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Article by DailyStocks_admin    (03-03-08 03:55 AM)

The Daily Magic Formula Stock for 03/01/2008 is Pacer International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Our Service Offerings



We provide our transportation services from two operating segments, our intermodal segment, which provides services principally to transportation intermediaries, beneficial cargo owners and international shipping companies who utilize intermodal transportation, and our logistics segment, which provides truck brokerage, truck transport (including specialized haulage), supply chain services, freight forwarding, ocean shipping and warehousing and distribution services to a wide variety of end-user customers. The intermodal segment consists of our Stacktrain, Cartage and Rail Brokerage operations. The logistics segment consists of our Highway Brokerage, Truck Services, International Freight Forwarding Services, Warehousing and Distribution Services and Supply Chain Management Services. Both segments have separate management teams and offer different but related products and services. Information about our segments, including revenues, income from operations, and geographic information is included in Note 8 to the notes to consolidated financial statements included in this report.



Intermodal Services



Stacktrain



Intermodal transportation is the movement of freight via trailer or container using two or more modes of transportation which nearly always include rail and truck segments. Our use of the doublestack 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 a major non-railroad provider of intermodal rail service in North America. We sell intermodal service primarily to intermodal marketing companies, truck brokerage companies, truckload carriers, large automotive intermediaries and international shipping companies, as well as to our own wholly-owned internal intermodal marketing company. We offer both ramp-to-ramp services (only rail services) as well as a door-to-door service offering called PacerDirect. We compete primarily with rail carriers and other rail equipment and service providers offering intermodal service and with over-the-road full truckload carriers.



Through long-term contracts and other operating arrangements with North American railroads, including Union Pacific, Burlington Northern Santa Fe, CSX, KCSM in Mexico, and Canadian National Railroad, we have access to over a 52,000-mile North American rail network serving most major population and commercial centers in the United States, Canada and Mexico. These contracts and arrangements 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, 2007, our equipment fleet consisted of 1,850 doublestack railcars, 28,025 containers and 30,423 chassis (steel frames with rubber tires used to transport containers over the highway). In addition, through arrangements with APL Limited and other shipping companies, we provide customers with access to a large fleet of smaller International Standards Organization (“ISO”) international containers, allowing us to provide additional transportation capacity using these containers as they are being repositioned from destinations within North America back to the West Coast. Our fleet, combined with ocean shipping companies ISO containers, makes us a major provider of capacity in all container sizes.



The size of our leased and owned equipment fleet (as well as the smaller ISO international container westbound fleet), the frequent departures available to us through our rail contracts and the geographic coverage of our rail network provide our customers with single-company control over their transportation requirements, which we believe gives us an advantage in attaining at a competitive price the responsiveness and reliability required by our customers. In addition, our access to information technology enables us to continuously track containers, chassis and railcars throughout our transportation network. Through our equipment fleet and arrangements with rail carriers, we can control the equipment used in our intermodal operations and employ full-time personnel on-site at many terminals to ensure close coordination of the services provided at these facilities.



Rail Brokerage



Our intermodal marketing company arranges for and optimizes the movement of our end-user customers’ freight in containers and trailers throughout North America using truck and rail transportation. We arrange for a container or trailer shipment to be picked up at origin by truck (using either our cartage services or other truck carriers directly) and transported to a site for loading onto a train. The shipment is then transported via railroad (using either our Stacktrain services or rail carriers directly) to a site for unloading from the train in the vicinity of the final destination. After the shipment has been unloaded from the train and is available for pick-up, we arrange for the shipment to be transported by truck (using either our cartage services or other truck carriers directly) to the final destination. We provide customized electronic tracking and analysis of charges, our own negotiated rail, truck and intermodal rates, and we determine the optimal routes. We also 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. Our rail brokerage operations are based in Rutherford (New Jersey), Dublin and Dayton (Ohio), Lincolnton (Georgia), and Jacksonville (Florida). Our experienced transportation personnel are responsible for operations, customer service, marketing, management information systems and our relationships with the rail carriers.



Through our rail brokerage operations, we assist the railroads and our Pacer Stacktrain operation in balancing freight 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, trucking companies and other third party transportation providers, providing access to large equipment pools and streamlining the paperwork and logistics of an intermodal move.



Local Cartage



Our subsidiary, Pacer Cartage, Inc., provides local motor transportation (also called local cartage) largely in and around major U.S. cities rail ramps and ports, including Los Angeles, Long Beach, San Diego, Lathrop, Oakland and Sacramento (California), Dallas (Texas), Jacksonville and Miami (Florida), Chicago (Illinois), Detroit (Michigan), Columbus, Cleveland and Marysville (Ohio), Memphis (Tennessee), Charleston (South Carolina), Seattle (Washington), Portland (Oregon), South Kearney (New Jersey), Worcester (Massachusetts) and Atlanta, Savannah and Dalton (Georgia). We contract with independent trucking contractors and maintain interchange agreements with many major steamship lines, railroads and intermodal equipment providers for the interchange and use of equipment supplied by these providers. This network allows us to supply the local transportation requirements across the country of shippers, ocean carriers and freight forwarders.



Logistics Services



Highway Brokerage and Truck Services



Through our highway brokerage unit, which is a division of our subsidiary Pacer Global Logistics, Inc., we arrange the movement of freight in containers or trailers by truck using a nationwide network of over 3,000 independent trucking companies. By utilizing our aggregate volumes to negotiate rates, we are able to provide quality service at attractive prices. We provide highway brokerage services throughout North America through our customer service centers in Dallas (Texas), Chicago (Illinois), Rutherford (New Jersey), and Dublin (Ohio). We manage all aspects of these services for our customers, including selecting qualified carriers, negotiating rates, tracking shipments, billing and resolving difficulties.



Our separate truck services unit, Pacer Transport, Inc., provides dry van and flatbed and specialized heavy-haul trucking services on behalf of our customers. We provide these trucking services through independent agents and contractors who operate approximately 650 trucks equipped with van, flatbed and heavy-haul trailers.



We believe that our ability to provide a range of trucking services through our separate highway brokerage and truck services units and our local cartage operations provides a competitive advantage as companies increasingly seek to outsource their transportation and logistics needs to companies that can manage multiple transportation requirements.



International Freight Forwarding and NVOCC Services



As an international freight forwarder, our subsidiary, RF International, Ltd., provides freight forwarding services that involve transportation of freight into or out of the United States. As a non-vessel operating common carrier (or indirect ocean carrier) and 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 airfreight forwarding services as an indirect air carrier. Our international product offerings serve more than 1,000 clients internationally through offices in Lake Success (New York), Norfolk (Virginia), Chicago (Illinois), Seattle (Washington), San Francisco (California), Los Angeles (California), Miami (Florida), Dublin (Ohio), Cincinnati (Ohio), a regional office in Hamburg, Germany and approximately 100 agents worldwide.



As a non-vessel operating common carrier (or indirect ocean carrier), our subsidiary, Ocean World Lines, Inc., arranges transportation of our customers’ freight by contracting with the actual vessel operator to obtain transportation for a fixed number of containers between various points during a specified time period at an agreed wholesale discounted volume rate. We then are able to charge our customers rates lower than the rates they could obtain directly 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 arrange transportation to the final destination. At the destination port, acting directly or through our agent, we deliver the freight to the receivers of the goods, which may include customs clearance and inland freight transportation to the final destination. Our contracts with ocean carriers generally require us to pay a small liquidated damage amount for each committed container that we do not ship during the relevant contract period. The aggregate amount of such damages that we have been required to pay in the past has not been material, however, and management believes that such contract terms will not have a material adverse effect on our operating results in the future.



As a customs broker, we are licensed by the U.S. Customs and Border Protection Service to act on behalf of importers in handling customs formalities and other details critical to the importation 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 to direct domestic importers in connection with many of the shipments that we handle as a non-vessel operating common carrier, as well as shipments arranged by other freight forwarders, non-vessel operating common carriers or vessel operating common carriers.



Warehousing and Distribution



Our warehousing and distribution unit, Pacer Distribution Services, Inc., primarily specializes in “import logistics,” or servicing the needs of importers looking to move their goods in a timely and efficient manner, either directly to a retailer or to an inland distribution point. To accomplish this objective and deliver superior service to our import customers, we operate multiple facilities in the Los Angeles area that occupy more than 800,000 square feet. All of these facilities are located within 18 miles of the Southern California ports, making possible a timely and efficient flow of ocean containers to and from our warehouses. To further boost the quality of service and expedite the delivery of ocean freight, our subsidiary, PDS Trucking, Inc., also manages a trucking fleet of 125 owner-operators, many of whom service the Southern California ports on a daily basis. To help our customers reduce their import costs, we have extended the hours of operation of our harbor trucking fleet to take maximum advantage of the program implemented by the Ports of Los Angeles and Long Beach to encourage the movement of cargo at night and on weekends to reduce truck traffic during peak daytime hours.



Our warehousing and distribution unit performs multiple services specifically designed for importers, including:


•

warehousing/distribution – receiving inventory to stock in order to fulfill future outbound orders,


•

value-added services – labeling, price tagging, palletizing, pick/pack and reworking,


•

transloading – transferring freight from ocean containers to domestic equipment, rail or road,


•

deconsolidation – the sorting of freight for distribution to multiple outbound destinations, and


•

consolidation – the collecting of multiple smaller inbound shipments to build full truckloads.

Supply Chain Management



We use the information from our advanced information system to provide consulting and supply chain management services to our customers. These specialized services, offered through our subsidiary, Pacer Global Logistics, Inc., 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 the distribution of finished goods to the end-user. We provide infrastructure and equipment, integrated with our customers’ existing systems, to handle distribution planning, just-in-time delivery and automated ordering. We also manage warehouses, distribution centers and other facilities for selected customers and consult on identifying 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 other service offerings.



Information Technology



Our current intermodal and logistics transportation technology systems provide a scalable migration path designed for the electronic interchange of data between our customers and us, and an Internet-based connectivity that allows us to communicate directly with our customers and transportation service providers. Our systems provide us with performance, utilization and profitability indicators as they monitor and track shipments across various transportation modes, providing timely visibility regarding shipment status, location and estimated delivery times. Our exception notification system informs us of any potential delays so we can alert our customers to minimize the impact of any problems. Our systems also report transit times, rates, equipment availability and the logistics activity of our transportation service providers, enabling us to plan and execute freight movements more reliably, efficiently and cost effectively.



We manage our intermodal services through the continuous monitoring and tracking of our containers, chassis and railcars throughout the network. This allows us to monitor equipment location and availability and therefore plan and provide for increased equipment utilization and balanced freight flows. We can also prepare and distribute customized accounting and billing reports for our customers as well as management reports to meet federal highway authority requirements.



Pursuant to a long-term information technology services agreement, APL Limited provides us with the computers, software and other information technology services necessary for the operation of and accounting for our Stacktrain business. We paid an annual fee of $10.6 million in 2007 to APL Limited under this agreement (of which $3.4 million has been subject to a 3% compounded annual increase since May 2003). This agreement with APL Limited has a term expiring in May 2019, and is cancelable by us on 120 days notice without penalty.



To further enhance our information technology capabilities, on September 30, 2007, we entered into a software license agreement with SAP America, Inc. (“SAP”) for an enterprise suite of applications, including the latest release of SAP’s Transportation Management Solution. Under the agreement, we were granted a perpetual license for the suite of SAP software. Total capital expenditures in 2007 including the license fee and other expenditures were $10.6 million.



The new system is expected to provide an improved integrated, streamlined platform across all business units, provide better information management, eliminate duplicated work effort and dispersed data, and enhance customer services and communications. Elements of the new system are expected to be implemented over the next 9 to 28 months.



We will continue to avail ourselves of the services and support under our existing long-term technology services agreement with APL Limited until the SAP implementation project is completed. See “Management’s Discussion of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional discussion.

Customers



We currently provide intermodal and logistics and transportation services on a nationwide basis to retailers, manufacturers, intermodal marketing companies and other companies, including a number of Fortune 500 and multi-national companies such as Big Lots, C.H. Robinson, General Electric, Sony, Union Pacific, Toyota and Conagra, which together represented approximately 19.0% of our 2007 revenues, as well as numerous intermodal marketing companies. Other important customers include The Scotts Company, Whirlpool, Shaw Industries, and Costco.



For the fiscal years ended December 28, 2007 and December 29, 2006, one customer contributed 10.4% and 10.3% of our consolidated revenues, respectively. For the fiscal year ended December 30, 2005, there was no single customer that contributed more than 10% of our consolidated revenues.



Sales and Marketing



As of December 28, 2007, we have over 125 direct sales and customer service representatives in our intermodal and logistics segments that sell and support our portfolio of services to a diverse customer base which includes intermodal marketing companies, steamship lines, truckload carriers, logistics companies, truck brokers and beneficial cargo owners.



Our sales representatives are directly responsible for managing our business relationships with our customers. They expand our business base by cross-selling our portfolio of services to our current and future customer base. They also collaborate with our customer service groups in an effort to provide problem-solving, cargo tracking services and the efficient processing of customer orders and inquiries. The domestic direct sales force is also supplemented with over 30 sales agents and agencies.



In addition to our direct domestic sales force, we also have an extensive international network of sales and customer service representatives for our international NVOCC and freight forwarding business located in eight offices in North America, and a regional office in Hamburg, Germany along with approximately 100 agents worldwide.



In 2007, we established a new corporate level marketing department to support our sales and customer representatives. The new marketing department is primarily responsible for all sales related and corporate communications, market research and development, product development and integration, public relations, as well as the further development of the Pacer corporate brand identity.



Development of Our Company



We commenced operations as an independent, stand-alone company upon our recapitalization in May 1999. From 1984 until our recapitalization, our Stacktrain 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 from APL Limited by two affiliates of Apollo Management, and an affiliate of each of Credit Suisse First Boston LLC and Deutsche Bank Securities Inc. and our redemption of a portion of the remaining shares of common stock held by APL Limited. On the date of the recapitalization, we also began providing retail and logistics services to customers through our acquisition of Pacer Logistics. In connection with these transactions, our name was changed from APL Land Transport Services, Inc. to Pacer International, Inc.



Pacer Logistics, Inc. was originally incorporated on March 5, 1997 under the name PMT Holdings, Inc., and acquired the successor to a company formed in 1974. Between the time of its formation and our acquisition of Pacer Logistics in May 1999, Pacer Logistics acquired and integrated six logistics services companies.



In 2000, we acquired four companies that complemented our business operations and expanded our geographic reach and service offerings for intermodal marketing, highway brokerage, international freight forwarding and other logistics services. In 2001, we integrated our intermodal marketing, highway brokerage and supply chain services business operations into our Pacer Global Logistics, Inc. subsidiary.

In June 2002, we completed our initial public offering of common stock, and used the net proceeds to repay a significant portion of our outstanding long-term debt. During June and July 2003, we completed the refinancing of our credit facilities, including the early redemption of $150 million of 11.75% senior subordinated notes originally issued in connection with our May 1999 recapitalization. In August 2003, we completed an underwritten secondary public offering of common stock on behalf of a number of selling stockholders; no new shares were issued and we received no proceeds from this offering.



On January 7, 2004, we filed with the SEC a “shelf” registration statement, providing for our issuance of up to $150 million in additional common stock, preferred stock and warrants to purchase any of such securities and for the sale by a number of selling stockholders of 8,702,893 shares of common stock. In offerings under the registration statement in April and November 2004, all 8,702,893 shares of common stock of the selling stockholders were sold with no new shares issued or proceeds received by the Company. Upon completion of the offerings, Apollo Management and its affiliated entities no longer owned any shares of our common stock. There are currently no arrangements in place for the Company to issue any additional securities.



On April 5, 2007, we entered into a new $250 million, five-year revolving credit agreement and repaid the principal balance due under the term loan portion of our prior bank credit facility, which was terminated.



Suppliers



Railroads



We have long-term contracts with our primary rail carriers, Union Pacific, CSX, and KCSM in Mexico, and we maintain other operating arrangements with the other North American railroads, including Burlington Northern Santa Fe Railroad and Canadian National Railroad. These contracts and arrangements generally provide for access to terminals controlled by the railroads as well as support services related to our Stacktrain operations. Through these contracts and arrangements, our intermodal business has established an extensive North American rail transportation network. Our rail brokerage business also maintains contracts with the railroads that 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 regular renewal or extension. We maintain close working relationships with all of the major railroads in the United States and will continue to focus our efforts on strengthening these relationships. The long-term rail contracts with Union Pacific and CSX represent a majority of our Stacktrain unit’s cost of purchased transportation, while other business with Union Pacific and CSX is covered by shorter-term commercial arrangements. Business with other railroads, including the Burlington Northern Santa Fe, Canadian National Railroad and KCSM, constituted approximately 7% of our Stacktrain unit’s cost of purchased transportation in 2007.



Through our contracts and arrangements with these rail carriers, we have access to a 52,000 mile rail network throughout North America. Our rail contracts and arrangements generally require the rail carriers to perform point-to-point linehaul transportation and terminal services for us. Pursuant to the service provisions, the rail carriers provide transportation of our intermodal equipment across their rail networks and terminal services related to loading and unloading of containers, equipment movement and general administration. Our rail contracts and arrangements generally establish per container rates for Stacktrain shipments made on the rail carriers’ transportation networks, and the long-term contracts typically provide that we are obligated to transport a specified percentage of our total Stacktrain shipments with each of the rail carriers (subject to the rail carrier’s achievement of certain service performance standards). The terms of our rail contracts and arrangements, including rates, are generally subject to adjustment or renegotiation throughout the term of the contract or arrangement, 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. Based upon these provisions, and the volume of freight that we ship with each of the rail carriers, we believe that we enjoy competitive transportation rates for our Stacktrain shipments.

Agents and Independent Contractors



In our long haul and local trucking services operations, we rely on the services of independent agents, who procure business for and manage a group of trucking contractors. 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 independent agents and trucking contractors are typically long-term in practice, they are generally terminable by either party on short notice.



Independent agents and trucking contractors are compensated on the basis of mileage rates, fixed fees between particular origins and destinations, fixed fees within certain distance-based zones or a fixed percentage of the revenue generated from the shipments that they arrange or haul. Under the terms of our typical lease contracts, independent agents and trucking contractors must pay all of the expenses of operating their equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance and debt service.



Local Trucking Companies



To support our intermodal operations, 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 from them.



Equipment



Our intermodal equipment fleet consists of a large number of doublestack railcars, containers and chassis that are owned or subject to short and long-term leases. We lease almost all of our containers, approximately 84% of our chassis and approximately 89% of our doublestack railcars.



In addition, all of our railcar equipment is associated with revenue generating arrangements. Our railcar fleet consists of “free running” railcars operating under the publicly reported “BRAN” mark. These railcars are in general service with railroads throughout North America to haul not only our own intermodal containers but also those of the railroads and their other customers. Under this system, our railcars are freely interchanged from one rail carrier to another throughout the North American rail system. To use our railcars, the rail carrier pays us a fee, known as the car hire rate, which takes into account the miles traveled by a railcar and the railcar’s time in service with a railroad. The actual rate payable is determined under our bilateral rate agreement with the railroad, or in the case of a railroad with which we have no rate agreement, under our schedule of car hire rates maintained in the Car Hire Accounting Rate Master (CHARM) administered by Railinc in association with the Association of American Railroads. We are solely responsible for the costs of operating our railcars, and do not have any recourse to our customers for the lease or purchase of our railcars.

CEO BACKGROUND

P. Michael Giftos

P. Michael Giftos, age 60, has served as a director of our Company since April 2004. During his 29-year career with CSX Corporation and its subsidiaries, Mr. Giftos served in many executive management positions. From April 2000 through his retirement in March 2006, Mr. Giftos served as Executive Vice President and Chief Commercial Officer. Before that assignment, Mr. Giftos spent more than a decade as CSX Transportation’s Chief Legal Officer. While employed at CSX, Mr. Giftos served as a director of TTX Company, a provider of rail cars and related freight car management services to the North American rail industry. Mr. Giftos currently serves as a director of Foundation Coal Holdings Inc., a coal mining company, where he is a member of its audit, compensation and nominating committees.

Bruce H. Spector

Bruce H. Spector, age 64, has served as a director of our Company since May 1999. He has been a partner of Apollo Management, L.P. since 1992. Prior to that, Mr. Spector was a senior member of the Los Angeles law firm of Stutman Treister and Glatt. Mr. Spector also serves as a director of The Private Bank of California, a California chartered community bank based in the Century City area of Los Angeles.

Michael E. Uremovich

In November 2006, Michael E. Uremovich, age 63, was appointed Chief Executive Officer and Chairman of the Board of the Company. Mr. Uremovich joined Pacer as Vice Chairman in October 2003. He served as a consultant to the Company from 1998 to October 2003. His background includes a range of senior executive and consulting positions in the transportation and logistics industries. Immediately before joining Pacer in October 2003, he was a principal owner of Manalytics International, a San Francisco-based consulting firm. During the early to mid 1990’s, Mr. Uremovich served as Vice President of Marketing for Southern Pacific Transportation and President of TSSI, its logistics operating company.

Robert S. Rennard

Robert S. Rennard, age 69, has served as a director of our Company since September 2002. Currently an independent consultant to enterprises engaged in worldwide logistics or automotive-related activities, Mr. Rennard served from 1996 to 1999 as a senior vice president with The Compass Group, a provider of consulting and executive search services located in Birmingham, Michigan. He retired from Ford Motor Company in 1996 as director for Worldwide Logistics and Distribution. From 1962 to 1996, Mr. Rennard held a number of key positions for the automotive company. These included chief operating officer for Autolatina, a joint venture between Ford and Volkswagen covering all automotive and credit company activities in Brazil and Argentina, as well as automotive exports from those countries.

Robert F. Starzel

Robert F. Starzel, age 66, has served as a director of our Company since January 2006. Since November 2006, he has been of counsel to Holme Roberts & Owen, a Denver-based regional law firm. From 2004 to 2006, he served as Chairman of The SF Newspaper Company, owner of The Examiner, a San Francisco newspaper. From 2000 to 2004, he served in a consulting role as Senior Representative of the Chairman of Union Pacific Corporation. From March 1998 to 2000, he served as Senior Vice President of Union Pacific Corporation, and from 1996 to February 1998, he was Regional Vice President of Union Pacific Railroad Company. Prior to that from 1988 to 1996, he was Vice Chairman of Southern Pacific Transportation Company.

Robert S. Rennard

Robert S. Rennard, age 69, has served as a director of our Company since September 2002. Currently an independent consultant to enterprises engaged in worldwide logistics or automotive-related activities, Mr. Rennard served from 1996 to 1999 as a senior vice president with The Compass Group, a provider of consulting and executive search services located in Birmingham, Michigan. He retired from Ford Motor Company in 1996 as director for Worldwide Logistics and Distribution. From 1962 to 1996, Mr. Rennard held a number of key positions for the automotive company. These included chief operating officer for Autolatina, a joint venture between Ford and Volkswagen covering all automotive and credit company activities in Brazil and Argentina, as well as automotive exports from those countries.

Robert F. Starzel

Robert F. Starzel, age 66, has served as a director of our Company since January 2006. Since November 2006, he has been of counsel to Holme Roberts & Owen, a Denver-based regional law firm. From 2004 to 2006, he served as Chairman of The SF Newspaper Company, owner of The Examiner, a San Francisco newspaper. From 2000 to 2004, he served in a consulting role as Senior Representative of the Chairman of Union Pacific Corporation. From March 1998 to 2000, he served as Senior Vice President of Union Pacific Corporation, and from 1996 to February 1998, he was Regional Vice President of Union Pacific Railroad Company. Prior to that from 1988 to 1996, he was Vice Chairman of Southern Pacific Transportation Company.

services to the air cargo industry. From March 2000 to April 2001, Mr. Clarke held a number of management positions with Forward Air Corporation. From August 1998 to March 2000, Mr. Clarke was an investment banker with Deutsche Banc Alex. Brown in the Global Transportation Group. Mr. Clarke is also a director of Panther Expedited.

Donald C. Orris

Donald C. Orris, age 65, served as our Chief Executive Officer and Chairman of the Board from May 1999 to November 2006 and as President from May 1999 through May 2006. He became Vice Chairman of the Company in November 2006, with Mr. Uremovich’s appointment as Chief Executive Officer and Chairman, and plans to serve as Vice Chairman until his retirement effective March 31, 2007. Mr. Orris served as Chairman, President and Chief Executive Officer of Pacer Logistics, Inc. from its inception in March 1997 until our acquisition of Pacer Logistics in May 1999. 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., a provider of bulk transportation services.

SHARE OWNERSHIP

(1)

Based on information contained in a Schedule 13G filed on January 23, 2007, Barclays Global Investors, NA has sole voting power over 1,764,787 shares and sole dispositive power over 1,875,268 shares; Barclays Global Fund Advisors has the sole voting power over 556,777 shares and sole dispositive power over 556,777 shares; Barclays Global Investors Japan Trust and Banking Company Limited, Barclays Global Investors Japan Limited and Barclays Global Investors Ltd. have the sole voting or dispositive power over 0 shares and sole or shared dispositive power over 0 shares. The business address for Barclays Global Investors, NA and Barclays Global Fund Advisors is 45 Fremont Street, San Francisco, CA 94105. The business address for Barclays Global Investors Ltd

is Murray House, 1 Royal Mint Court, London, EC3N 4HH. The business address for Barclays Global Investors Japan Trust and Banking Company Limited, NA and Barclays Global Investors Japan Limited is Ebisu Prime Square Tower, 8 th Floor, 1-1-39 Hiroo Shibuya-Ku, Tokyo 150-0012 Japan.


(2) Based on information contained in a Schedule 13G filed on February 8, 2007, Cardinal Capital Management, LLC has sole voting power over 1,130,720 shares and shared voting power over 0 shares and sole dispositive power over 1,904,900 shares and shared dispositive power over 0 shares. The business address for Cardinal Capital Management, LLC is One Greenwich Office Park, Greenwich, CT 06831.


(3) Based on information contained in a Schedule 13G filed on February 8, 2007, Kayne Anderson Rudnick Investment Management, LLC has sole voting and dispositive power over 2,453,247 shares. The business address for Kayne Anderson Rudnick Investment Management, LLC is 1800 Avenue of the Stars, 2 nd Floor, Los Angeles, CA 90067.


(4) Based on information contained in a Schedule 13G filed on February 12, 2007, New Amsterdam Partners, LLC has sole voting power over 1,103,165 shares and shared voting power over 0 shares and sole dispositive power over 2,048,798 shares and shared dispositive power over 0 shares. The business address for New Amsterdam Partners, LLC is 475 Park Avenue South, New York, NY 10016.

COMPENSATION

Compensation Objectives. This Compensation Discussion and Analysis, or “CD&A,” reports on the Company’s compensation principles for its named executive officers, whose actual compensation earned during 2006 is set forth in the Summary Compensation Table following this CD&A.

The objectives of our executive compensation policies and programs are to:


•

provide competitive compensation systems that support the Company’s business strategies;
•

attract, retain and motivate over the long term high quality, productive individuals by maintaining competitive compensation relative to other companies in the marketplace;
•

focus our executives on achieving financial and operational goals that are tied to their annual performance objectives; and
•

align management and shareholder interests through grants of equity-based incentive and retention awards.

Achievements Rewarded. Our incentive compensation programs are designed to reward achievement of the Company’s financial targets, which in turn are expected to result in stock price appreciation to benefit our shareholders. For example, in 2006 as part of a company-wide 4% merit pay increase for all employees, the salary increases for the named executive officers and other higher-paid Company personnel were conditioned on meeting improved interim financial performance targets. These improvements were achieved and the increases went into effect in August 2006. Similarly, as discussed in further detail below, the 2006 cash incentive plan was conditioned on meeting a stretch-case diluted earnings per share target in order to fund the 2006 incentive bonus pool, with an individual’s bonus opportunity being dependent as well on meeting the applicable business unit operating income target and his or her achieving an “SM” (satisfactorily meets objectives) or higher performance rating.

Compensation Components. The compensation components for the named executive officers include base salary, an annual performance-based cash incentive bonus, stock option, restricted stock or other equity-based incentive awards, and employment agreements providing for post-termination compensation in certain circumstances.

The Compensation Committee has not established any formal policies or guidelines with respect to the mix of base salary, cash incentive compensation and equity awards to be paid or awarded to the named executive officers. In general, the Compensation Committee believes that a greater percentage of the compensation for the named executive officers and other senior members of management should be based on performance and seeks to link pay with measurable financial objectives to align the interests of our executive officers with our shareholders.

Base Salary . The Company pays base salaries at levels believed to be necessary to attract and retain the named executive officers and other key personnel. Base salary levels are assigned to positions based on job responsibilities, the Company’s historical salary levels for that position and informal reviews of salaries paid by similar enterprises for similarly situated employees. In other cases, salaries are determined in negotiations to recruit certain highly qualified executives for key positions, after consideration of, with no specific weighting, the importance of the position being filled, the experience and background of the candidate, the level of compensation required to induce the candidate to leave his or her current position, and the compensation historically paid to others in that position. No particular percentile of base salary in comparison with peers has been established as a target level of base salary, although the Company does monitor the base salary levels of peers in the transportation industry.

In November 2006, when determining the base salary to be paid to Mr. Uremovich in connection with his promotion to Chief Executive Officer, the Compensation Committee considered, with no particular weighting, the base salary reported in the proxy statements of eight peer companies (Hub Group, CH Robinson, Forward Air, EGL, Landstar, Swift, JB Hunt and Expeditors), the base salary paid to Mr. Orris, his recommendation of a $450,000 base salary for Mr. Uremovich, bonus payouts made over the past three years, stock option and restricted stock compensation expected to be earned by Mr. Uremovich, and the overall percentage (more than 50%) of Mr. Uremovich’s pay that would be dependent on Company performance. After considering these factors, the Compensation Committee approved the recommended base salary of $450,000 to Mr. Uremovich.

In May 2006, when determining the base salary to be paid to Mr. Shurstad in connection with his promotion to President of the Company, the Compensation Committee considered, with no particular weighting, management’s recommendation of a $375,000 base salary for Mr. Shurstad, the $323,232 base salary then paid to Mr. Shurstad as head of our wholesale segment, the additional responsibilities that he would assume as President of the Company, the base salary paid to Mr. Orris as President and Chief Executive Officer of the Company, and the Committee members’ general knowledge of compensation paid to presidents of peer companies in the transportation industry. After considering these factors, the Compensation Committee approved management’s recommended base salary of $375,000 to Mr. Shurstad, which was later increased to $390,000 as a result of the 4% company-wide salary increase implemented in August 2006.

Annual Incentives. The 2006 cash incentive plan for our named executive officers and all other employees required the achievement of quantitative financial objectives as well as the satisfaction of individual qualitative performance standards. The quantitative financial objectives were set by the Compensation Committee at the beginning of the year in connection with the Board’s approval of the Company’s 2006 operating plan and budget. As with prior years, the primary goal of the Company’s 2006 operating plan and budget was to deliver sustained year-over-year earnings per share growth within the range of expectations of our shareholders. To earn the targeted bonuses under the 2006 cash incentive plan, however, the Company had to meet a significantly higher diluted earnings per share goal, and individual business units had to meet their separate operating income targets, in each case as set forth in the 2006 cash incentive plan. When the Compensation Committee set these quantitative financial objectives for the 2006 cash incentive plan (i.e., the higher diluted earnings per share and business unit operating income targets), it considered these performance objectives to be challenging but achievable through greater effort on the part of the named executive officers and the Company’s other employees, given assumptions made at that time regarding foreseeable industry developments and changes and anticipated economic conditions for 2006.

The 2006 cash incentive plan sets forth the individual bonus target levels for the named executive officers and other Company employees, expressed as a percentage of his or her annual base compensation that generally corresponds to the employee’s title, position or compensation level. The targeted bonus percentages for the named executive officers for 2006 are listed in note (2) to the “2006 Grants of Plan-Based Awards” table below.

If the Company met or exceeded the 2006 cash incentive plan’s diluted earnings per share target for funding the bonus pool, each participant would then be entitled to a bonus award of up to 25% (or 100% for corporate department employees as noted below) of his or her target bonus to the extent of the funds in the pool. To receive the remaining 75% of his or her target bonus, the employee’s business unit had to meet or exceed its separate annual operating income target stated in the 2006 cash incentive plan, except that for personnel in the Company’s sales department, he or she had to meet the gross margin target established in the annual sales plan for that employee. Employees in the Company’s corporate department, which include all of the named executive officers, were not subject to a separate business unit operating income target, and they were entitled to up to 100% of their target bonuses upon the Company’s satisfaction of the 2006 cash incentive plan’s higher diluted earnings per share target for the year. If the targeted operating income levels were exceeded in a particular business unit, the Compensation Committee or the Board in consultation with management had discretion to award bonuses in excess of 100% of the target bonus amount.

The award of a bonus under the 2006 cash incentive plan was also subject to the participant receiving a satisfactory individual performance rating. Individuals who received a rating of CE (consistently exceeds expectations), ME (meets and exceeds expectations) or SM (successfully meets expectations) were eligible to receive their full target bonus amount to the extent of funds reserved under the plan on a company-wide and business unit basis, as applicable to the employee. Individuals who received an FM (fails to meet) performance rating were not eligible for a bonus award, while individuals who received an MS (meets some) performance rating would have received only half of the bonus to which they would otherwise have been entitled.

Generally, reflecting our focus on financial results, our annual cash incentive plans are administered objectively without the exercise of much discretion by management or the Compensation Committee. Individual performance only affects the bonus amount when the person receives an FM or MS rating. In the past, from time to time, discretion has been exercised as to all employees on a company-wide basis, but not on an individual-by-individual basis. For instance, in 2004, even though we did not meet the 2004 incentive plan’s earnings per share target, management recommended and the Compensation Committee approved the award of discretionary bonuses to all employees in amounts up to 25% of the employee’s target bonus amount in consideration of the momentum shown by the Company’s strong fourth quarter performance, the Company’s continuing and reliable cash flow, the significant financial and operational progress made by the Company and its subsidiaries during 2004, the impact of increased professional fees in connection with certain litigation matters and Sarbanes-Oxley compliance, and overall 2004 financial performance.

Although the Company met the full-year diluted earnings per share goal in the 2006 operating plan and budget, the Company did not achieve the significantly higher earnings per share target in the 2006 cash incentive plan, and as a result no cash incentive bonuses were awarded to the Company’s employees, including the named executive officers, for 2006.

Long Term Compensation: Stock Options under the 1999 and 2002 Stock Option Plans. Before our initial public offering in June 2002, options were granted to executives under the Pacer International, Inc. 1999 Stock Option Plan, as amended, or the “1999 Plan.” In connection with our initial public offering in June 2002, the Pacer International, Inc. 2002 Stock Option Plan, or the “2002 Plan,” was adopted. The purposes of these plans are to further our growth and success by permitting our officers, employees and consultants to acquire shares of our common stock, thereby increasing their personal interest in the growth and success of the Company and to provide a means of rewarding outstanding contributions by these persons. The Company’s practice has been to grant options in connection with a person’s hiring or promotion or, less frequently, as a reward for strong work performance.

Stock option grants are designed to link executive compensation to the Company’s share price over a multi-year performance period and to encourage executives to work toward established financial goals. Consistent with these goals, options granted under the 1999 Plan before our initial public offering in 2002 were divided into three tranches, Tranche A, Tranche B and Tranche C. Tranche A options vest in five equal installments on the grant’s first five
anniversary dates, provided the employee remains in Pacer’s employ on each anniversary date. Tranche B and C options vest on the date of grant’s seventh anniversary date if the employee is employed by us on that date but may also vest earlier in 20% increments over five years from the grant date if specified per share target values are attained. No options have been granted under the 1999 Plan since June 2002. Options granted under the 2002 Plan generally will vest in equal 20% increments on the first five anniversaries of the grant date.

Under these stock option plans, the number of stock options awarded to executive officers has generally been determined pursuant to a standardized range based on the employee’s starting salary level and title with the Company. Factors used to set the standardized range of stock options included management’s and the Compensation Committee’s perception of the incentive necessary to motivate individuals to join the Company, the stock-based incentives provided by similarly-situated companies, and the role and impact of the various management levels in achieving key strategic results. No specified weighting was applied to any of these considerations.

None of the executive officers were hired during 2006, and no options were granted to any of the executive officers in 2006.

In 2006, the Compensation Committee approved an amendment to the 1999 Plan and to outstanding awards under the 1999 Plan and the 2002 Plan to provide for accelerated vesting of options upon a change in control. In approving these amendments, the Compensation Committee and the Board considered, with no particular weighting and in addition to other factors, that the accelerated vesting would induce executives to remain with the Company at least through consummation of a specified transaction, that a majority of the option plans and programs of the Company’s peers provide for change in control acceleration without restriction or limitation on such acceleration and that accelerated vesting would further the retention and incentive goals and objectives of the 1999 and 2002 Plans. For more information, please see the discussion below under the heading “ Potential Payments Upon Termination or Change in Control .”

Other than these amendments related to accelerated vesting upon a change in control, the Compensation Committee has not generally exercised its discretion to amend stock option awards to change the vesting schedule or performance conditions (such as the stock price required for early vesting of the Tranche B or C options). However, in connection with the change in the status of an executive who had been serving as our Chief Commercial Officer, to a consultant effective May 1, 2006, the Committee did approve an amendment to his options granted under the 1999 Plan to allow such options to continue to vest during the one-year period in which he is serving as a consultant to us in order to make such options consistent with his options under the 2002 Plan (which by its stated terms provides for the continued vesting of options during the period of his consulting service).

All options granted since our initial public offering in 2002 have been granted with the approval of the Compensation Committee, and the exercise price of the option has been set at the closing price of our common stock on the date that the Compensation Committee approved the option grant. Generally, option grants are approved at our regularly scheduled quarterly meetings of the Board and its Committees, which are held just before we announce our quarterly financial results. From time to time, the Compensation Committee has approved option grants outside of the regular meeting schedule by unanimous written consent, either to correspond to the date that an officer first joins the Company and more commonly, to correspond to the date that a new non-employee director is appointed to the Board.

Long Term Compensation: Restricted Stock and other Awards under the 2006 Long Term Incentive Plan Submitted for Shareholder Approval. Shareholders are being asked to approve the adoption of the 2006 Long Term Incentive Plan, or the “2006 Plan.” The 1999 and 2002 Plans only authorize the grant of stock options. Option plans have a number of limitations, including limited retention value after vesting, exercise prices that vary based on what the market price on the grant date happened to be, and the new complexity and cost of option programs under FAS 123R. The Company’s Board and Compensation Committee have approved and recommend that the shareholders approve the 2006 Long Term Incentive Plan to expand the range of equity-based incentives that may be issued to employees and consultants. The 2006 Plan will allow the Company to provide incentives through the issuance of stock options, stock appreciation rights, restricted stock, performance awards and other stock-based awards as determined by the Compensation Committee from time to time after taking into account prevailing market, legal, regulatory, and industry conditions and practices and other relevant factors. The 2006 Plan is also expected to improve our ability to recruit high-level talent from industry competitors and other sources and to create flexibility to ensure retention of key executives and managers by, among other things, providing for a longer term stake in the Company and establishing a penalty for leaving the Company’s employ.

The purpose of the 2006 Plan is to attract and retain the best available individuals for positions of substantial responsibility, provide incentive to employees and consultants to use their best efforts toward the Company’s continued success and to operate and manage the Company’s business in a manner that will provide for long-term growth and profitability, and align the long-term interests of employees and consultants with those of shareholders.

Management, the Compensation Committee and the Board have been considering other equity incentives to motivate Company personnel to continue to devote their time and attention to the Company’s success. On June 1, 2006, in connection with its CEO succession planning process and anticipated executive officer appointments and changes, including the promotion of Mr. Shurstad to President, the Board and the Compensation Committee considered proposed limited grants of restricted stock awards to certain key members of management and authorized management to develop an omnibus equity incentive plan allowing such awards. At the next board meeting held on August 1, 2006, management proposed the 2006 Plan for Compensation Committee and Board approval, and with certain revisions discussed at the meeting, the Compensation Committee and the Board adopted the 2006 Plan, which is attached to this proxy statement as Appendix A. At that meeting, the Compensation Committee and the Board also ratified and confirmed the restricted stock awards proposed at the June meeting. In November 2006, the Board and the Compensation Committee approved an increase in the number of shares of restricted stock awarded to Mr. Uremovich to 100,000 shares in connection with his promotion from Vice Chairman to CEO and Chairman. In February 2007, the Board and the Compensation Committee approved an increase in the number of shares of restricted stock awarded to Brian Kane to 10,000 shares in connection with his promotion from Corporate Controller to Chief Operating Officer of the Intermodal Segment.

No compensation consultants were engaged specifically in connection with this 2006 restricted stock award program. In the first half of 2005, the Company engaged Pearl Meyer & Partners to provide a competitive perspective on long term incentive practices of 22 peer transportation companies. The study analyzed the peers’ equity award plans generally, not by particular officer, and included the types of equity awards granted by the 22 peer companies, the vesting characteristics of the awards granted, the weighted average number of shares outstanding under the peers’ equity plans, the number of shares available for future grant, the three-year average number of shares awarded, recent plan changes and our ranking against the peers. This study was referenced to by management in developing the 2006 Plan and the recommended restricted stock awards.

We believe that the vesting of these restricted stock awards in 25% installments based on continued service over a four-year period, subject to shareholder approval of the 2006 Plan, will motivate the recipients to remain in the Company’s employ and to focus their efforts on operational and financial goals that will enhance shareholder value. The number of shares of restricted stock granted to these key management personnel were recommended by management. Factors considered in setting the award levels and vesting periods included, with no particular weighting, the value of the restricted stock awards, the importance of the executives to the Company’s long-term success, the long-term incentive practices of industry peers, and the amount and vesting schedule of outstanding options held by the executives receiving restricted stock awards.

If the 2006 Plan is approved by the shareholders, the next step for management, the Compensation Committee and the Board will be to consider whether to make awards to other key personnel and whether to establish a periodic award program to replace or supplement the one-time option grant program historically in effect. The type of awards, vesting periods, performance criteria, grantees and other decisions about awards under the 2006 Plan will be in the discretion of the Compensation Committee.

As historically we have only granted stock options at the time of an employee’s hiring, we have not adopted any program, plan or practice that requires us to grant equity-based awards on specified dates, and we have not made grants of awards that were timed to precede or follow the release or withholding of material non-public information. If the 2006 Plan is approved by shareholders, it is possible that we will establish programs and policies regarding the timing of equity-based awards in the future.

MANAGEMENT DISCUSSION FROM LATEST 10K

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 intermodal segment and the logistics segment. The intermodal segment comprises the former wholesale segment units, Pacer Cartage and Pacer Stacktrain, with the addition of the rail brokerage unit. The logistics segment comprises all of the former retail units except the rail brokerage unit which is now part of the intermodal segment. See Note 8 to the notes to our consolidated financial statements included in this report for segment information. Our intermodal segment provides intermodal rail transportation, local cartage and intermodal marketing services. Our logistics segment provides non-intermodal highway brokerage and truck services, warehousing and distribution, international freight forwarding and supply chain management services.



Executive Summary



In 2007 Pacer took a series of steps to position our company for the future. We maintained our focus on four major initiatives: (1) continuing the development of a world-class intermodal product, (2) redefining our relationships with our major rail suppliers, (3) improving performance in our logistics segment and (4) rationalizing our cost structure and improving productivity. We made good progress in all of these areas.



As shown in the table below, our revenues have grown each year since our 2002 IPO reaching a record level in 2007, and validating our focus on our core intermodal product, and our operating cash flows remain strong. While our income from operations, net income and diluted earnings per share were below those of 2006, they were above all other years since our IPO. As we have noted previously and describe below, 2006 benefited from the overall favorable settlements of several arbitration cases and other rate disputes which did not recur in 2007.

Our intermodal segment remains strong, and our logistics segment continued its improvement with operating income of $4.1 million, 156% above last year. Each unit within the logistics segment improved over last year with the exception of our trucking operations which continue to be impacted by the economic downturn. The overall logistics segment’s gross margin percentage, calculated as revenues less the cost of purchased transportation divided by revenues, decreased from 18.0% in 2006 to 17.8% in 2007 because of competitive pressures and business mix changes primarily in our trucking operations.



The intermodal segment contributed $112.0 million to income from operations compared to $132.6 million in 2006. The year-to-year comparison for our intermodal segment is difficult due to the overall favorable settlements of several arbitration cases and other rate disputes in 2006 that improved results in that year. Revenues for all three Stacktrain lines of business improved over 2006, increasing by 14.9%, 12.6% and 7.1% for the Stacktrain international, automotive and third-party domestic lines of business, respectively. Rail brokerage revenues also increased over 2006 by 3.6% and revenues for our cartage operations were 2.1% higher than in 2006. The overall gross margin percentage for the intermodal segment decreased from 24.8% in 2006 to 23.0% in 2007 due to the arbitration and other rate dispute settlements benefiting 2006, increased competition in 2007 and lower pricing in 2007 to maintain equipment flow and minimize repositioning costs. Gross margins were also impacted by increases in underlying rail transportation costs both in contract lanes pursuant to market rate adjustment provisions and in non-contract lanes.



During 2007, we undertook several initiatives that we believe will position our company for the future. We instituted a facility rationalization and severance program during the past year that reduced employment by 134 personnel, or 8.4% from 2006, and closed 4 facilities. The costs of this program, which is nearly complete, decreased our 2007 income from operations by $6.0 million, but we believe the program has laid the foundation for improved profits in the future. As another step to improve future performance, in September 2007, we entered into a software license agreement with SAP America, Inc. (“SAP”) for an enterprise suite of applications including the latest release of SAP’s Transportation Management Solution. Under the agreement, we were granted a perpetual license for the suite of SAP software. Once implemented, the new system is expected to provide an integrated, streamlined platform across business units, providing better management information, eliminating duplicated work effort and dispersed data, and enhancing services and communications with customers. Elements of the new system are expected to be implemented over the next 9 to 28 months. See “Liquidity and Capital Resources.”



In April 2007, we refinanced our term loan and revolving credit facility with a $250 million, five-year revolving credit facility. In connection with the refinancing, we paid $0.8 million in fees and expenses and charged to expense $1.8 million for the write-off of existing deferred loan fees related to the prior facility. Also during 2007, we reduced our outstanding shares of common stock by 2,938,635 shares, or approximately 7.9%, pursuant to our stock repurchase program which began in 2006. A total of $60.7 million remains under the repurchase authorization which expires on June 15, 2008.



We are confident about the steps we have taken and continue to take to strengthen our company and during 2008 we will continue to focus on improving performance and building on recent successes.



At our May 2007 annual meeting, our shareholders approved our 2006 Long-Term Incentive Plan under which awards of 195,000 shares of restricted stock were granted to members of our senior management in 2006 (subject to the May 2007 shareholder approval). The awards vest in equal installments over four years beginning on June 1, 2007. An additional 87,000 shares of restricted stock were granted in 2007, bringing the total restricted stock awards to 282,000. In 2007, $2.0 million was expensed for the restricted stock awards. The annual expense for all restricted stock awards will be approximately $1.5 million in each of the next three years. In addition, in 2007 we accrued $3.0 million for performance bonus and discretionary incentive and retention payments compared to no bonuses in 2006.



Our overall gross margin percentage (calculated as revenues less cost of purchased transportation and services divided by revenues) was 21.9% in 2007 and is expected to decline slightly to a forecasted 21.0% in 2008 due primarily to changes in business mix. We plan to continue to take selective rate increases where feasible, although these will be partially offset by increased costs charged by our underlying service providers.



Our tax payments in 2007 were $24.1 million compared to $37.4 million in 2006. We expect tax payments to be approximately $26.0 million in 2008.



Our capital budget in 2008 is forecasted at $22.0 million and includes $18.9 million for the SAP project with the remainder for normal computer and equipment replacement items. Capital expenditures in 2008 will be funded by operating cash flows. The SAP project is also budgeted to incur $4.9 million of operating expenses during 2008.

Critical Accounting Policies



The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be predicted with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.


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Recognition of Revenue



We recognize revenue when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is determinable and collectability is reasonably assured. We maintain signed contracts with many of our customers and have bills of lading specifying shipment details including the rates charged for our services. Our Stacktrain operation 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 Stacktrain operation offers volume discounts based on annual volume thresholds. We estimate our customers’ annual shipments throughout the year and record a reduction to revenue accordingly. Should our customers’ annual volume vary significantly from our estimates, a revision to revenue for volume discounts would be required. During 2007, our total volume discounts (excluding discounts for our own rail brokerage operations) were $13.2 million.

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Recognition of Cost of Purchased Transportation and Services



Both our intermodal and logistics 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. In addition, our rail brokerage operations may earn discounts to the cost of purchased transportation and services that are primarily based on the 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. Total discounts earned (excluding discounts earned from our Stacktrain operations) for 2007, 2006 and 2005 were none, none and $0.8 million, respectively.


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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 could be required.

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Goodwill



At December 28, 2007, we had recorded $288.3 million of goodwill, net of amortization prior to the adoption on December 29, 2001 (the first day of our fiscal 2002) of the Financial Accounting Standards Board Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The carrying amount of goodwill at December 28, 2007 assigned to our intermodal and logistics segments was $169.0 million and $119.3 million, respectively. Goodwill and other intangible assets are subject to periodic testing, at least annually, for impairment and recognition of impairment losses in the future could be required based on the methodology for measuring impairments described below. SFAS 142 requires a two-step method for determining goodwill impairment where step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. We determine the fair value of the reporting units using an income approach based on the present value of estimated future cash flows, and a market approach based on market price data of stocks of corporations engaged in similar businesses. 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 and charged to operations.



We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual future results may differ from those projections, and those differences may be material. The valuation methodology used to estimate the fair value of our total company and reporting units requires inputs and assumptions that reflect current market conditions as well as management judgment. The current economic downturn has negatively impacted many of those inputs and assumptions. For example, the assumed control premium (the amount in excess of the current stock price that a buyer would be willing to pay to acquire our company based on an analysis of the comparable market transactions used in our analysis) has declined compared to year-end 2006. While our year-end 2007 annual goodwill impairment analysis did not result in an impairment charge, the excess of fair value over carrying value for both operating segments declined substantially. The excess of fair value over carrying value for our intermodal and logistics segments (our reporting units) as of December 28, 2007, the annual testing date, was approximately $288 million and $3 million, respectively, as compared to $1.1 billion and approximately $23 million, respectively, as of December 29, 2006. The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions used, such as changes in the reporting unit’s future growth rates, control premium, discount rates, etc. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 5% decrease to the fair values of each reporting unit. This hypothetical 5% decrease would result in excess fair value over carrying value for our intermodal segment of $262 million at December 28, 2007. The logistics segment decrease in fair value at December 28, 2007 would result in an impairment of goodwill for that reporting unit due to the factors discussed above.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Executive Summary

Revenues for the third quarter of 2007 compared to the 2006 quarter were up $31.1 million with increases in both operating segments. Intermodal segment revenues increased $26.3 million over the 2006 quarter, reflecting increases in our Stacktrain, rail brokerage and cartage operations. Our Stacktrain and rail brokerage traffic volumes continued to increase over both the third quarter of 2006, up 8.7% and 11.1%, respectively, and over the second quarter of 2007, up 1.6% and 8.4%, respectively. Our intermodal segment gross margin percentage, revenues less the cost of purchased transportation divided by revenues, declined to 22.2% in the 2007 quarter from 27.0% in the 2006 quarter due, in part, to the benefit of the previously reported arbitration and other rate dispute settlements in the 2006 quarter. Compared to the second quarter of 2007, the intermodal gross margin percentage declined only 0.4 percentage points due in large part to increased local dray costs, empty repositioning costs and increases in underlying purchased transportation costs. Revenue per load for Stacktrain domestic traffic and rail brokerage for the third quarter of 2007 declined 1.2% and 1.9%, respectively, as compared to the 2006 quarter due to competitive rate pressures, and higher westbound volumes, accomplished to balance traffic flows. Rail brokerage revenue per load during the third quarter of 2007, however, was 1.9% higher compared to the second quarter of 2007. In addition, Stacktrain automotive and international traffic revenue per load increased 5.5% and 6.3%, respectively, compared to the 2006 quarter.

Revenues in our logistics segment increased $4.7 million, or 4.8%, in the 2007 period compared to the 2006 period reflecting increased revenues in all segment units but the truck services and truck brokerage units. The logistics segment gross margin percentage improved to 18.5% in the 2007 quarter compared to 17.8% in the 2006 quarter due to yield management efforts and changes in business mix.

Income from operations was $23.3 million for the third quarter of 2007, $8.3 million below the 2006 quarter. The 2007 quarter included $2.4 million in pre-tax severance costs. The 2006 quarter included $7.4 million in pre-tax arbitration settlement benefits and other settled rate dispute benefits (of which $5.3 million related to prior years) improving income from operations in the 2006 quarter, and a $3.5 million bonus accrual in the 2006 quarter that did not recur in the 2007 quarter. As shown in the table below (in millions), these amounts accounted for $6.3 million of the $8.3 million decrease in consolidated income from operations for the 2007 quarter compared to the 2006 quarter.

Although these or similar events may recur in the future, we believe that, when comparing historical periods as we are doing here, the above table highlighting these significant items between historical periods provides useful information that is essential to a proper understanding of our current income from operations and allows investors and management to more easily compare income from operations from historical period to period.

Intermodal segment income from operations declined $13.4 million due partially to the 2006 arbitration settlement benefiting results in that quarter, but also to lower gross margins in 2007. The logistics segment income from operations increased $1.4 million, or 280.0%, with all units contributing to the increase except the truck brokerage unit. Corporate costs were $3.7 million less in the 2007 quarter compared to the 2006 quarter due essentially to the $3.5 million bonus accrual included in the 2006 quarter.

We generated $13.4 million of net income, or $0.38 per diluted share during the 2007 quarter, $4.9 million and $0.10 per share below the 2006 quarter, respectively.

Through September 21, 2007, we have reduced employment by 116 people and closed 4 facilities under our exit activity and other severance program. As previously reported, our management team is charged with identifying and implementing process improvements, facility rationalization and other savings opportunities in order for Pacer to become a more effective and efficient organization.

We continued our stock repurchase program by repurchasing 720,479 shares under the plan during the third quarter of 2007 for $16.3 million. Operating cash flows along with borrowings under our credit facility funded the repurchase. During the first nine months of 2007, we repurchased 2,838,635 shares under the plan for $71.1 million, and, since inception of the plan in 2006, we have repurchased 3,804,453 shares through September 21, 2007 for $97.5 million. The remaining authorization is $62.5 million.

Through the first nine months of 2007, operating cash flows were $67.2 million compared to $45.6 million for the first nine months of 2006.

On September 30, 2007, we entered into a software license agreement with SAP America, Inc. (“SAP”) under which an enterprise suite of applications was licensed, including the latest release of SAP’s transportation management solution. Under the agreement, we were granted a perpetual license for the suite of SAP software for a license fee of $9.3 million (capital investment), payable 30 days from contract execution, and agreed to a two-year maintenance and support commitment for an annual fee of $2 million. We plan to implement the new system over the next 22 to 28 months. Once implemented, the new system is expected to provide an integrated, streamlined platform across business units, providing better management information, eliminating duplicated work effort and dispersed data and enhancing services and communications with customers.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be predicted with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. For additional information regarding each of these critical accounting policies, including the potential effect of specified deviations from management estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our 2006 Annual Report.

Recognition of Revenue . We recognize revenue when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is determinable and collectability is reasonably assured. We maintain signed contracts with many of our customers or have bills of lading specifying shipment details including the rates charged for our services. Our Stacktrain operations recognize 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 are available in our computer systems. In addition, our Stacktrain operations offer volume discounts based on annual volume thresholds. We estimate our customers’ annual shipments throughout the year and record a reduction to revenue accordingly. Should our customers’ annual volume vary significantly from our estimates, a revision to revenue for volume discounts would be required. Our wholesale cartage operations and our logistics segment recognize revenue after services have been completed.

Recognition of Cost of Purchased Transportation and Services . Both our intermodal and logistics 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. In addition, our rail brokerage unit earns discounts to the cost of purchased transportation and services that are primarily based on the 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 could be required. Historically, our actual losses have been within the estimated allowances. However, unexpected or significant future changes could result in a material impact to future results of operations.

Deferred Tax Assets . At September 21, 2007, we have recorded net deferred tax assets of $2.8 million. We have not recorded a valuation reserve on the recorded amount of net deferred tax assets 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 these assets is $7.2 million. Should we not be able to generate this future income, we would be required to record valuation allowances against the deferred tax assets resulting in additional income tax expense.

Goodwill . We adopted Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” effective December 29, 2001. SFAS No. 142 requires periodic testing for impairment and recognition of impairment losses under certain circumstances. The carrying amount of goodwill at September 21, 2007 assigned to our intermodal and logistics segments was $169.0 million and $119.3 million, respectively. 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, or at least annually. Determination of impairment requires comparison of the reporting unit’s fair value with the unit’s carrying amount, including goodwill. If this comparison indicates that the fair value is less than the carrying value, then the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the reporting unit’s goodwill to determine the impairment loss to be charged to operations.


Revenues . Revenues increased $31.1 million, or 6.8%, for the three months ended September 21, 2007 compared to the three months ended September 22, 2006. Intermodal segment revenues increased $26.3 million, reflecting increases in our Stacktrain, rail brokerage and cartage operations. Stacktrain revenues increased $16.0 million in the 2007 period compared to the 2006 period and reflected increases in all three Stacktrain lines of business. Avoided repositioning cost “ARC” revenues (the incremental revenue to Pacer for moving international containers in domestic service) and container and chassis per diem revenues were comparable between periods. The quarter-over-quarter increases in the three Stacktrain lines of business were as follows:


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The 7.4% increase in Stacktrain third-party domestic revenues reflected an 8.6% increase in overall domestic containers handled coupled with a 21.2% average fuel surcharge in effect during the 2007 period compared to a 21.9% average surcharge during the 2006 period. The average freight revenue per container decreased 1.2% for Stacktrain third-party domestic business due primarily to competitive rate pressures.

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The 16.6% increase in automotive revenues reflected a volume increase of 10.5% over the 2006 period coupled with a 5.5% increase in the average freight revenue per container. The increase in the average freight revenue per container was due to a combination of business mix, rate increases and fuel surcharges.


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The 13.4% increase in Stacktrain international revenues reflected a 6.6% increase in containers handled from existing customers coupled with a 6.3% increase in the average freight revenue per container. The increase in average freight revenue per container was due primarily to changes in business mix.

Rail brokerage revenues for the 2007 period were $9.7 million, or 9.0%, above the 2006 period due to a volume increase between periods of 11.1%, offset by a decline in revenue per load of 1.9%. The lower revenue per load was due to competitive rate pressures, and higher westbound volumes, accomplished to balance traffic flows, which historically move at lower freight rates than eastbound traffic. Cartage revenues were $0.6 million, or 2.3%, above the 2006 period due primarily to increased revenues in the West and Midwest regions including two additional business locations.

Revenues in our logistics segment increased $4.7 million, or 4.8%, in the 2007 period compared to the 2006 period reflecting increased revenues in our warehousing and distribution, supply chain services and international units partially offset by reduced revenues in our truck services and truck brokerage units. The warehousing and distribution unit’s revenues increased 11.5% because of current customers requiring year-round storage and increased storage and warehouse handling revenues. In addition, this unit started a container transload facility in Southern California in June 2007, which, while not yet profitable, contributed to the revenue increase. Our supply chain services unit revenues increased 67.3% due to the addition of a new customer, and our international unit revenues increased 16.0% because of increased import/export business partially offset by reduced overseas aid cargo and agricultural shipments. Our truck services revenues decreased by 0.8% due to soft demand and lower truck counts and our truck brokerage revenues decreased by 36.0% for the 2007 period compared to the 2006 period as a result of fewer shipments.

Cost of Purchased Transportation and Services. Cost of purchased transportation and services increased $40.8 million, or 11.9%, in the 2007 period compared to the 2006 period. The intermodal segment’s cost of purchased transportation and services increased $37.7 million, or 14.4%, in the 2007 period compared to the 2006 period reflecting increases in Stacktrain and rail brokerage costs. Cartage costs were comparable between periods. The Stacktrain increase was related to the increased shipments noted above combined with a 9.8% increase in the cost per container because of increased fuel costs from our underlying service providers, rate increases from our underlying rail carriers, and changes in business mix. Local dray costs from the ramp to customer location increased $1.5 million in the 2007 period compared to the 2006 period due to the increase in PacerDirect product volumes and increased Stacktrain international volumes. In addition, repositioning costs increased $0.3 million due to chassis repositioning for the trailer-on-flatcar business. Reducing the Stacktrain 2006 period costs was a gross benefit of $7.4 million, related to expenses accrued in 2006 and prior years, from the settlement of a series of arbitration cases and other rate disputes during the 2006 quarter that resulted in the reversal of prior period expense accruals. The increased rail brokerage costs were related to the increased shipments noted above combined with increased fuel costs from our underlying service providers, rate increases from our underlying rail carriers, and changes in business mix.

The overall gross margin percentage, revenues less the cost of purchased transportation divided by revenues, for the intermodal segment decreased from 27.0% in the 2006 period to 22.2% in the 2007 period. The arbitration settlements in 2006 discussed above accounted for approximately 2.1 percentage points of the decline. Competition, increases in fuel costs especially for our international business, lower pricing to maintain equipment flow and minimize repositioning costs and increases in underlying rail costs both in contract lanes pursuant to market rate adjustment provisions and in non-contract lanes also contributed to the decline.

Cost of purchased transportation and services in our logistics business increased $3.0 million in the 2007 period compared to the 2006 period reflecting the increased business in the majority of the Logistics segment units. The overall gross margin percentage for our logistics business increased from 17.8% in the 2006 period to 18.5% in the 2007 period due primarily to increased storage revenues which incur no additional costs in our warehouse and distribution unit and increased margins in our truck services unit due to business mix. Gross margin percentages for the other logistics business units were comparable between periods.

Direct Operating Expenses. Direct operating expenses, which are only incurred by our Stacktrain operations, increased $1.7 million, or 5.8%, in the 2007 period compared to the 2006 period due primarily to higher container and chassis lease costs for newer 53 ft. equipment and higher maintenance costs associated with increased equipment velocity. Overall fleet size was comparable between periods. At September 21, 2007, we had 0.7% or 199 more containers and 0.5% or 156 fewer chassis than at September 22, 2006.

Selling, General and Administrative Expenses . Selling, general and administrative expenses decreased $2.9 million, or 5.6%, in the 2007 period compared to the 2006 period. The decrease was due, in part, to a bonus accrual in the 2006 period of $3.5 million that was not incurred during the 2007 period (this accrual was reversed in the fourth quarter of 2006 under the terms of our 2006 bonus plan). During the 2007 period, $2.4 million was incurred for severance costs ($1.3 million for the intermodal segment, $0.6 million for the logistics segment and $0.5 for the corporate office). Substantially offsetting these 2007 costs were reduced legal fees and reduced employment costs in both of our operating segments. Our overall average employment level decreased by 154 (including the 116 employees terminated through the 2007 period under our facility closing and other severance program), or 9.5%, in the 2007 period compared to the 2006 period due to our cost reduction efforts and normal attrition, with reductions across all business units. Average employment levels for the 2007 period were down 94 in our logistics segment, 59 in our intermodal segment and 1 in our corporate office, as compared to the 2006 period.

Depreciation and Amortization . Depreciation and amortization expenses decreased $0.2 million for the 2007 period compared to the 2006 period as a result of normal property retirements.

Income From Operations . Income from operations decreased $8.3 million, or 26.3%, from $31.6 million in the 2006 period to $23.3 million in the 2007 period. Corporate expenses were $3.7 million below the 2006 period due primarily to the absence of a bonus accrual ($3.5 million accrued in 2006) combined with reduced legal costs during the 2007 period, partially offset by $0.5 million of additional severance costs during the 2007 period.

Intermodal segment income from operations decreased $13.4 million reflecting a $10.2 million decrease in Stacktrain income from operations, a $3.7 million decrease in rail brokerage income from operations and a $0.5 million increase in cartage income from operations. The Stacktrain decrease was due to the $7.4 million benefit in the 2006 period for arbitration and other rate dispute settlements, higher direct operating expenses, and reduced margins in the 2007 period due to lower pricing to maintain equipment flow and increases in underlying service provider costs. The rail brokerage decrease was due to competitive rate pressures and increases in underlying service provider costs and an increase in lower average revenue westbound business to balance traffic flows. The increase in our cartage unit reflected additional business including two additional locations in the 2007 period and additional business from our Stacktrain and rail brokerage units compared to the 2006 period. Income from operations in the 2007 period for the intermodal segment was reduced by severance costs of $1.3 million.

Logistics segment income from operations improved $1.4 million to $1.9 million in the 2007 period compared to $0.5 million in the 2006 period reflecting increases in all business units except our truck brokerage unit. The increase in our warehousing and distribution unit resulted from additional storage and handling business partially offset by start-up related costs from the new Southern California transload facility. Our supply chain services unit’s increase was due to the addition of a new customer, our truck services unit’s increase was because of improved margins and reduced labor costs and our international unit’s increase reflected strong import/export business partially offset by reduced overseas aid and agricultural shipments. The decrease in our truck brokerage income from operations was due to decreased shipments. Income from operations in the 2007 period for the logistics segment was reduced by severance costs of $0.6 million.

Interest Expense, Net . Interest expense, net, decreased by $0.2 million, or 12.5%, for the 2007 period compared to the 2006 period reflecting the lower average debt balance outstanding during the 2007 period and to reduced interest rates including loan fees. The outstanding debt balance at September 21, 2007 of $73.9 million was $6.1 million below the $80.0 million outstanding at September 22, 2006. The average interest rate during the 2007 period was 6.5% compared to 7.0% during the 2006 period.

Income Tax Expense. Income tax expense decreased $3.2 million in the 2007 period compared to the 2006 period because of lower pre-tax income in the 2007 period, combined with a slightly lower effective tax rate of 38.8% for the 2007 period compared to 39.0% for the 2006 period.

Net Income . Net income decreased by $4.9 million, or 26.8%, from $18.3 million in the 2006 period to $13.4 million in the 2007 period reflecting the lower income from operations (down $8.3 million, including a $7.4 million decrease attributable to arbitration settlements that benefited the 2006 period and $2.4 million of 2007 severance costs) as discussed above, partially offset by reduced interest costs (down $0.2 million). Net income in the 2007 period also reflected lower income tax expense (down $3.2 million) related to a lower pre-tax income and a slightly lower effective tax rate in the 2007 period.

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