increase was
partially offset by a 1.7% reduction in the average revenue per container
resulting from mix changes. The increases were due to increased customer demand
coupled with the addition of 2,000 53-foot containers during the second half of
1998. In addition, international business increased due to both growth among
existing customers as well as the addition of a large new customer in the second
quarter of 1999. Other stacktrain segment revenues increased approximately $1.5
million due primarily to the management fees associated with the 1999 Stacktrain
Services Agreement with APL Limited.
Net Revenues. Net revenues increased $22.2 million, or 77.6%, for the 1999
period compared to the 1998 period. The acquisition of the logistics segment
accounted for $16.2 million, or 73.0%, of the increase and the stacktrain
segment accounted for the remaining $6.0 million of the increase. Stacktrain
cost of purchased transportation increased $28.5 million, or 27.9%, on container
volume increases of 28.5%. The stacktrain segment gross margin declined to 20.9%
in the 1999 period from 21.9% in the 1998 period due primarily to the
significant traffic increase in the lower rated international business line.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the stacktrain segment, increased $6.1 million, or 68.5%, in the
1999 period compared to the 1998 period. Expenses in the 1998 period were
reduced by a $5.0 million credit from a third-party transportation provider that
was not received in the 1999 period. In addition, equipment lease and
maintenance expenses increased by $1.5 million as a result of the expansion of
the fleet of containers and chassis discussed in gross revenues above coupled
with the sale and leaseback of 199 railcars in the second quarter of 1999.
Partially offsetting these expense increases was a $0.6 million increase in rail
car rental income due to the increase in the railcar fleet in mid-1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.2 million, or 153.4%, in the 1999 period
compared to the 1998 period. The acquisition of the logistics segment accounted
for $10.9 million, or 97.3%, of the increase and the stacktrain segment
accounted for $0.3 million, or 2.7%, of the increase. Stacktrain segment costs
decreased to 22.0% of net revenues in the 1999 period from 25.5% in the 1998
period.
Depreciation and amortization. Depreciation and amortization expenses
increased $0.8 million, or 53.3%, for the 1999 period compared to the 1998
period. The acquisition of the logistics segment accounted for $1.0 million of
the increase while the stacktrain segment decrease was due to the sale and
leaseback of 199 rail cars. Depreciation expense was $1.5 million and $1.4
million and amortization expense was $0.8 million and $0.1 million for the 1999
period and 1998 period, respectively.
Income From Operations. Income from operations increased $4.1 million, or
37.6%, from $10.9 million in the 1998 period to $15.0 million in the 1999
period. The acquisition of the logistics segment accounted for $4.3 million of
the increase while the stacktrain segment decreased by $0.2 million, or 1.8%,
due primarily to the $5.0 million credit to direct operating expenses in 1998
discussed above. Excluding this one-time credit, income from operations for the
stacktrain segment would have increased by $4.8 million due primarily to the
28.5% increase in container volume during the period.
Interest Expense. Interest expense increased by $7.5 million for the 1999
period compared to the 1998 period due to the issuance of $150 million of senior
subordinated notes and borrowing $135 million under the term loan portion of the
credit facility on May 28, 1999 to fund the recapitalization of the Company and
the acquisition of the logistics segment.
Income Tax Expense. Income tax expense decreased by $0.8 million from $4.1
million in the 1998 period to $3.3 million in the 1999 period due to reduced
income in the 1999 period.
Net Income. Net income decreased $3.0 million, or 42.3%, from $7.1 million
in the 1998 period to $4.1 million in the 1999 period. The stacktrain segment
accounted for a $4.6 million
15
<PAGE>
decline in net income and minority interest costs (accrued paid-in-kind
dividends on the exchangeable preferred stock of the logistics segment)
accounted for $0.4 million of the decline. These decreases in net income were
partially offset by the acquisition of the logistics segment which accounted for
an increase in net income of $2.0 million. The stacktrain segment decrease was
due primarily to the increase in interest expense and the $5.0 million credit
from a third-party transportation provider in the 1998 period discussed above,
partially offset by increased income from operations as a result of increased
container volumes during the 1999 period.
Nine Months Ended September 17, 1999 Compared to Nine Months Ended September 18,
- - --------------------------------------------------------------------------------
1998
- - ----
The following table sets forth historical financial data for the Company
comparing data for the nine months ended September 17, 1999 and September 18,
1998.
Financial Data Comparison by Reportable Segment
Nine Months Ended September 17, 1999 and September 18, 1998
(in millions)
<TABLE>
<CAPTION>
1999 1998 Change % Change
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenues
Stacktrain............................................ $ 492.1 $ 416.2 $ 75.9 18.2%
Logistics............................................. 134.2 - 134.2 n/a
Inter-segment elimination............................. (9.4) - (9.4) n/a
------------ ------------ ------------ ------------
Total.............................................. 616.9 416.2 200.7 48.2
Cost of purchased transportation and services
Stacktrain............................................ 390.9 330.4 60.5 18.3%
Logistics............................................. 112.5 - 112.5 n/a
Inter-segment elimination............................. (9.4) - (9.4) n/a
------------ ------------ ------------ ------------
Total.............................................. 494.0 330.4 163.6 49.5
Net revenues
Stacktrain............................................ 101.2 85.8 15.4 17.9
Logistics............................................. 21.7 - 21.7 n/a
------------ ------------ ------------ ------------
Total.............................................. 122.9 85.8 37.1 43.2
Direct operating expenses
Stacktrain............................................ 46.0 39.7 6.3 15.9
Logistics............................................. - - - n/a
------------ ------------ ------------ ------------
Total.............................................. 46.0 39.7 6.3 15.9
Selling, general & administrative expenses
Stacktrain............................................ 22.6 21.9 0.7 3.2
Logistics............................................. 14.5 - 14.5 n/a
------------ ------------ ------------ ------------
Total.............................................. 37.1 21.9 15.2 69.4
Depreciation and amortization
Stacktrain............................................ 4.5 4.8 (0.3) (6.3)
Logistics............................................. 1.4 - 1.4 n/a
------------ ------------ ------------ ------------
Total.............................................. 5.9 4.8 1.1 22.9
Income from operations
Stacktrain............................................ 28.1 19.4 8.7 44.8
Logistics............................................. 5.8 - 5.8 n/a
------------ ------------ ------------ ------------
Total.............................................. 33.9 19.4 14.5 74.7
Interest (income) expense............................... 9.6 - 9.6 n/a
Income tax expense ..................................... 9.5 7.3 2.2 30.1
Net income.............................................. 14.2 12.1 2.1 17.4
</TABLE>
16
<PAGE>
Gross Revenues. Gross revenues increased $200.7 million, or 48.2%, for the
nine months ended September 17, 1999 compared to the nine months ended September
18, 1998. The acquisition of the logistics segment accounted for $134.2
million, or 66.9%, of the increase. The stacktrain segment increase of $75.9
million was due primarily to a $72.5 million, or 18.2%, increase in freight
revenues driven by an overall container volume increase of 73,782 containers or
20.0%. This increase was partially offset by a 1.5% reduction in the average
revenue per container resulting from mix changes. The increases were due to
increased customer demand coupled with the addition of 2,000 53-foot containers
during the second half of 1998. In addition, international business increased
due to both growth among existing customers as well as the addition of a large
new customer in the second quarter of 1999. Reposition incentive revenues
increased $1.5 million in the 1999 period as a result of increased APL Limited
shipping volume. Other stacktrain segment revenues increased $2.0 million due
primarily to the management fees associated with the 1999 Stacktrain Services
Agreement with APL Limited.
Net Revenues. Net revenues increased $37.1 million, or 43.2%, for the 1999
period compared to the 1998 period. The acquisition of the logistics segment
accounted for $21.7 million, or 58.5%, of the increase and the stacktrain
segment accounted for the remaining $15.4 million of the increase. Stacktrain
cost of purchased transportation increased $60.5 million, or 18.3%, on container
volume increases of 20.0%. The stacktrain segment gross margin remained constant
at 20.6% in both periods despite the significant traffic increase in the lower
rated international business line.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the stacktrain segment, increased $6.3 million, or 15.9%, in the
first nine months of 1999 compared to the same period in 1998. Expenses for the
1998 period were reduced by a $5.0 million credit from a third-party
transportation provider that was not received in 1999. In addition, equipment
lease and maintenance expenses increased by $3.9 million as a result of the
expansion of the fleet of containers and chassis discussed in gross revenues
above coupled with the sale and leaseback of 199 railcars in the second quarter
of 1999. Partially offsetting these expense increases was a $2.4 million
increase in rail car rental income due to the increase in the railcar fleet in
mid-1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $15.2 million, or 69.4%, in the 1999 period
compared to the 1998 period. The acquisition of the logistics segment accounted
for $14.5 million, or 95.4%, of the increase and the stacktrain segment
accounted for $0.7 million, or 4.6%, of the increase. Stacktrain segment costs
decreased to 22.3% of net revenues in the 1999 period from 25.5% in the 1998
period.
Depreciation and amortization. Depreciation and amortization expenses
increased $1.1 million, or 22.9%, for the 1999 period compared to the 1998
period. The acquisition of the logistics segment accounted for $1.4 million of
the increase while the stacktrain segment decrease was due to the sale and
leaseback of 199 rail cars. Depreciation expense was $4.5 million and $4.4
million and amortization expense was $1.4 million and $0.4 million for the 1999
period and 1998 period, respectively.
Income From Operations. Income from operations increased $14.5 million, or
74.7%, from $19.4 million in the 1998 period to $33.9 million in the 1999
period. The acquisition of the logistics segment accounted for $5.8 million, or
40.0%, of the increase and the stacktrain segment accounted for $8.7 million, or
60.0%, of the increase. The stacktrain segment increase was due primarily to
the 20.0% container volume increase in the 1999 period partially offset by the
$5.0 million credit to direct operating expenses in 1998 discussed above.
Interest Expense. Interest expense increased by $9.6 million for the 1999
period compared to the 1998 period due to the issuance of $150 million of senior
subordinated notes and borrowing $135 million under the term loan portion of the
credit facility on May 28, 1999 to fund the recapitalization of the Company and
the acquisition of the logistics segment.
17
<PAGE>
Income Tax Expense. Income tax expense increased by $2.2 million from $7.3
million in the 1998 period to $9.5 million due to increased income in the 1999
period.
Net Income. Net income increased $2.1 million, or 17.4%, from $12.1
million in the 1998 period to $14.2 million in the 1999 period. The acquisition
of the logistics segment accounted for $2.5 million of the increase and the
stacktrain segment accounted for $0.2 million of the increase partially offset
by minority interest costs (accrued paid-in-kind dividends on the exchangeable
preferred stock of the logistics segment) of $0.6 million in the 1999 period.
The stacktrain segment increase was due primarily to increased income from
operations as a result of increased container volumes substantially offset by
increased interest expense and the $5.0 million credit from a third-party
transportation provider in the 1998 period, discussed above.
Liquidity and Capital Resources
- - -------------------------------
Cash generated by operating activities for the nine months ended September
17, 1999 was $17.6 million compared to $8.0 million for the nine months ended
September 18, 1998. The increased source of cash for the 1999 period was due
primarily to increased income from operations associated with the stacktrain
segment traffic volume increase, the acquisition of the logistics segment and to
the net change in accounts receivable and payable. Cash generated from operating
activities was used for seasonal working capital purposes, to fund capital
expenditures and for acquisitions. The Company had a working capital deficit of
$14.3 million at September 17, 1999 compared to a deficit of $23.1 million at
September 18, 1998, an improvement of $8.8 million.
Cash flows used in investing activities were $73.2 million and $39.7
million for the 1999 period and 1998 period, respectively. The increased use of
cash in the 1999 period was due to the acquisition of the logistics segment for
$111.3 million partially offset by the net proceeds of $39.6 million from the
sale and leaseback of 199 railcars originally purchased in 1998. Capital
expenditures of $1.5 million in the 1999 period were primarily for computer
hardware and software associated with Year 2000 compliance efforts and leasehold
improvements to office space and warehouse facilities.
Cash flows from financing activities were $65.7 million and $31.7 million
for the 1999 period and 1998 period, respectively. Prior to the Company's
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. During
the first nine months of 1998, a net intercompany borrowing of $31.7 million
from APL Limited was necessary to fund the purchase of 200 railcars, 199 of
which were subsequently the subject of the sale and leaseback discussed above.
During the first nine months of 1999, in connection with the recapitalization of
the Company and acquisition of the logistics segment, proceeds of $104.4 million
were received from the issuance of the Company's common stock. The Company also
borrowed $135 million under a term loan facility and issued $150 million of
senior subordinated notes, and borrowed $2 million under the $100 million
revolving credit facility expiring in 2004. The Company paid $9.5 million of
financing costs associated with these borrowings which will be amortized over
the life of the debt. The $2 million borrowed under the revolving credit
facility was repaid in July 1999. These borrowings were partially offset by a
distribution to shareholders of $300 million and to fees paid in connection with
the recapitalization of $10.2 million. In July 1999, the Company also redeemed
$2 million of the exchangeable preferred stock of its subsidiary, Pacer
Logistics, Inc.
The $150 million of senior subordinated notes, due in 2007, bear interest
at 11.75% with interest due semi-annually at June 1 and December 1. The $135
million term loan facility, due in 2006 and the $100 million revolving credit
facility, expiring in 2004 bear interest at variable rates subject to increases
or decreases based upon the achievement of financial ratios set forth in the
credit agreement. At September 17, 1999, the interest rate on the revolving
credit facility was 7.9% and the interest rate on the term loan was 8.4%.
Voluntary prepayments and commitment
18
<PAGE>
reductions will generally be permitted without premium or penalty, subject to
certain conditions. The credit facilities are generally guaranteed by all of the
Company's existing and future direct and indirect wholly-owned subsidiaries and
are secured by liens on its properties and assets. At September 17, 1999, the
Company had $100 million available under the revolving credit facility. These
credit agreements contain certain restrictions and financial covenants such as
an adjusted total leverage ratio and a consolidated interest coverage ratio. At
September 17, 1999, the Company was in compliance with these covenants.
The stacktrain segment took delivery in the fourth quarter of 1999 of 1,500
new 53-foot containers and chassis financed through an operating lease to help
meet current and projected business growth.
Based upon the current level of operations and anticipated growth in both
operating segments, management believes that operating cash flow and
availability under the revolving credit facility will be adequate to meet the
Company's liquidity needs for the next five years, although no assurance can be
given in this regard.
Year 2000
- - ---------
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the Year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company utilizes software and related computer technologies
essential to its operations that could be affected by the Year 2000 issue.
Year 2000 remediation and testing follows the Company's segment reporting
requirements, i.e. separate systems remediation and testing for the stacktrain
and logistics segments. Remediation and testing for the stacktrain segment's
systems infrastructure and business applications is being conducted by APL
Limited. APL Limited has represented that it has devoted considerable personnel
and resources to a comprehensive Year 2000 project that addresses mission-
critical systems, infrastructure, vendors, suppliers and customers. Their goal
is to minimize, as much as possible, any detrimental impact that the Year 2000
problem may have upon their ability to serve their clients and provide the
services to us described in the Information Technology Outsourcing and Licensing
Agreement term sheet. APL Limited has represented that the remediation phase of
critical mainframe applications as well as critical components of the
infrastructure were completed by the end of August 1999. Testing will continue
through the remainder of 1999 and includes integrated testing with vendors as
well as customers. Contingency plans are being developed by key managers with
an expected completion date of the end of November 1999. APL Limited has
contacted major rail vendors and performed a risk assessment based on their
reported state of Year 2000 preparedness. Based on both APL Limited's
assessment as supplied to us and the Company's assessment, the Company believes
that US rail carriers, which carry the majority of the Company's cargo, fall
into the low risk category while two foreign carriers are currently rated as
medium risk. The Company is engaged in ongoing efforts to re-assess the medium
risk carriers.
The logistics segment is following a five phase approach to the Year 2000
issue including 1) inventory of all date sensitive systems and equipment, 2)
assessing compliance and assigning priorities, 3) remediation of non-compliant
items, 4) testing and certification of systems and equipment and 5) contingency
planning. Through the end of the third quarter of 1999, the inventory of date
sensitive equipment and testing and certification are nearly 100% complete and
approximately 90% of the remediation actions consisting largely of replacement,
and/or installation of operating system software upgrades have been completed.
The assessment phase was completed by the end of the second quarter.
Expenditures through the end of the third quarter 1999 were approximately $2.2
million. Contingency planning is underway throughout the organization. Core
business processes have been identified. Contingency plans consist largely of
refinement of existing manual procedures that are utilized during periodic
interruptions of
19
<PAGE>
computer and other communications failures. The Company has also installed
diesel or natural gas powered electricity generators at key operations sights.
The logistics segment has initiated formal communications with all of its
significant vendors and customers, with special attention being directed toward
electronic business partnerships, to determine vulnerability to those third
parties' failure to remediate their Year 2000 issues. Communications have been
successful with numerous cases of existing EDI applications being upgraded to
year 2000 compliant versions of software. Overall, responses to date, are
incomplete and do not in all cases provide detailed information with which to
assess level of compliance. Follow-up activities are on going and will continue
through the fourth quarter of this year.
If the Company fails to properly recognize and address the Year 2000
problem in its systems, or if APL Limited fails to properly recognize and
address the Year 2000 problems in its systems, the Company's business, financial
condition and results of operations could be materially adversely affected. In
a worst case scenario, this could result in a system failure or miscalculation
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. The occurrence of any or all of these consequences could
affect customer and vendor relations and/or adversely impact the Company's
results of operations, financial condition or cash flow.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the Notes to Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
(b) During the three months ended September 17, 1999, no reports on
Form 8-K were filed by the Company.
21
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PACER INTERNATIONAL, INC.
Date: December 14, 1999
By: /s/ L.C. Yarberry
-----------------
Vice President - Finance
(Principal Financial Officer)
22
<PAGE>
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-25-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-17-1999 SEP-18-1998
<CASH> 10 0
<SECURITIES> 0 0
<RECEIVABLES> 155 65
<ALLOWANCES> 3 1
<INVENTORY> 0 0
<CURRENT-ASSETS> 166 64
<PP&E> 62 96
<DEPRECIATION> 10 6
<TOTAL-ASSETS> 454 175
<CURRENT-LIABILITIES> 180 87
<BONDS> 283 0
23 0
0 0
<COMMON> 0 0
<OTHER-SE> (35) 73
<TOTAL-LIABILITY-AND-EQUITY> 454 175
<SALES> 617 416
<TOTAL-REVENUES> 617 416
<CGS> 494 330
<TOTAL-COSTS> 583 396
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10 0
<INCOME-PRETAX> 24 19
<INCOME-TAX> 10 7
<INCOME-CONTINUING> 14 12
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14 12
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
